Kodak focuses on patent sales to redevelop profitability

ROCHESTER--Kodak, the company that invented the first digital camera in 1975, and developed the photo technology inside most cell phones and digital devices, is in the middle of the worst crisis in its 131-year history.

Now, Eastman Kodak Co. is reaching more deeply into its intellectual treasure chest, betting that a cash infusion from the sale of 1,100 digital-imaging inventions will see it through a transition that has raised the specter of bankruptcy.

Kodak popularized photography over a century ago. It marketed the world's first flexible roll film in 1888 and transformed picture-taking into a mass commodity with the US$1 Brownie camera in 1900. But for too long the world's biggest film manufacturer failed to capitalize quickly on its new-wave know-how in digital photography.

As a result, Kodak has been playing catch-up. Pummeled by Wall Street over its dwindling cash reserves and its stumbling attempts to reinvent itself as a profitable player in digital imaging and printing, Kodak has been hawking the digital patents since July. Many financial analysts foresee the portfolio fetching US$2 billion to US$3 billion.

But others think Kodak can haul in far more than that, and soon. That's because patents have become highly valuable to digital device makers who want to protect themselves from intellectual property lawsuits. In July, an alliance made up of Apple and Microsoft purchased a raft of patents from Nortel Networks for US$4.5 billion. A month later, Google bought Motorola Mobility for US$12.5 billion, in part, to gain hold of the company's 17,000 patents.

“The size of the (Kodak) deal could blow your socks off,” predicts Los Angeles money manager Ken Luskin, whose Intrinsic Value Asset Management owns 3.8 million Kodak shares.

“It's pocket change for Google and Apple to go pay US$3 billion or US$4 billion or US$5 billion for these patents,” concurs Christopher Marlett, chief executive of MDB Capital, an investment bank in Santa Monica, California, that specializes in intellectual property. “There is an all-out nuclear war right now for global dominance in smart phones, tablets and mobile devices, and Kodak has one of the largest cache of weapons sitting there.” Marlett says he owns Kodak stock, but wouldn't disclose how much.

A hefty return, skeptics counter, won't solve Kodak's struggle to return to profitability in 2012 after running up losses in six of the last seven years.

“All the extra cash does is give you a lifeline for a short period. And then, poof, you're back in the same position without the assets to sell,” says analyst Shannon Cross of Cross Research in Livingston, New Jersey.

Kodak's financial picture should become clearer when it reports third-quarter results Thursday.

Investors will likely focus on the company's latest borrowing activities and cash woes — it had US$957 million in cash in June, down from US$1.6 billion in January. They will also want to know what progress Kodak made in the July-September period growing an ink business to replace film sales.

Kodak has poured hundreds of millions of dollars into new lines of inkjet printers that are finally on the verge of turning a profit. Home photo printers, high-speed commercial inkjet presses, workflow software and packaging are viewed as the company's new core. Kodak projects that revenue from those businesses will reach US$2 billion in 2013, accounting for 25 percent of all sales.

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