Tuesday, January 12, 2010

Kodak: story of how George Eastman resolved the patent paradox

In spite of owning a few hundred patents Edison struggled to make a profit from his electricity business. We called this paradox – patent paradox. Interestingly, Edison could never solve the patent paradox. In the subsequent business of phonograph where his company was the leader for the first half of the first decade in the 20th century, he lost the lead to the rival Victor Recording Machines never to regain it. Around the time Edison was spending time & energy in patent battles in 1880s, another entrepreneur was also doing the same in a different business. The person was George Eastman and the business was photography. However, in contrast to Edison, Eastman was to establish a brand called Kodak that would create monopoly lasting close to a century. What did Eastman learn and do that Thomas Edison didn’t? Let us explore.

When George Eastman quit his school to start work as an office boy in 1868 in an insurance company at $3 a week he was fourteen years old. And when Eastman quit his job at Rochester Saving Bank in 1881 he was getting $1400 a year. By then his photography business was already 4 years old and he was ready to “put all his eggs in one basket and then watch that basket”. He purchased his first camera in 1877, it cost him $49.58 and he had to pay additional $5 for lessons. With tent-load of equipment carry and knowledge of tedious film development procedure, photography was either a professional business or at least a serious hobby.

Initially, Eastman and co concentrated on developing and patenting what they viewed as the three basic elements of photography: the film, the process of filmmaking and the roll holder. He also went at great lengths to buy patents of others. Eastman entered into pools to control price and output. Until 1887 or 1888, Eastman and his employees were working so intensely, especially on the delicate problems involved in the preparation of emulsions for coating plates or film that there was no time for the big picture. Eastman pushed his colleagues with such forcefulness that a rather large number of them collapsed under strain. What happened next is no less than a “paradigm shift”.

Eastman began working on a simple camera which targeted mass market in the summer of 1887. By December, his “little roll holder breast camera” was ready for a name. He called it Kodak. He wanted a brand-new unique word in order to meet the trademark requirements in England; and he also wanted a word easy to pronounce. Including the case in which it was sold, the new Kodak was 6.5 inches by 3.25 inches by 3.75 inches. Price: $25. And Eastman wasn’t just selling the camera. He was selling a service as well. The $25 camera came loaded with a roll of one hundred frames of unexposed film. Taking the photograph was as easy as pushing a button and turning the key for the next frame. When all one hundred frames had been exposed, the photographer sent the camera back to Rochester when Eastman Kodak Company unloaded it, developed pictures, reloaded the camera and sent the pictures and the camera back to the customer. Price for this service: $10. Eastman created a unique customer experience and associated it with a brand name called “Kodak”. In fact, Kodak later launched a brand campaign: “You press the button, we do the rest”. Not every problem needs a technical solution; something Edison never understood.

Kodak never stopped filing patents; in fact he developed a strong relationship with MIT which ensured a stream of talent kept coming to Kodak. By 1900, Eastman brought out a more compact version called Brownie. It was selling for $1.00 with roll of film for an additional $0.15. Kodak was to sell millions of them. It would take another 91 years after Brownie was launched when a 35 year old William Gates Jr. would profess in Buffett Group meeting that “Kodak is toast”. Funny part is, the same Bill Gates, would actually buy additional 8 million shares of Kodak with his personal money 17 years later (Dec 2008). Bill is the last guy to underestimate the value of a century old brand. (Primary source for this article: Giants of Enterprise by Richard Tedlow)


  1. This is a good insight on 'management of innovation'. The case highlights integrative approach; while we manage technology and/or innovation we can not afford to miss out the business. The paradox has been nicely explained in this case. This is what we call' 'entrepreneurship'. Thanks Vinay for posting the wonderful piece.

  2. I am probably being a bit dumb, but I didn't really get the point.

    Given the benefit of hindsight and everything, what would you have recommended to Edison to get him out of all his patent troubles with regards to electricity? Maybe an answer to that would help understand this better.

  3. Did Edison create larger companies than Kodak - General Electric, ATT?

  4. Divya,

    Thanks for the question. It brings out my inability to drive home the main point. It is very easy to get carried away with the "hindsight bias" and start preaching what could have been done better etc.

    Efficiency of capital markets many times works beautifully. J P Morgan and some other investors persuaded Edison to do what was best at that time, sell his business and merge with arch-rival Thomson Houston to form General Electric.

    Edison came from a strong belief that "if I make a technically great product, it is bound to sell". And it works some times. However, it is anchored in one basic flaw, an assumption that we buy products because they are technically better. Sometimes we buy for status and other times because it is endorsed by Deepika Padukone etc.

    To answer your question Divya, I will add following suggestion for a systematic innovator: Listen to your customer and understand their needs as deeply as one can.

    To give an example, Victor Recording Machines signed up one year exclusive contract with a popular singer and produced records which were of inferior quality than Edison's but sold much better. If there were a referee for this game, Edison would have shouted, "Foul".

  5. It's an excellent and apt story that says value is what customers pay for. The role of the inventor-entrepreneur, or for that matter the manager, is to innovate the way in which value can be delivered to customers. A century later, Steve Jobs replicated the idea of combining service with the product when he launched the iTunes Store with the iPod.

  6. Hi Vinay,

    I heard about you through chetan vij with whom I worked in GE. I am subscriber of your excellent articles on innovation.

    Was reading a nice article and thought it would interest you - this is from brian arthur