The boom in digital photography triggered a series of aftershocks at
Eastman Kodak Co. as one after another of its aged factories was
dynamited.

Since 2004, the world’s biggest film manufacturer has eliminated
27,000-plus jobs, cast off major operations and invested billions to
gain a firm foothold in the highly competitive arena of electronic
imaging. It now offers an alluring patchwork to help people harness
their photo collections: a 70-million-member online service, 80,000
retail kiosks and an array of digital cameras, printers and other
devices.

The most perilous turnaround in Kodak’s 127-year history is
officially over, and fourth-quarter results due Wednesday will spell
out the final four-year toll – upward of US$3.4 billion.

But questions about the photography pioneer’s prospects are
intensifying: Will it adapt and flourish, propelled by a rich portfolio
of patents? Is it destined for a breakup? Might it even join forces a
few years from now with Xerox Corp., its historic cross-town rival?

“Their strategy makes sense, they’re doing the right things, … but
the competitive reality they face is extremely daunting and will only
grow more challenging over time,” said Citigroup analyst Matthew Troy.

Chief Executive Antonio Perez, who ran Hewlett-Packard Co.’s digital
printing operations before succeeding Dan Carp at Kodak’s helm in June
2005, “is doing an excellent job,” Troy said. “It’s just that, with
what he has, I don’t know if anyone can do that job.”

Ten of 11 key analysts rate Kodak neutral or advise selling its
stock. The shares, which topped US$94 in 1997, skidded to a 30-year low
when they closed at US$18.04 on Jan. 15. Kodak’s payroll, which peaked
at 145,300 in 1988, has shrivelled to around 30,000, a level not
skimmed since the Great Depression.

“Supposedly the restructuring is done. Now show us in 2008!”
implored George Conboy, president of Brighton Securities, a
money-management firm in suburban Rochester. “What they need to convey
is the image of a transformed company, and they are far from having
done that.”

Despite a 30 per cent slide in U.S. sales of consumer film in recent
years, Kodak can still rely on its longtime cash cow – and especially
its motion-picture film unit – to ease its bumpy ride.

While digital businesses now account for more than 60 per cent of
Kodak’s revenue and are growing rapidly, they still net only modest
profits.

Ulysses Yannas, a broker with Buckman, Buckman & Reid, thinks
Kodak has the technology, management, distribution and iconic brand
name to support success.

“They’ll never get the margins they used to get out of film, but the
sales gains they can get out of digital, especially in commercial
printing, are unbelievable,” he said.

There were inklings of vitality in 2007 when Kodak posted profits in
back-to-back quarters for the first time in three years. In July
through September, Kodak earned US$82 million from digital units as
sales jumped 12 per cent to US$1.59 billion. In contrast, traditional,
film-based sales sank 16 per cent to US$986 million.

As high-profit film fades, Kodak’s survival will hinge on how well
it prevails against entrenched, digital-consumer-savvy competitors such
as Sony Corp., Canon Inc. and Hewlett-Packard.

“You’re fighting against much larger players with a more singular focus, better balance sheets and bigger scale,” Troy said.

Kodak’s answer has been to outsource camera manufacturing and
leverage its imaging know-how and intellectual property via licensing
deals. And it has splurged US$2.6 billion on a promising slice of the
high-end commercial printing market where the likes of HP, Canon,
Ricoh, Xerox and Fuji also are doing fierce battle.

Unloading analog baggage everywhere it could, Kodak sold its
health-imaging unit for US$2.35 billion, rather than bring the
111-year-old X-ray business into the digital age.

Nowhere was its transformation starker than at Kodak Park, a
colossal manufacturing hub north of downtown Rochester that George
Eastman opened in 1891. The park has shrunk from 650 hectacres to about
283 over the last decade, with scores of buildings sold off to
developers. And beginning last July, five mammoth plants where silver
halide-based products were made or stored were reduced to rubble.

“It’s an extremely sad and shocking time” for longtime employees and
retirees “when buildings that size vanish inside 10 seconds,” said
Robert Burley, a photography professor at Ryerson University in Toronto
who came to see an 89-year-old paper products plant implode in
September.

“Even though these technological transitions in the end take 10 or
20 years to happen, this one is happening very quickly. It’s
remarkable,” Burley said.

Kodak has high hopes for its inkjet photo printer that uses
inexpensive ink cartridges and is targeting US$1 billion in sales by
2010 in a US$16 billion home-printer market dominated by Palo Alto,
Calif.-based HP. And in May, it aims to shake up the commercial market
with a 2,000-page-a-minute, highly customizable inkjet machine that
delivers offset-print quality.

That would put it in closer competition with Xerox, the Stamford,
Conn.-based office-equipment imaging company that also was founded in
Rochester, in 1906, and still has its biggest factories here.

“Don’t be grossly shocked, two years out, if you find Kodak and
Xerox together because each one wants to get on the other guy’s turf,”
Yannas said.

Kodak’s meteoric rise to blue-chip status in the 20th century was
“emblematic of what America is capable of,” so the perils it faces
invoke “a wistful worry,” said Mark Zupan, dean of the University of
Rochester’s Simon Graduate School of Business Administration.

“You’re starting to see more of an edge to Kodak,” Zupan said. “But
just one or two successful innovations aren’t going to do the trick. It
takes aggressiveness, ingenuity and a willingness to take risks.”