The Rise of Digital imaging and the Fall of the Old Camera industry
By Christian Sandström
I ran into the pictures below in autumn 2006. They are taken inside the new Hasselblad building that the company moved to in 2003. However, one year later – the building is empty. Having suffered from losses and layoffs, the legendary Hasselblad balanced at the brink of bankruptcy and had to move into a smaller building, a few blocks away, still in the city centre of Gothenburg, Sweden. The shift to digital imaging put the company in great trouble and huge losses had been generated in 2002-2004.
I was amazed by these pictures and asked myself why the company had failed so miserably in this shift. After having read a bit about Hasselblad, I realized that it is a myth that the company did not recognize the digital threat. In fact, Hasselblad started to explore digital imaging in various applications in the early 1980s – and still, the company was collapsing once the digital avalanche came into motion in the early 2000s.
Back in 2006, I was about to finish my M.Sc. studies. The need to know more about this technological shift was one of the main things that compelled me to go for a PhD, despite that the economy was booming and job opportunities were abundant in those days. I thought to myself that someone ought to figure out what actually happened in those 25 years of the company’s history and that doing so would most likely lead to valuable insights related to the challenges of technological shifts.
After 2.5 years, more than 100 hours of interviews, weeks and weekends digging through piles of old documents I think I know what happened, and why. The story which emerges from this is more exciting than I could have ever imagined. It turned out that the popular story about Hasselblad ‘oversleeping’ the shift was indeed a myth. I’ve seen how the firm recognized the threat in the early 80s, explored it through various digital applications, initiated work on a complete digital studio camera in 1994 only to kill the project two years later after yet another ownership change, chose instead to collaborate with Fuji in order to develop a new camera system. After severe delays, the H1 system did not become the success that was anticipated since it was much more expensive than the ‘good enough’ digital SLR cameras from Canon and Nikon. Being close to bankruptcy, the firm was sold again to a new owner which merged Hasselblad with Imacon, a manufacturer of digital backs, and could finally deliver a complete digital system on their own and thereby survive. Over those years, a lot of conflicts took place. Electronic engineers who had a digital vision of the company thought it was disastrous to stop the development project back in 1996. In one Powerpoint presentation from 1997, they wrote “if the chemical waste from film processing could be turned into beer – film would have a bright future!”. At the same time, the mechanical engineers underlined the importance of a new camera system with modern features such as autofocus and grew increasingly frustrated about the fact that Hasselblad lagged behind in this area. During the 1980s the company accumulated large amounts of cash for future development projects, however, after an ownership change in 1996, the company went from being well capitalized into being heavily under-capitalized. Needless to say, being ‘leveraged’ by its owners does not increase the likelihood of surviving a coming digital revolution (more about Hasselblad here).
Having been amazed by this story for several years, I realized that similar patterns must be present in many of those established firms that suffered so greatly in the shift from film-based to digital photography. Legendary and highly innovative companies such as Polaroid, Bronica, Contax, Agfa, Konica Minolta and Ilford have gone out of business since the rise of digital imaging. Some of the other old boys like Kodak, Hasselblad, Pentax, Mamiya, Leica and Fujifilm have suffered from huge losses but survived until now. While some established players like Canon, Nikon and Olympus have done well since the shift it is still striking to what extent companies with no past experience in photography have prospered. Consumer electronics firms like Casio, Sony, HP and Samsung have entered the industry after the shift to digital imaging.
This is only one out of many buildings in Rochester (NY) that Kodak has been
forced to demolish since the rise of digital imaging. (Photo: Flickr)
In Munich, Germany, the former Agfa building was demolished in February 2008.
The popular press tends to feed us with stories about how firms like Hasselblad, Kodak, Polaroid and Leica missed the shift because they failed to recognize the emerging technology.. These firms are often described as being too focused on the short term, too bureaucratic, too risk averse, too ignorant or just incompetent.
Common sense tells us that it seems very unlikely that firms which invest millions in R&D and employ some of the brightest scientists and engineers in the world would fail to see a technological revolution with such profound effects for the industry and for photographers. Moreover, a glimpse at the history of digital imaging is enough to confirm that many of the established players not only recognized the shift at an early point, but also embraced it and were active in pushing the technology forward. Kodak developed the first megapixel sensor in 1986, Polaroid invested extensively in digital imaging and had a prototype ready in 1992, Leica launched a digital studio camera in 1997 and Hasselblad had developed a 6 Megapixel prototype camera in early 1996. Why then, have established players encountered such difficulties despite often responding to the threat at an early point? Below, I outline what I think are the three main reasons for this.
Core Competence = Core Incompetence
In order to understand this puzzle we need to ask ourselves what a firm is made of. A company like Kodak is not simply an institution that helps us to take photos. It is rather a bunch of resources that transforms input to output. The ability to make profits on doing so is based upon knowledge related to R&D, purchasing and production, capital in terms of manufacturing processes as well as organizational structures that support this endeavour.
Back in the analogue era, this competence base was primarily related to optics, precise mechanics and also chemistry for those firms which made film. However, with the shift to digital imaging, the key resources for making cameras are primarily related to optics and electronics. Hence, a lot of the old resource base is rendered obsolete. This is the main reason why Kodak has demolished many buildings in Rochester. Factories that used to make paper or film have lost their economic value and there is no strategy or management fad that can change this fact.
Back in the early 1970s, Facit, a Swedish manufacturer of mechanical calculators, typewriters and office furniture went from record profits to huge losses and layoffs within only a few years. The reason for this was of course the rise of electronic calculators that became cheaper, better and lighter every year. An electronic engineer that used to work at Facit once said that “The cogwheels in the mechanical calculators were the soul of the company”. With the shift to electronics, this cogwheel soul lost all its value.
This perspective helps us to explain why an entire industry for digital backs for medium format cameras emerged in the 1990s. Since companies like Jenoptik, Leaf, Phase One and Imacon were created around the idea of attaching a digital back to a camera, there was obviously a huge business opportunity here that Hasselblad, Mamiya, Pentax, Bronica and the other medium format players failed to capitalize on. The main reason for this appears to be that these firms had a competence base which was essentially analogue. Even though digital backs could be attached to Hasselblad cameras since the early 1990s, the firm never succeeded in developing a digital back and could not deliver a complete digital system until 2005, after a merger with Imacon.
The resource approach can also shed some light on the entry of new companies. It was in fact Casio – a company with no past experience in the camera industry, that came up with the dominant design of a compact camera. In 1995, Casio launched the first camera with an LCD screen. This concept turned out to be very attractive since images could be viewed instantly. The big Japanese players now invested extensively in developing this concept. Having introduced both electronic calculators and digital watches in the past decades, Casio had developed a unique capability to rapidly wire integrated circuits and LCD screens into consumer products. The company could essentially use the same skills in order to enter the camera industry.
A parallel to biology can serve as a final illustration of this argument. The octopus is a fantastic animal. It is highly intelligent, very flexible since it has no skeleton, a fast swimmer with colour-changing camouflage and an ability to expel ink. Despite all those skills, no one would expect it to survive on land for the obvious reason that its skills have no value there.
Positions and Business Models Lost Their Value
In the same way as a company builds up a relatively rigid competence base over time, it also builds a position and a business model in relation to its competitors and the value chain. Those firms which made both cameras and film essentially developed a razorblade business model, i.e. just like Gillette makes money by selling consumable blades, these companies made profits on the continuous consumption of film, rather than on selling cameras. This can be illustrated by the famous Kodak slogan “You press the button, we do the rest”. Polaroid, Kodak, Agfa and Fujifilm were all making their profits on “doing the rest”.
“Doing the rest” was a business model that also implied that these companies were vertically integrated. They did almost everything in the entire value chain - basic research, manufacturing, sales, marketing and photo-finishing. The rise of digital imaging had huge implications for those firms which had a position and business model related to “doing the rest”.
Firstly, “the rest” became much less to do since digital imaging removed the need for film. Polaroid suffered greatly from this since their film was very expensive. Moreover, this implied a huge inertia since the razorblade business model had served the company so well in the past. After having invested heavily in digital imaging, Polaroid could not find a way to leverage upon its business model. Consequently, the company became paralyzed by conflicts in the mid 1990s and eventually sold off all digital capabilities and instead invested more in marketing. Needless to say, this strategy was good in the short term but made the company bankrupt in record time only a few years later.
In the film era, Kodak encouraged people to take as many photos as possible
since the company made most of the profits on selling film.
With the rise
of digital imaging, these signs and the benefits of being vertically integrated
lost its value.
Secondly, these firms did not have the competence base to “do the rest” in the digital era. “The rest” was now done by hardware and software companies like Adobe, Flickr, Microsoft, Epson, and Dell. Though Kodak has launched Kodak Gallery after an acquisition, the competition from other photo websites is so fierce that it may not be very profitable in the long term. For sure, it is by far not enough to compensate for the decline in film sales.
Summing it up, the companies that made money on “doing the rest” encountered great difficulties for two reasons. With the decline of film, “the rest” was simply much less, and other firms were better positioned to do what remained.
The Digital Avalanche
The third reason why the camera industry has been turned upside down is the economic dynamics of digital technology. Gordon Moore, the founder of Intel, published a paper in 1965 where he observed that the amount of transistors that could be put on an integrated circuit had doubled approximately every second year. He predicted that this trend would continue and it has done so up until now. This is nowadays referred to as “Moore’s Law” and implied that the price and performance of digital technology has been improved at a furious pace to the point were virtually everything can be substituted with electronics. The microelectronic revolution has swept through industry after industry, overthrowing former industrial giants and creating a competitive climate that had previously been unheard of. The same pattern can be seen for radios, calculators, watches, computers, TVs, phones, gambling, video surveillance. And cameras.
Digital technology has turned out to be very difficult to handle for incumbent firms. As mentioned above, one reason is that established players usually have a competence base that is not related to electronics. Another reason is that commercializing digital technology in its early stages is very tricky. Moore’s law suggests that both the performance and the price are not that attractive in the beginning. However, after a decade or so of exponential improvements it will reach levels that are ‘good enough’ and then an avalanche of growth will occur. Timing such a shift is not an easy task and failing to do so has often lead to extinction.
At Hasselblad, people struggled to find a niche application where digital imaging could be nurtured prior to the revolution. The electronic engineers thought that studio photography was such a segment. Since this segment required that a lot of photos are taken, a filmless camera would hopefully be appreciated since images could be viewed instantly on a computer. Moreover, in this application photos were digitized sooner or later anyway for instance in order to produce catalogues. Maybe those customers were willing to trade off some image quality to get all those benefits? Market research showed that there was a need for this and Leica launched a similar camera in 1997. About 150 units of this large studio camera were sold before the project was stopped. However, the marketing people at Hasselblad and the new owner were worried that a product with inferior photo quality would harm the company’s brand. Since this has always been one of the firm’s greatest assets, such concerns can be understood. After many internal conflicts, the project was eventually killed and the digital development team had to leave the company. Four years later, digital SLR cameras from Canon and Nikon had reached a performance level where they could remove Hasselblad from some if its core segments – wedding and portrait photography.
This example illustrates how difficult it is to handle the market aspects of digital technology. An initially inferior price/performance ratio along with a furious pace of improvement means that most companies either enter too early or too late. One electronic engineer who used to work at Hasselblad once told me that he thought it was wrong to kill the digital project, but that he could never have imagined that the shift would happen so fast and with such implications. The fact that even an expert in digital imaging underestimated the explosive nature of digital technology speaks for itself.
The violent pace of improvement has turned out to be very hard to master for many established players. Back in the analogue days, new models were launched at a moderate pace. While some improvements were made, there was by no means an exponential improvement along price and performance. Many companies such as Contax, Pentax, Kodak, Agfa and Leica recognized the threat and managed to launch digital cameras. However, only a few years later, many of those cameras had been outperformed on virtually all dimensions, leaving those companies behind with no more ace to play.
Moore’s Law can also help us to make predictions about the future direction of the camera industry. The continuing increase in performance and reductions in price have had two major consequences so far. Firstly, DSLR cameras have taken and will continue to take market shares from the medium format segment. The solution with a digital back is bulkier and more expensive while the DSLR cameras are cheaper and good enough for most applications. A couple of additional years of Moore’s Law would speak for DSLR at the expensive of medium format cameras. Secondly, compact cameras have reached performance levels which are beyond what most consumers need. Consequently, sales have declined in favour of mobile cameras which provide a decent Point and Shoot performance. Bearing Moore’s Law in mind, there is no reason why this trend should not continue.
As the price, performance and size of the electronics in a camera are improved, more functions will be integrated into the same gadget. In recent years, camcorders and DSLR cameras have started to converge. This is also a direct consequence of Moore’s Law and extrapolating this trend would suggest that this is one of the future directions of the camera industry (read more about it here).
To conclude, the rise of digital imaging put an end to the camera industry as we knew it. Many established players have gone out of business or balanced at the brink of bankruptcy for several years. The main reasons for this seem to be the explosive nature of digital technology, along with the fact that many firms had a position and a competence base that was rendered obsolete. While digital imaging has both popularized photography and taken it to new heights, this has been accomplished through the destruction of thousands of jobs and entire companies. Chairman Mao once said that “A revolution is not a tea party”. Those people who have worked at Kodak, Polaroid, Hasselblad, Contax, Pentax, Agfa, Leica, Fujifilm, Mamiya, Bronica and Ilford are very well aware of this.
Christian Sandström is a PhD student at Chalmers University of Technology in Gothenburg, Sweden. His research concerns disruptive innovation and the challenges they present for established firms. Christian has an M.Sc. in Industrial Engineering and also an M.Sc. Economics. Christian is particularly interested in cameras, calculators and the video surveillance industry. Most of his work can be found here.