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The State of the Imaging Industry 2003

The Photo Market Weighs In on What to Do With All Those Digital Images

In an industry that grows seemingly more and more obsessed with statistics every day, we lead off with a few numbers that caught our eye while going through this year's "State of the Industry" submissions.

• U.S. digital camera penetration is approaching 30%.
• Around 10% of digital camera users don't print their photos at all.
• Over 90% of the rest print at home.
• U.S. domestic factory sales of digital cameras will top $2.9 billion incremental pictures (digital and film) before the end of the year.

While we seem to be awash in stats these days, that last number really sticks out. 1.5 billion. That's a lot of images, most of which are captured digitally and most of which don't get printed at all.

Just imagine if half those images, or even a quarter, got printed at retail. The cash registers around the country would be ringing off their counters. Photo specialty store and minilab owners would be dancing in the street. It would truly be a digital revolution.

Unfortunately though, we're not there yet. In fact we're not even close. Some estimates put the chunk of images that are actually printed at somewhere between 15-20%. And, if you ask us, that even sounds a little high.

But things are rapidly changing and don't just take our word for it. Instead, take a look below at the nearly 40 "State of the Industry" submissions from some of the imaging industry's leaders and read about how in an overall down market, the photo industry is humming again. And the engine that's generating that hum? It's called the Digital Express and if you haven't done so already, maybe it's time you hopped on board.

UBS
A Complex Balancing Act
by Ben Reitzes, IT Hardware & Imaging Technology Analyst, UBS Investment Research

Another year has gone by where we all are still trying to make sense of the "digital shakeout." Who is winning? Who is losing? Who will make the necessary moves to benefit in the future? That is what we care about on Wall Street.

As digital camera sales continue to surge, the winners clearly seem to be the "non-traditional" players like SanDisk and Hewlett-Packard, while traditional players like Kodak continue to try to find their way. We do not believe that digital camera hardware is the road to prosperity for Kodak, as margins are thin and competition intense. We only like digital cameras if they drive more inkjet paper sales and Ofoto processing services.

SanDisk sells the memory cards that go into cameras-the digital film. With no traditional conflicts like too much capacity for film and paper and conflicts with retailers, the digital film market has more leverage to current trends.

As the leading photo printer maker, Hewlett-Packard's Imaging & Printing Group (30% of sales) has been able to benefit from home printing of digital photos. This trend is helping support HP's earnings as its enterprise hardware businesses continue to face considerable challenges. We believe that home printing will continue to experience solid growth, but more and more consumers will inevitably wish to have digital photos processed at retail. Given that home printing is still the easiest solution right now for digital prints, we believe that HP's inkjet business is well positioned.

For traditional players, Canon is an exception, doing a good job of growing a profitable digital camera business and using it to augment its resurgent inkjet printer business.
Where is Kodak in all this? We look at Kodak's retail kiosk business as only a "bridge" to a more convenient digital photofinishing experience (drop off and pick up) that is only in its early stages. Therefore, the kiosk market may actually be quite limited and it is important to drive digital output at retail through minilabs, which use traditional photo paper. Right now, Fuji has the lead with the Frontier labs, which enable easier management and output from digital media, in addition to providing traditional photofinishing services.

Kodak is still trying to manage traditional conflicts with its retailers who still want a big piece of the processing pie. We believe the natural tendency is for online photofinishing (Ofoto and others) to cut out retailers to be more efficient. With conflicts inevitable, it seems that market dynamics are forcing Kodak to try to win more onsite processing share.

In summary, Kodak (and Fuji) have a more complex balancing act to perform than "digital pure plays." Kodak seems to be learning by trial and error that it is best suited to drive processing growth at retail, placing more importance on minilabs and paper as film declines. We would look for "paper wars" at the likes of Walgreen's and Wal-Mart, etc. only to become more important in the future to revenues and profits. Stay tuned.