THE NEW LOOK OF PHOTOGRAPHY The transition from film to electronic imaging seems sure to excite consumers and create fast-growing markets. Who will win them? Kodak? Polaroid? Or the Japanese?
By Peter Nulty REPORTER ASSOCIATE Thomas J. Martin

(FORTUNE Magazine) – HOLD ON to your lens caps, shutterbugs. A storm of technological innovations and new products is gathering over the world of photography. When it breaks sometime in the 1990s, it will blow away much that is familiar -- including film, chemicals, and darkrooms -- replacing it with a technology that seems both dazzling and old hat: computers. That's right, photography is going electronic and digital. Semiconductor chips put the power and quality of 35-mm photography into the hands of camera buffs over the past decade by automating such tricky adjustments as focus and shutter speed. But compared with the changes that are coming, this was a breeze. The big wind will bring consumers the power to edit photographs. To crop, to blow up, to combine images, to change colors. It's the might of the darkroom, something now wielded exclusively by professionals and the most dedicated hobbyists. The average amateur will be able to assemble family group portraits from individual photographs, for example, and touch them up along the way by cleaning the mud off Billy's shirt, say, or changing Sis's hair from purple back to brown or giving Aunt Daisy a new hat. The companies that provide all this editing capacity to the huge consumer market at the right price stand to inherit the crown of George Eastman, founder of Kodak and king of the shutterbugs. He invented dry film in the & 1880s and thereby armed generations of snapshooters with hand-held cameras. Photographers now spend some $16 billion a year on cameras, equipment, film, and services. Most are amateurs pursuing one of America's most popular hobbies. Electronic imaging could add much more. Eugene Glazer, a security analyst at Dean Witter Reynolds, estimates that electronic imaging has already become a $1-billion-a-year business, mostly hidden in industrial or professional applications, such as advertising and ''desktop publishing,'' the computer-assisted production of newsletters, brochures, pamphlets, and such. When amateurs begin to buy the equipment, the industry could quadruple in size by the year 2000. Old-line camera and film makers, including Kodak and Polaroid, are in a desperate race against electronics manufacturers to capture a piece of this new, high-stakes market. Two notable electronic-imaging products have already made it to consumers in recent years. One was a flop, the other a megahit. In 1984, Sony brought out the Mavica, an electronic still camera that uses a semiconductor sensor instead of film to record images that are then stored on small floppy disks for display on TV screens. Sony won't tell how many it has sold, but security analysts say Mavicas gather dust on store shelves. Similar cameras like the Canon Xapshot and the Fuji Fujix have fared no better. The problem: The pictures are crude when compared with photographs taken with conventional film. The price was rough too. The Mavica initially was priced at $1,000, though it's now listed at $799 and can be bought for much less. THE BIG HIT: the camcorder. Sales have increased from 500,000 in 1985, two years after it was introduced, to three million last year. Sony and Matsushita dominate the market. Over the same period list prices have dropped from $1,000 to $500. Like the Mavica, camcorders use semiconductor sensors and store images on videotape. Their resolution is also far inferior to ordinary film photography. But viewers don't really notice because they compare the result not to still photographs but to what they see on TV. Now other consumer-electronic photo wares are trickling into stores. Among them: Sony's updated Mavica, list-priced at $849, which records ten seconds of sound, enough for the photographer to dictate a caption or preserve his subjects saying ''cheese.'' A printer made by Hitachi (listed at $999) turns images from your funniest home videocassettes into stills. Next year Kodak will introduce compact disks (for under $20) that will store photographs magnetically for viewing on television screens. (See diagram for examples of what else you will be able to do with the new technology.) The fight to seize a share of the market will be a doozy, reminiscent of the early days of personal computers. New products and small companies may soar, burst, and fade like fireworks before the right combination of technology and price is discovered. Many experts on the industry see the race as a simple contest between the molecule jocks (chemists) and their electron counterparts (physicists). If so, and if electronics is the future, can Kodak and Polaroid, whose greatest strengths are in chemistry, survive against masters of electronic hardware like Sony and Hitachi? Many on Wall Street think not. But Kodak and Polaroid aren't goners yet. There is more to pictures than meets the eye, and chemistry has a big advantage over electronics that won't soon disappear. All recorded images, chemical or electronic, are made up of tiny dots, called pixels in computerese. Thanks to the extreme sensitivity of silver halide chemistry, the basis of all conventional photography, any amateur with a 35-mm camera and top-quality film can capture images made up of as many as 80 million pixels. The best electronic sensors, such as those used in camcorders and electronic cameras, record only about 300,000 pixels per image. Thus, a simple silver halide photograph may have resolution 250 times greater than a camcorder or an electronic camera can produce -- a huge advantage that is seen in sharper forms and more shades of color. When it comes to capturing an image, chemistry leaves electronics in the darkroom. Even so, electronic imaging has one tremendous edge over chemical photography. An image recorded in digital form in a computer can be edited or manipulated far faster than in a darkroom. That means the image can be touched and retouched until it is right. Sound familiar? Remember the advent of word- processing programs and spreadsheets? Computer systems that manipulate photographs will do for photography what spreadsheets did for accounting and word processors did for writing. Electronic computing has taken so long to infiltrate photography because capacious memories are needed to store the images and accommodate the complex software that manipulates them. Depending on the software used, a 20-megabyte hard disk (the standard capacity of the typical desktop IBM PC) will hold little more than one snapshot. Software designers are struggling to find mathematical formulas that will reduce the amount of data needed to capture each image. The hunt for the best ''compression algorithm,'' as these formulas are known, is critical. An early leader: Ricoh Corp. of Japan. It recently discovered one and named it the Generalized Chen Transform. It compresses an image to one-hundredth of its data and in 30% less time than the nearest competitor. Ricoh has applied for patents. As software improves and the cost of memory falls, the consumer market will open wide. Electronic imaging is already the hot new technology in commercial graphics, advertising, and some news media applications. A recent ad featuring a nuclear submarine-size bottle of Budweiser surfacing under a rubber raft of people lost at sea was created by a computer imaging system made by Quantel of Darien, Connecticut. This spring Time magazine used computers to assemble five potential replacements for Vice President Dan Quayle, positioning them around him and President Bush. Electronic imaging is burying the old saw ''Pictures don't lie'' and sparking debate among journalists over what ethical rules should apply to their expanding power to alter images. Time, a sister publication to FORTUNE, carefully identified its image as ''computer- altered.'' Anticipating a boom in the imaging industry, acquisitive corporations are zooming in on small entrepreneurial firms like Iris Graphics of Bedford, Massachusetts, and Britain's Crosfield Electronics. Iris makes printing machines, costing up to $123,000, for electronic imaging. Crosfield makes computer imaging systems, which cost up to $2.5 million each and are used mainly by publishers. Israel's Scitex, a major competitor of Crosfield, bought Iris last year for some $24 million. Du Pont and Fuji of Japan, the world's second-largest film maker after Kodak, formed a joint venture that bought Crosfield for $370 million in 1989. ALTHOUGH most photo-processing companies are waiting to see how photo imaging will affect them, a new kind of retailing has already begun. In the trendy and bustling shopping district of Westwood, California, and at the corner of Michigan Avenue and Wacker Drive in downtown Chicago stand two Imageland stores. They are a joint venture between Canon and CPI Inc. CPI, a St. Louis company founded 50 years ago as a portrait studio, runs 320 photo- finishing stores and 1,000 portrait studios in Sears outlets in North % America. Imageland is a kind of one-stop supermarket of imaging services, offering computers and various printing processes. Most customers are businesses that want to create ads, say, or photo-heavy catalogues. But Imageland also deals with consumers, turning photos into T-shirts, greeting cards, or illustrated family trees. Bruce Carl, CPI's vice president for new ventures, says that if Imageland succeeds, he could see a chain of shops set up at malls next door to greeting- card or gift shops so that shoppers might imprint their purchases with photographs. Arthur S. Diamond of Diamond Research Corp., a consulting firm in Ventura, California, that specializes in electronic imaging, sees another development. He believes electronic imaging will lead famous folk to ''proffer their pixels,'' as he puts it, and license their images to be electronically mixed with the photos of ordinary folks. Imagine: You and Kim Basinger, cheek to cheek on your T-shirt! The success of the camcorder teaches an important lesson for companies hoping to win consumers over to new products: Customers will sacrifice some of the quality of chemical-based photography for other advantages, which for camcorders means motion, sound -- and instant gratification. This suggests there is a device, call it a Holy Grail, that could usher in the age of total electronic photography and the end of film for consumers. It will be an electronic still camera with better resolution and a lower price than Sony's Mavica. Making it will require more sensitive semiconductor sensors and more capacious lightweight memories. Such a camera would let shutterbugs snap pictures, edit them at home on TVs or computers, and print them without going to the photo processor, an independence that is one of the pleasures of camcorders. The riddle manufacturers face: How much resolution is needed at how low a cost for a camera to set the consumer market on fire? Kodak and Polaroid have the technology for sensors that capture more than one million pixels per image on a computer disk, three times as many as Sony's new Mavica can handle. Other companies are surely working toward the same goal. Last year, for example, Fuji set up a plant to design and build semiconductors, including sensors, for electronic imaging. An electronic camera with a sensor that captures one million pixels or more still won't find buyers among the general public because the cost will be prohibitive. In August, Kodak will sell a 1.3 million pixel sensor mounted on ! a Nikon camera. Asking price: $20,000. But a camera like this may prove irresistible to photojournalists. Reason: Their need to get pictures back to their editors dwarfs all other considerations. The digital images can be instantly transmitted by telephone or even satellite through a suitcase-size scanner and dish. In fact, the Kodak camera, though developed independently, is a more sophisticated version of Sony's Promavica, which is list-priced at $2,500. The Promavica has two sensors that can capture 760,000 pixels. Photographer John Schaer of Cable News Network used such a camera to take the photo of a flower-carrying Chinese student facing down a tank in Beijing's Tiananmen Square during the 1989 rebellion. Schaer was able to elude China's blockade of news photographs by transmitting the shot by telephone. Toshiba of Japan recently announced an electronic still camera that will feed images through a processing device into computers. The company hopes the camera, which sells for about $12,000, will appeal to desktop publishers. The question is how soon the cost of top-quality sensors will approach what's available in the pocketbooks of hobbyists. Says I. MacAllister Booth, chief executive of Polaroid: ''It would be a miracle if an electronic still camera with sufficient resolution and low enough price, under $500, say, hit the market in less than five years.'' WHAT STRATEGIES have Kodak and Polaroid cooked up to fight competitors in the new world of electronics? Executives of both companies contend they can survive and prosper, at least in the transition period that may take 20 years before electronic cameras rival chemicals in quality. They make several points. First, that electronics companies are fallible: Witness Sony's first Mavica, Cannon's Xapshot, and Fuji's Fujix. Second, customers will always demand some form of ''hard copy,'' a high-quality, old-fashioned photograph that remains the specialty of the two U.S. companies. In the past, successful new camera technologies, by touching off excitement among hobbyists, created voracious surges in film demand. In 1970, when simple, inexpensive 35-mm cameras began to roll into the market, Americans took five billion photographs a year. In 1980 they took ten billion, and last year 17 billion. As anybody who works in an office knows, computers have not done away with paper. Sales of bonded paper, used for printouts and other things, have increased over 50% since 1980. Kodak and Polaroid believe the same will hold true for electronic photography. They think the excitement generated by the new technology will stimulate a larger market for photographic images, which can always be translated into digital form and transmitted when necessary. Says Kodak CEO Kay Whitmore: ''Our forecast well beyond 2000 is for traditional photography to continue growing, although electronic imaging may grow faster. We don't think traditional photography will shrink and die. That's one thing I don't worry about.'' Which doesn't make him worry-free. Over the past five years, Kodak has cut its profit margins on film to defend sales against aggressive attack from Fuji. During that period, Kodak's U.S. market share has dropped from about 85% to 80%. The price of Kodak stock has been locked in the $40 to $50 range in the same five years. Whitmore, 58, joined the company in 1957 from the University of Utah, where he earned a B.S. in chemistry. He watched four major reorganizations in the 1980s as predecessor Colby H. Chandler tried in vain to improve sluggish earnings. As president, Whitmore helped steer Kodak into a variety of diversifications, including 1988's $5 billion purchase of Sterling Drugs. A Mormon and a frank talker, Whitmore became CEO in 1990 and admits that these investments have yet to pay off. Says he: ''Should we have done better? Yes. Did we know how? No. But the business is changing dramatically and we are making a new future. Investors will have to be patient.'' For now, Whitmore is spending 25% of his $1.7 billion research and development budget on electronic imaging. His own pursuit of photography remains more traditional. He has a single-lens-reflex camera, which he mostly uses to take snapshots of his 13 grandchildren. Next year Kodak will try to cement a marriage of chemistry and electronics with a photographic compact disk. An optional extra for customers who turn in film for processing, the disk will look much like the kind you play on an audio machine today. The customer will be able to choose between picking up conventional prints or getting both the prints and his photographs on CD, where they will have been electronically stored and can be viewed on a videodisk player. The disk will be offered for $20 to customers who ask for them. The player will be made by N.V. Philips, the electronics giant of the Netherlands, and will sell for about $500 at photo and consumer electronic stores. Peter Palermo, Kodak's vice president for consumer imaging, says that the CD + has the advantage of ''extending the life of 250 million silver-halide-based cameras in the U.S. into the electronic age.'' But it will also require photo- processing shops to buy about $100,000 worth of equipment, including scanners that will translate filmed images into digital form and printers that can turn digital images into prints. Kodak will make and sell them the equipment. Other new products in Kodak's pipeline include a simple, consumer-friendly computer console that might sit on the counter of your local photo shop. Without investing in their own video player, photo buffs could use the machine to play their CDs, edit the photographs, and print them out as, say, greeting cards. Meanwhile, Philips will sell a special video-CD player that will let the viewer enlarge or crop the image. The same player will show CD movies on TV sets. Glazer of Dean Witter thinks the CD might be a hit with desktop publishers looking for an inexpensive way to get high-quality images into their computers (each CD will hold 100 photographs). Some security analysts think Whitmore will need more than the CD to lift Kodak out of doldrums that include missing out on the camcorder craze. Kodak briefly sold a small 8-mm camcorder in 1984 when other machines were bulkier, but soon gave it up, while Sony later came out with a lightweight 8-mm and ran away with the market. Alex Henderson, an analyst at Prudential Securities, thinks Kodak's venture into CDs could be similarly doomed. He sees the electronic revolution as threatening the core of what has been a classic repeat business -- film for cameras is like blades for razors. Says Henderson: ''There's not much profit in this for Kodak. If it does succeed, Philips and the Japanese will make the players and Kodak the disks, and it could accelerate the shift to video. Maybe consumers will want the disks and not the prints, and there's not much money in that.'' But Whitmore is moving to build a base of electronically minded customers. Kodak recently opened the Center for Creative Imaging in Camden, Maine, a school that can accommodate up to 50 artists, photographers, and graphic designers who want to master the new art. The center uses equipment made by Apple Computer and Sun Microsystems, among others. Polaroid also has to move fast to grab a role in photography's changing technoscape. For decades the company has operated in the special niche created when founder Edwin Land introduced instant photography in 1948 and protected it with a battery of patents. But most remaining patents will expire over the next two years. And consumer interest in Polaroid photography has been in a long decline. At its peak in 1978, the company sold 13 million instant cameras. Last year, by which time the price of a basic Polaroid camera had dropped from $100 in 1978 to $30, sales barely passed four million. Profits in the 1980s were erratic, partly because of the costs of defending against a takeover attempt by Shamrock Holdings. The company has total debt of $732 million. Polaroid is far less popular with investors than it was in the early 1970s. It may have an $873 million windfall in the form of court-ordered damages against Kodak for patent infringements. Interestingly, that award, which Kodak is appealing, represents 66% of Polaroid's capitalized value, or what Wall Street thinks the company is worth. CEO Booth, 59, won't say how he will spend the money if Polaroid wins the case. Obviously, he might decide to pay a big chunk of the debt. Meanwhile, he is embracing electronics with gusto. He is now investing 50% of Polaroid's $147 million in R&D spending on electronics and is hiring electron jocks to help. Among them: a new director of research, James Ionson, who was head of innovative science and technology on the Strategic Defense Initiative, and a new vice president for professional systems, Carl Yankowski, who studied electrical engineering at MIT and marketing at Procter & Gamble and PepsiCo. Yankowski does not hesitate to wear pink-madras suspenders in a once button- down corporate environment. Booth, an ebullient mechanical engineer (Cornell University), became CEO in 1986. He says he will focus on turning digital images into ''quick, inexpensive, high-quality hard copy. People will always want that.'' Polaroid recently introduced a $1,000 scanner that will translate photos or film into digital images for desktop PCs and a $1,500 printer that can produce photos from the computer -- onto Polaroid film, naturally. The initial market: professionals, such as interior designers who might want to take instant pictures of a client's living room, alter them, and then print them out to illustrate how the room might be redecorated. That seems to represent sparse pickings. But for the longer term, Booth says, Polaroid is working toward making an electronic camera that would contain a small screen for instant still replays or, perhaps, a tiny printer. The advantage over a current Polaroid, which also makes prints: An electronic Polaroid could also feed digital images directly into a computer. The small screen and the printout would both be extras. Booth admits that this kind of device is a long way off because of huge technological hurdles. Better sensors, bigger memory, a printer that requires little energy from its batteries -- all these are needed. Such products seem little more than dreams, but it would be a mistake to dismiss them out of hand. Consider the history of semiconductors. Over the past 20 years, their progress has been one of pell-mell pace marked by smarter chips, bigger memories, and less energy. Photography's chemists are certainly talking tough. Says William Fowble, vice president of imaging at Kodak: ''We just don't think this will turn out the way people expect, with the death of chemistry. When videotape came out they predicted the demise of films. When Mavica came out, we said, 'Holy cow, what does this mean?' Now we know that just because a technology is neat doesn't dictate acceptance.'' At the very least, chemistry and electronics will make a fascinating marriage -- till the death of one doeth them part.


-- My assignment during a crash course at Kodak's Center for Creative Imaging: to assemble a photo of my two kids. A scanning machine digitized a shot of son Kiernan, 7, and the Red Sox. A computer displayed it on the screen. -- I cropped Kiernan's image by writing on an electronic pad with a stylus, similar to the mouse you would use with a computer. Then I pushed the blow-up button. Storing this picture, I called up a snapshot of daughter Aran, 11. -- Here's Aran, in a picture taken in her grandmother's garden this spring. Next, I retrieved the shot of Kiernan so that I could put him next to her. For an extra detail, I went back through other photos looking for a baseball bat. -- As final touches, I recolored Aran's jersey and headband. Flowery accents seemed right. To make the kids more visible, I cropped the photograph before printing it. A note completed the birthday card (above). - P.N.