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Snapshot of a Creative Destruction

Monday, January 23, 2012

Kodak, Rochester, and the decline of the industrial northeast.

One technology replaces another only when it is better or cheaper or both. The automobile, for instance, was so much more versatile, safe, and easy to use than the horse and buggy that, once Henry Ford brought its price within reach of the average man, it replaced the old technology in only 20 years.

Eastman Kodak, one of the iconic American companies for most of the 20th century, likewise rose to greatness on the basis of a new technology. Now, apparently, it will die because of another.

Kodak filed for Chapter 11 bankruptcy protection on Thursday.

In the early days of photography, whose infancy was in the 1820s and ’30s, it was a messy, difficult business. During the Civil War, Mathew Brady needed a whole Conestoga wagon dark room in order to make his immortal images of the fighting. He had to take a glass plate, coat it with light-sensitive chemicals, expose it, and develop it all within about 15 minutes. Even when dry plates, on which the light-sensitive chemicals were suspended in a gelatin, appeared in the 1870s, their handling was too difficult and expensive for most amateurs.

George Eastman (1854-1932) began his photographic career manufacturing dry plates in 1880; in 1884 he patented photographic film. At first it was paper-backed, but in 1889 he perfected film made from cellulose that was transparent. (It might be noted that movies—another great 20th-century industry—only became possible after Eastman invented transparent film.)

It was politics and the rise of the new South that ended these cities’ glory days. Once Jim Crow was abolished and air conditioning became ubiquitous, the South offered many advantages over the old northern industrial centers.

He formed the Eastman Company that same year. He had already trademarked the name Kodak (he liked the letter K and his mother came up with the word itself). In 1892, the company name was changed to Eastman Kodak. He also devised a camera that could take a hundred photos. It came loaded with film and, when all the exposures were taken, you sent it back to Kodak, which returned it with the developed pictures and a new roll of film installed. “You press the button,” his advertising slogan ran, “and we do the rest.”

For the first time, the family photograph became possible and ordinary life could be recorded. It was a titanic economic success and by the turn of the 20th century, George Eastman was a very rich man. In 1901, Eastman, who never married, made a $625,000 contribution to what is now the Rochester Institute of Technology. He made numerous other donations to hospitals and colleges, including MIT, and left his entire $95 million fortune to the University of Rochester when he died.

By the 1920s, Eastman Kodak had a near monopoly on both film and cameras in the United States, controlling about 90 percent of the film market and 85 percent of the camera market, a monopoly that it would enjoy for decades. The company was added to the Dow Jones Industrial Average in 1930 and would stay on the list until 2004. For most Americans, photography simply was Kodak, and its yellow boxes were seen everywhere. Paul Simon had a hit song called “Kodachrome,” after the company’s signature color film, the first in the world for the amateur market, introduced in 1935.

In the 1980s, the Japanese Fujifilm began to make inroads into the American market, cutting into Kodak’s sales. And then came digital photography. Digital photographs do not use film, instead they capture light on an array of light-sensitive sensors and then store the image as a digital file.

It is little surprise that, once the price dropped within reach, digital photography largely replaced film in only a decade.

The advantages over film are almost limitless. A digital camera can take and store hundreds of pictures of astonishing resolution. And once you purchase the camera, there is nothing else to buy: No film, no processing. And, of course, there’s no waiting. Digital photography is instant photography. The images are easily stored—impervious to heat and moisture—in a computer, which can also edit, organize, manipulate, and send them to others. It is little surprise then that, once the price dropped within reach, digital photography largely replaced film in only a decade.

Kodak, however, did not make the transition successfully, even though it pioneered some aspects of digital photography. It even made, as a prototype, the world’s first digital camera in 1975. Weighing eight pounds, storing images on a cassette tape, and with a very low resolution, it was only a proof-of-concept model.

It is likely that Kodak suffered from “monopoly disease.” With a guaranteed market, monopolies don’t have to work hard to make handsome profits and they tend to become fat, dumb, lazy, and un-innovative. When the world changes, monopolies often have a very hard time adapting. Many of them don’t. Xerox floundered after its patents on copiers expired in the 1970s. IBM, overwhelmingly dominant in mainframe computers, nearly didn’t survive the personal computer revolution of the 1980s.

The big three automakers, who had an effective cartel in the American market after World War II, were blindsided by the gas crisis of 1973 and the invasion of Japanese cars at about the same time. The Japanese cars were better made, more stylish, and more technically advanced: they soon captured an ever-increasing share of the American market. All three firms struggled for the next 30 years, and two of them, Chrysler and General Motors, had to go through bankruptcy. Their eventual fate is still not clear.

Xerox floundered after its patents on copiers expired in the 1970s. IBM, overwhelmingly dominant in mainframe computers, nearly didn’t survive the personal computer revolution of the 1980s.

While the apparent failure of Kodak is very bad news for both the stockholders and employees of the company, it is also very bad news for Rochester, New York, home of Kodak since the very beginning. Rochester, too, rose to greatness thanks to technology, in its case the Erie Canal. The quick and inexpensive transportation provided by the canal caused a great economic boom along its whole length. A string of cities—Buffalo, Rochester, Syracuse, Rome, Utica, Schenectady, and Troy—became industrial powerhouses.

They are all now in serious decline. This time it is not new technology that is at fault. While the Erie Canal was obsolescent by the late 19th century (although it still carries some commercial shipments, it is now mostly used for recreation) the New York Central Railroad, and then the New York State Thruway, paralleled the canal and kept transportation cheap and efficient.

Rather, it was politics and the rise of the new South that ended these cities’ glory days. Once Jim Crow was abolished and air conditioning became ubiquitous, the South offered many advantages over the old northern industrial centers. The climate was mild in the winter, labor was cheap and mostly un-unionized, taxes were low, and regulation was light. If a company was looking to build a new factory, why build it in snowy, high-tax, union-dominated Rochester or Utica if it could be built in warm, low-tax, right-to-work South Carolina or Texas?

The creative destruction of capitalism, it seems, applies not just to companies, but to cities and states as well.

John Steele Gordon has written several books on business and financial history, the latest of which is the revised edition of Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt.

FURTHER READING: Gordon also writes “Good as Gold?” “Occupy Wall Street Faces a Winter of Discontent,” “The Henry Ford of Our Time,” and “English: The Inescapable Language.” Kevin A. Hassett and Steven J. Davis say “Private Equity Is a Force for Good.” Christopher DeMuth contributes “Competition and the Constitution.”

Image by Rob Green / Bergman Group

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