WAVE Report

PhotoPlus Expo 2002
by John Latta
Wave Issue 0240 11/8/02

November 2, 2002
New York, NY

As many of the readers of the WAVE Report know I have a passion for digital photography. This can be seen on the web sites:

http://www.fourthwave.com
http://www.wave-report.com

It was with great interest that I was able to go to Photokina in Cologne, Germany and our report is available here. Photokina showed the first full frame (35mm) CMOS image sensors and cameras. I went to PhotoPlus in New York to explore these cameras and their pricing in more detail.

Today, the competition in digital full-frame SLR cameras is between the Canon 1Ds and the Kodak DCS Pro 14n. Both are slated to go on sale by the end of the year. Kodak has been in the digital camera business for 10 years and has been a real pioneer. However, their cameras have been very expensive and in the last 2 years, when Nikon and Canon have had professional digital equipment, Kodak has seemed to struggle. This all changed the Friday before Photokina, when Kodak announced the DCS Pro 14n at $4,999, with expected street pricing of $4,000. Canon stated their camera was priced at $8,999, but at PhotoPlus stated in the booth it has been lowered to $7,999. Virtually all I have spoken with consider even this reduced price to be high. The question asked over and over is why Canon would be so out-of-sync with the market.

The camera business, even at the high end, is like the consumer business. Core products, such as camera bodies, exist on very thin margins. It is the accessories and lenses that net margins. The classic razor and razor blade business model applies. Why then would Canon price the 1Ds so far beyond the sweet spot of the market – which is $5,000 to $6,000?

I see two reasons:

  • Canon thinks it can get it and they will lower the price later.
  • The yields for the CMOS sensor are poor.

Keep in mind that the 1Ds is very similar to the 1D and thus the costs, other than the sensor, should be very similar for these two cameras. The 1D sells for $5,000 to $5,500. It should be noted that Canon uses an 8” wafer while Kodak uses a 6” wafer for its sensor. One of the inherent advantages of the CMOS sensor is the use of CMOS fabrication technology, and thus is expected to have a lower cost over CCDs.

In this business no one speaks of yields. Yet this is the critical factor in determining profitability or the break even point. Kodak did state to the WAVE Report at Photokina, that they consider their yields as quite good – whatever that means. One problem with the camera business, in general, is that the demand is front loaded. It seems as if everyone wants the first units and then demand rapidly falls off. Thus, the traditional gains from manufacturing efficiencies are mitigated by the demand curve. If Canon does have a yield problem, possibly a factor of 3 worse that the 1D, it could significantly impact its ability to make any profits from this camera using traditional pricing. Thus, the company may find that it must cover its low yields with high pricing.

To address the first reason above, let’s consider the gross margin aspects of the business. Kodak has targeted its most loyal buyer – portraiture and wedding photographer – with the DCS Pro 14n. Kodak’s gross margins come from the back end – traditional paper and chemical processing. Thus, its camera is intended to reinforce an already strong position in this segment of the market. Kodak products will continue to drive the use of its high-margin back-end photo supplies.

The Canon situation is quite different in that photo equipment is where it nets the margins – accessories and lenses. There is a contradiction in the Canon business in that it is these items that create a consumer’s infrastructure or product attachment. Once an individual has made a substantial investment in lenses it is hard to switch to Nikon, for example. The customer has an investment in the infrastructure of a particular manufacturer. So if a Canon buyer says, “I’ll wait on the 1Ds and buy another lower cost model, such as the Canon D60,” Canon has not lost much business, in terms of gross margin. However, if the 1Ds is priced with much greater gross margins, Canon wins when this camera is bought. However, price elasticity comes into play. Specifically, how much does the volume fall off as a function of the price? Certainly by every indication the drop is quite steep. We cited in our Photokina report that the total number of buyers could be as low as 500 but it may be as high as 1000 – 2000. Based on our conversations with dealers we expect that pricing in the $4,000 to $5,000 range would see volumes above 10,000. (These volumes are for the US only.)

There is a potential big win for Canon with the 1Ds, which is the ability to get buyers to move from Nikon to Canon - the two dominant high end 35mm camera bodies. Nikon has not announced a full-frame digital camera. Its D1X model is widely considered the best digital camera currenlty available (I have had 2), but it will not be able to compete with full frame digital cameras. A new buyer of Canon products needs not just a body but frequently many lenses. It is not at all unusual to have $10,000 invested in lenses, for these camera body systems. In terms of gross margin this is a big win for Canon. Nikon did not announce a widely rumored D2 full-frame camera at Photokina. At PhotoPlus my sense is that Nikon’s response may be 6 months to a year away. Again Canon has a window of opportunity with pricing being its lever and entry gate at the same time.

At PhotoPlus, Canon “announced” that its minimum advertised price would be $7,999 for the 1Ds. That is, no dealer could advertise a price less than this. Yet, there was no press release, just booth talk. We spoke with one large dealer who largely dismissed this price. Canon has a history of playing with the price until the last minute before shipment. In booth discussions with Canon it was nothing but the party line on pricing.

Certainly the dark horse in this is the Kodak DCS Pro 14n. I found it interesting that Canon personnel were in the Kodak booth trying the engineering models. These models seemed far more polished that the crude models at Photokina. If anything could spoil Canon’s lunch to get buyers to switch to Canon from Nikon, it is this camera. The Kodak camera is based on a Nikon body, and will take all the Nikon lenses. Kodak stated that its camera is now in production and units are still slated for retail sale in mid-December. Right now Kodak’s effort is going into completing the firmware for the camera.

Canon can pitch that the Kodak DCS Pro 14n is not a “real” camera, as it is built from parts from two Nikon bodies and it is not a part of an integrated line of accessories. These are hollow words in that if the camera passes the tests of professionals and the review sites, word will spread in hours.

At PhotoPlus we spoke with one large dealer. He laughed at the games Canon has played with the pricing. “Nothing is firm until the first units ship.” The company has a history of seeking the highest prices the market will bear, but in the end market forces mold its actions. The D60 was a classic example of seeking as much as possible when first announced, but in the end the price had to come down with what the market would support. Canon also loses if it announces a camera, ramps production but cannot move the units consistent with the production rate.

The output end of the market has been significantly changed by the Epson Stylist Photo 2200. This is a pigmented ink printer that creates the richest prints yet from these long-lifetime inks. This is my 4th generation of photo printer and nothing comes close to it. While walking the floor at PhotoPlus I spoke with a number of users and they had the same view. Epson has shifted the color output market. One of the big problems with this printer is the cost of supplies. Again this is a gross margin issue – money is made on the supplies, not the printer. A number of the competing ink companies are coming out with similar inks to compete with Epson. Certainly one of the more interesting is MediaStreet.com. It has its Niagara II Continuous Ink Flow System, that has independent ink bottles outside of the printer. They claim to have Epson equivalent inks in a month. The price of the Niagara II Continuous Ink Flow System is $275 and $16 for the inks per bottle. The economics are vastly better with such a system.