With the announcement on Monday that Heidelberg is to hand over its digital printing operations to Eastman Kodak, we can now analyze this agreement, and assess how this affects the digital printing market.

The agreement is interesting, and on further investigation leaves many questions only partially answered. This agreement has Heidelberg handing over its 50% share in Nexpress L.L.C., and its 100% ownership of Heidelberg Digital L.L.C. Nexpress is the developer and manufacturer of the Nexpress 2100 digital color press, and Heidelberg Digital is the manufacturer of the Digimaster 9100 and 9150 families of monochrome digital printers. Also included in this agreement is the Nexpress GmbH operation in Kiel, Germany.

Under the agreement it is understood that no money changed hands in either direction, but that Heidelberg has a financial incentive to work with Kodak in the ongoing success of the Nexpress. This will be to receive a maximum of $150 million over the next two years based upon sales success and defined sales targets. There is also the possibility of further payments concerning ongoing success over a five-year period. Within this, Heidelberg has a non-compete agreement not to compete against Kodak in the Nexpress 2100 market segment. In the new structure Heidelberg will continue to own the production facility in Manitou Road, Rochester, NY, where both the Nexpress and Heidelberg Digital operations, under their new Kodak name, will be based. Kodak will lease this location from Heidelberg.

This is an interesting compromise agreement between the two companies, as it is understood that Heidelberg had received substantial grants to re-develop this location that was acquired from Eastman Kodak when Heidelberg took over the monochrome printing operation from Kodak in 1999.

The first thing that is interesting in this agreement is that it appears that Kodak does not regard the Digimaster monochrome printing operation as being of much value. There is no non-compete agreement between the two companies for this product area. It would appear that Kodak sees this product is at the end of its life, and that products from competitors like Canon, Ricoh and Xerox have made the Digimaster less competitive. This is particularly the case for the future, as little ongoing development on new monochrome printing products has been done, and no new products are understood to be in the pipeline.

The other area of the agreement that is still somewhat ambiguous is the position of Heidelberg. When Heidelberg stated last year it was to sell its digital printing operations, it commented that it would continue selling the products. It also indicated that it would supplement the Nexpress and Digimaster products with additional entry-level products to widen the range of digital printing products it would distribute.

It appears that Kodak did not agree with Heidelberg's plans in this area. At present, and this may change before drupa, Heidelberg has no distribution agreement with Kodak to be the graphic arts sales channel for Nexpress and Digimaster. All that is stated is that Heidelberg will work together with Kodak to sell the products. This will hopefully be rewarded by payments up to a maximum of $150 million over the next two years under a sales target plan. One wonders just how realistic this is on the basis of the very optimistic sales projections made between Heidelberg and Kodak when they set up the Nexpress L.L.C. joint venture company in 1997.

So where does all this put Kodak in its plans to become a major player in the digital printing market. Kodak has now put together a comprehensive plan to operate in this area. It has in its portfolio Encad, a supplier in the wide format ink jet market, Kodak Versamark, the old Scitex Digital Printing operation, and now the Nexpress and Heidelberg Digital organizations. Kodak also has a 50% stake in Kodak Polychrome Graphics, the very successful graphic arts consumables, systems and distribution company. It also has a huge portfolio of technology within the Eastman Kodak laboratories that is stated to be applicable for the digital printing markets.

James Langley, President, Commercial Printing and Senior Vice President, Eastman Kodak Company, also stated that Kodak planned to increase its portfolio of products to fill gaps in its market coverage. This is particularly in the entry-level area of the market. My guess is that distribution agreements may be made with Canon for certain products. Canon, who have long-term relationships with both Kodak and Heidelberg Digital, is very keen to increase its presence in the commercial printing markets, and Kodak may be the best solution to do this.

Kodak sees ink jet technology as one of the core elements of its plans to be a major player in digital printing. With Kodak Versamark it already has the market leader in very high-performance transactional printing. The new BC2 imaging head technology, that Kodak Versamark is introducing at drupa, should enhance this situation and potentially widen the market reach of the Versamark products by adding higher imaging quality in color. The key however for the future may be in new STREAM ink jet technologies coming out of the Eastman Kodak laboratories.

Technologically it appears that Kodak will have the capabilities of creating a competitive range of products. In some areas new development will need to be carried out to make certain products more competitive. The Nexpress 2100 was flawed in its design in the first place in being designed as an offset press that printed using xerographic technologies. In this design no capabilities were built in to allow for connection of on-line finishing equipment. This, plus the operator servicing and non-click charging approach, was designed to replicate the way offset presses worked. Unfortunately the corporate markets, which are the markets that buy most digital printers, don't want to work with what is a xerographic offset press. Perhaps new versions of Nexpress are on the way and will be introduced at drupa that will be more suited for corporate markets.

STREAM is a continuous ink jet (CIJ) technology capable of running at high speed and high resolution and suitable for a wide range of applications. Gil Hawkins, Distinguished Research Fellow & Senior Laboratory Head at Eastman Kodak, explained that the technology had originally been developed for photofinishing, but its capabilities make it appropriate for other high volume printing applications. Unlike conventional CIJ technology, STREAM uses no electrostatics. Instead it introduces a new principle of ink jet printing, based on thermal 'pinch-off' of continuously jetted fluid streams.

By applying a regular pulse to heaters surrounding each nozzle orifice, the ink is stimulated into breaking into fine droplets. Ink drops not required are deflected away from the substrate by airflow and recirculated to the ink supply. Drop size and 'pinchoff' is regulated by the time between heat pulses, thereby creating a variable drop or grayscale capability. Print speeds were quoted at 1.2m/sec linear speed at 640dpi and 2.3m/sec at 320dpi with a robustness or printhead life many times greater than existing drop on demand technologies.

STREAM technology is still in development and has not yet been commercialized. However, it is understood to be tolerant to a wide variety of ink types and viscosities and has the potential to be manufactured at very low cost - possibly as low as under $0.01 per nozzle. Over the last few years Kodak has invested heavily in STREAM technology and according to Mr Hawkins, "commercialization is now months, not years away".

It appears very likely that STREAM will be incorporated in a new range of printers from Kodak Versamark, aimed at higher quality or lower equipment cost markets than the current and new BC2 based range of products. It is unlikely STREAM will be able to attain the highest speeds of the Versamark technology while maintaining quality, but it will be able to achieve high quality at lower speeds. The cost of the heads should be substantially lower than the Versamark heads because there is not the need for the very complex and expensive spot generation and deflection technology.

One can envisage a future product line from Kodak that is a mix of xerographic and ink jet devices. STREAM technology appears to be suitable for products fitting between Nexpress and Versamark products, and perhaps even coming down into the current 50 pages/min plus Nexpress markets. In the market area beneath 50 - 70 pages/min Nexpress area it is likely Kodak will reach a distribution agreement with a third-party company, perhaps Canon, to complete the product range.

This brings me to what I still see is the unanswered questions. This is the go-to-market and distribution strategy. At present Kodak has a very limited distribution channel in operation. Kodak Versamark works with a number of distribution partners around the world to sell predominantly into corporate organizations and specialized high-volume printing markets. The Versamark channel is not suited for distribution of the Nexpress products. The question of where Heidelberg fits is significant. I believe Kodak does not see Heidelberg as a key partner, and it is likely that any future agreement will be very limited, and for a maximum of two years.

Kodak has already stated it plans to employ as many of Heidelberg's specialist sales and support staff as it can. The non-compete clause appears mainly to keep Heidelberg from reaching agreements with other companies like Xerox, for digital printing products. Heidelberg is paying a high price to get out of its expensive mistakes in the way it planned to become a major player in digital printing.

So what will Kodak do to develop its go-to-market strategy? Many people think that KPG may be a key in this. KPG however is only owned 50% by Kodak and 50% by Sun Chemical. Jeff Jacobson, KPG's CEO has stated he and his executives are responsible for the company's bottom line, and they, not their shareholders will decide what products KPG sells. What incentives may Kodak provide to convince KPG to become part of the distribution strategy?

There is also the situation about getting into the corporate markets. With the Digimaster monochrome printers Heidelberg had a relationship with Ikon and Danka for sales and support of the products. Will Kodak continue with such arrangements and open up more of the product lines to them? What about a possible acquisition of one of these organizations? That would open up substantial go-to-market opportunities. The questions about distribution are the ones that most analysts still find unclear, and expect to hear more about how these strategies will develop.

The other big question from many analysts concern Kodak's history in the digital markets. In the past Kodak has failed in all its activities in these markets. It could not make a success of the Diconix ink jet operations that it sold to Scitex. (It later re-acquired this organization, which is now Kodak Versamark.) The same situation applies to the Digimaster product line. This was sold to Heidelberg in 1999 after Kodak had failed to succeed in selling this product. Heidelberg made minor changes to this product and made a reasonable success of it. Now it is back in Kodak. If Kodak could not make a success of these products and markets in the past, why should it now make a success of them?

We are advised that there is a totally new and focused team running the shop, and this team brings in the necessary experience to succeed. This team has a large bundle of money to spend, and a board-level commitment in making a success of Kodak's push into digital commercial printing. In this area Kodak has made the initial moves in building a product strategy. The jury however is out on the implementation and distribution issues. It is something the world will be watching to see how it all develops.