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The bankruptcy of the American icon that invented the handheld camera is reverberating beyond Wall Street and around the world's entertainment capital. Insiders say Hollywood may be on the verge of scaling back a decades-old symbiotic relationship, and seeking business alternatives.
Kodak's star began to fade in the late 1990s as digital technology began chipping away at its century-long stronghold on film distribution. But the company still provides a significant amount of film to Hollywood and it remains a presence in the land of make-believe, where the Kodak Theater is home to the Oscars.
Sources say major studios - listed among Kodak's top unsecured creditors because they are owed millions of dollars in film rebates - fear they will not get repaid and have started to look elsewhere to buy film.
Major entertainment companies listed among Kodak's top 50 unsecured creditors include Sony (6758.T), owed $16.7 million; Time Warner's (TWX.N) Warner Brothers, due $14.2 million; Comcast (CMCSA.O) NBC Universal, short $9.3 million; Viacom's (VIAB.O) Paramount Studios, owed $6.8 million; and Walt Disney (DIS.N) Studios, $4.2 million.
Bankruptcy experts say Kodak's creditor arrangements are up for scrutiny. Two sources with knowledge of the contracts say most of these debts are related to film rebates owed to the studios who buy film from Kodak on a picture-by-picture basis. The price of film varies and often drops as a studio uses more, which is why they are often owed rebates.
"In bankruptcy, Kodak will have the option to continue with these arrangements," said Edward Neiger of Neiger LLP, a New York based bankruptcy law firm.
But he noted that if Kodak decides to continue with any contracts, it must demonstrate it can still make its payments under the contracts as they come due.
If it decides to reject contracts, "they will only have to pay what is owed in bankruptcy dollars," which is discounted from the original amount, and then the counterpart would be free to find other partners.
All the studios were either unavailable for comment, declined comment or had no immediate comment.
HEDGING BETS
One of the two sources, who works for a company that buys film from Kodak and spoke on condition of anonymity, said studios have been stockpiling Kodak film in anticipation of a bankruptcy filing. Now, they are also talking with other film suppliers, like Fuji (4901.T).
That executive said he received a letter from Kodak on Thursday stating it would continue to supply film but not addressing the matter of its debts - a potential sticking point in future relationships.
At its peak, Kodak probably generated about $500 million from film distribution for motion pictures annually, experts estimate.
In addition to setting the standard for 35mm film, Kodak also won numerous Oscars for technical achievement. Its founder, George Eastman, was named an honorary member of the Academy of Motion Picture Arts and Sciences.
Chris McGurk, CEO of Cinedigm (CIDM.O) and former COO of Metro-Goldwyn-Mayer Inc, said that in the late 1990s, studios, filmmakers and theater chains stepped up efforts to digitize movies, eventually rendering Kodak's staple 35 millimeter film a relic of the past.
"Kodak failed to recognize the game-changing impact the digital technology would have on the film-making business. Those who didn't see it have fallen by the wayside," McGurk said.
"It's easy to see how that could happen. Industry has been resistant to change and projection film on 35 mm had been happening for 75 years but the fact is that the world has changed and digital takes enormous costs out of the distribution system."
WIDENING RIPPLES
Beyond mere film supply, speculation persists that the Academy of Motion Picture Arts and Sciences, which hosts the Oscars, may exercise an option in its contract that allows it to find a new home for Hollywood's glitziest awards show.
The Academy said in a statement it has not begun venue negotiations for the Oscar telecast beyond 2013.
But many industry watchers feel the Oscars may want to disassociate itself from Kodak - or prepare for the company to become a punchline at the upcoming Academy Awards.
"I don't think it's good branding at all for the Oscars to be associated with a bankrupt company," branding expert Adam Hanft, CEO of Hanft Projects, said.
About 10 years ago, Kodak agreed to pay $75 million to Hollywood developer CIM Group LP, which owns the building, over some 20 years to see its name on the 3,400-plus-seat theater.
The film academy has a 20-year deal with CIM to host the Oscars there, with an option in the 10th year to explore other venues or renegotiate the rest of the lease term.
A third source who was familiar with the situation said the film academy is currently at the 10-year point of its lease, stoking speculation the Academy would at the very least use Kodak's precarious financial situation as leverage to negotiate a better deal.
"The fact that Kodak committed that much money to a deal, when they were desperate for cash and funds for R&D, shows how short-sighted they were," Hanft said.
The ripples of the bankruptcy extend even to the Magic Kingdom. In 2002, Kodak and Disney announced they had renewed a multiyear promotion accord first set in 1989, which marketing experts said could be valued at tens of millions of dollars.
Under the original deal, Kodak paid Disney for the rights to use Disney characters in promotions and advertisements worldwide, and to advertise its products on Disney's cable television channel and in Disney publications.
In 2002, the companies renewed their alliance and provided for sales and promotion at Disney properties of traditional film and one-time use cameras; on-site photo processing and services; provision of imaging kiosks; and other services.
Neiger said this deal could be revisited as well.
"One of the biggest assets that Kodak has going for it is its brand-name recognition and its goodwill. Very few companies have the name recognition that Kodak has. It's up there with Xerox and General Motors," he said.
"Some of this goodwill can be attributed to Kodak's high-profile placements, such as its sponsorship of Disney and the Kodak Theatre where the Oscars are held."
"In its bankruptcy, Kodak will analyze whether they're getting the right bang for their buck with these arrangements, or whether the money could be better spent elsewhere, for example, on R&D."
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