In 1975, an engineer at Kodak invented the world’s first digital camera.
The prototype took 23 seconds to capture a black and white picture. The image was stored on a cassette tape and could be displayed on a television.
The technology was primitive, but clearly had potential. Still, digital cameras would threaten Kodak’s lucrative film photography business. So Kodak executives ditched the project.
At the time, Kodak was on top of the world. It was the number 1 camera seller and had nearly 90% of the film market at its peak.
The company didn’t make much money on cameras. All the profit was in film and photo development, where gross margins reached a juicy 70%. It was a classic “give away the razor, sell the blades forever” model.
By 2001 digital cameras were taking over the traditional film market. Kodak was still the #1 digital camera seller, but margins were slim and there was no perpetual revenue like with film.
By the time the iPhone launched in 2007, it was clear Kodak was in trouble. Phones with built-in cameras would be the nail in the coffin of this great American company.
Kodak hung on until 2012, when it finally declared bankruptcy.
In hindsight, some pundits blame Kodak’s management for not adopting the digital camera fast enough. This is the wrong way to look at it.
Kodak actually did the correct thing by burying its digital camera project and delaying its development. There wasn’t nearly as much money in making digital cameras as there was in film.
These types of tech disruptions are extremely complex. There is no clear path to maintaining market share, and large companies always have trouble competing with nimble startups when breakthroughs occur.
Today Alphabet (Google) finds itself in a similar situation. They invented the tech behind today’s AI models, but ironically AI now threatens their core search business.
Google’s Digital Camera Moment
In 2017, 8 scientists working at Alphabet/Google published a paper titled “Attention is All You Need”.
This paper laid the foundation for today’s advanced AI models. It introduced the transformer, a new technology which would be used to build large language models (LLMs).
Already, Google likely regrets having published the transformer paper. They may have been better off if they had simply buried the breakthrough and delayed the inevitable, as Kodak did with the digital camera.
Google literally built the foundation for OpenAI’s revolutionary ChatGPT models. Now Google finds itself behind in the race to capture market share in the booming AI market.
OpenAI controls roughly 80% of the AI market today. Alphabet has just a sliver.
In terms of technology, Google is catching up. Google’s latest Gemini Pro 2.5 model is impressive.
But in terms of adoption and user-friendliness, the company is still far behind. ChatGPT is easier to use for both individuals and companies, and has better marketing.
Google’s Smart Diversification
Diversification is one area where Kodak failed badly. For example, the company could have branched out into semiconductors, as its smaller competitor Canon successfully did.
Google does not appear to be making the same mistake. Since very early in its corporate life, Google/Alphabet has successfully branched out into new markets.
For example, Youtube, which Google acquired for $1.65 billion in 2006, has become a massive business. In 2024 Youtube revenue surpassed Netflix with over $42 billion. Youtube may also soon surpass Disney in revenue, which is absolutely remarkable.
Alphabet’s “robotaxi” business Waymo has been another excellent investment. Since 2010 Google has invested heavily in self-driving technology, and it’s about to pay off in a big way. The company is now doing more than 250,000 rides a week in its driverless taxis, and is scaling up rapidly. Read more on this in my recent piece, Tesla’s Moment of Truth.
There are very few tech companies with the vision to invest heavily for 15 years before the payoff begins. Google is one of them.
Google also has a mobile carrier (Google Fi), a productivity suite competing with Microsoft (Google Workspace), a leading robotics firm, and more than a dozen other promising businesses.
Yes, AI does threaten Google’s core business model (search). But they have successfully diversified the business to a point where even if they lose in AI, it’s not going to be a fatal blow. Don’t get me wrong, it would be a hard hit, but not a deadly one.
Google still employs many of the brightest minds in AI, and there is a decent chance the company eventually overtakes OpenAI and Anthropic. The company is currently trying to merge search + AI, and there’s a chance this effort is successful.
All of this is to say that, no, Google/Alphabet is not going to fail as Kodak did. Its leadership has done a good job diversifying the business, and it still has a chance to compete in AI. Artificial intelligence is both a threat and opportunity.
Predictions of Google’s demise are premature. The company is here to stay for at least a few more decades, and probably much longer.
Alphabet is no Kodak. If we ever get a big crash in the tech sector, Google will be one of the names on my shopping list.
