Followup on Nikon's Financials

It's always fascinating to watch discussions of hot topics. Last week's hot topic was Nikon's surprise financial presentation projecting a loss for the imaging group for the year. Before I get back to what Nikon said, let's first clear up a couple of the discussion points that keep coming up.

  • "Smartphone connections (sharing of images) won't save cameras." Those of you with long memories will recall that I pointed out that cameras needed do this as early as 2007, and became rather persistent about the requirement starting in 2009. Now perhaps I'm wrong—though I don't think I am wrong on cameras needing modern connectivity—but if making cameras live fully in the 21st century instead of the mid-20th century fails to make a change in the buying pattern of potential customers, then the dedicated camera market is pretty much going to die. At least I have ideas. Do those that are posting flat out dismissals of someone else's ideas have any or their own ideas and any support for them?

    Right now, that pro/hobbyist [sic] user that Nikon seeks out over the non-pro/hobbyist [sic] user—geez, Nikon can't even get their market descriptors right—is yes, stable in size, but is also growing older and older in average age. My thesis has been that you won't attract someone who grew up with the notion that cameras share images by making cameras that don't. On top of carrying another gadget, you now add shooting and workflow complexity that is, to be frank, now getting to be ridiculous given what the right 21st century tech allows.

    I might also point out that "stable in size" as new geographic markets were added and population increased is not a positive statement in and of itself. A stable buying population of 3m as suggested by Nikon's odd, not-even-MBA-wannabee-quality charts implies would mean that cameras get less relevant over time. Either that or we're going to have a population die-off we weren't expecting ;~(.

    For the camera business to have any traction moving forward it has to find elements and areas of product improvement that will trigger some sort of growth, or at least attract users new to the market. The industry must find and capture more younger users. I've posited connectivity as one attribute that might develop that, but it's not the only one. The common theme among all the things I can think of to attract new users as opposed to catering to the same, aging subset is this: 21st century tech applied correctly. 

  • "Thom wants a job at Nikon." Nope. And I'd turn one down if offered. These days I write, photograph, and teach. That's more than enough for my quasi-retirement. That doesn't mean I don't have an informed opinion about what's happening in an industry I've followed for decades.

    I simply want my favorite photographic tool company—one I grew up with starting 50 years ago—to gets its head out of a posterior position and do the right things. If you've been paying attention, I don't give Canon, Fujifilm, Olympus, or Sony any slack on this, either. Indeed, as consumers, I don't think we should ever give corporations slack on making sure that their products solve real user problems, live in the current world we do, and do so well. 

    So one comeback I hear about the things I'd like to see changed/fixed/added is that Nikon might not be able to show a profit if they invested in what I—and I believe many others—want of them. Well, if you can't make a profit doing what customers want and need you to do, then you shouldn't be in that business, simple as that. The way companies die is that they get disconnected from their customers. The companies start looking at cost cutting instead of product suitability to "grow the profit" in flat and down-turning markets. That turns off customers, and it begins a downward spiral that some companies never escape.

    Everything I've pointed out where cameras have issues tends to be an area where the camera company did something that was convenient or cost-effective for them, but overlooked something that a customer trying to use their product might have issues with. I don't sugarcoat my writing. If I think something wrong, I write that I think it's wrong. 

  • "Nikon said mirrorless isn't doing well." That's not exactly what Nikon said. They said their sales plan for mirrorless turned out to be over-estimated and the shift towards mirrorless didn't generate significantly more full frame sales as they expected. Meanwhile, of course DSLR sales are down, as everyone has long expected. (Okay, they're down more than most expected, but no one predicted they'd stabilize or go up.) [I also suspect that some of Nikon's phrasing was a culturally-approved form of public spanking. The over-estimators are probably looking at offices with a window soon. That's not a good thing in Japan.]

    I'd argue that many of the issues Nikon points out as problems all boil down to poor product line management on Nikon's part, coupled with letting the marketing message get away from them. On the DSLR side, for instance, only the D6 appears to be on schedule (let's hope its specifications push that product forward again). A D5s or D5x never showed up, the D850 didn't iterate on the usual two-year window they'd established for D8xx, the D750 is over four years old, the D610 even older. In the DX realm, in addition to never filling up the DX lens lineup (buzz, buzz), the D3500, D5600, and D500 are beyond their past-due iteration dates, and the D7500 update is due now. 

    What that says to me is that Nikon took their eye off the DSLR ball and started down a "no or mild" update path for DSLRs, and that customers saw through that. Of course they won't buy outdated cameras or mildly updated ones at full list price. The D7500, if you recall, even had several things taken out of it from the D7200, while dropping in pixel count. Hmm, that doesn't look like an update, does it? (Which is one reason why I say the marketing message got away from them.)

    Meanwhile, to protect the DSLRs, Nikon has made all the Z's land under the higher end DSLRs they slot against (what happened to that pro/hobbyist they want to retain?). The Z7 is missing things the D850 has, the Z50 is missing things the D7500 has. Well, that's not going to get anyone accelerating into mirrorless now, is it? And that's not exactly catering to the "pro" part of pro/hobbyist. 

    The question is whether Nikon actually sees that contradiction between their own actions and presentations. They claim to want the higher end, more stable customer—what I would call pro and serious enthusiast—and then they shoot slightly lower and don't hit projections. Duh. Or they don't update a camera or phone in the update. Again, you're not going to hit projections with that kind of tactic.

Meanwhile, everyone seems to have missed a key element in Nikon's presentation: a 5b yen write down in a 10b yen loss, all on 25b yen lower revenue. Moreover, another 5b yen write down in the next fiscal year.

The actual numbers you need to see are that sales will go down a total of 25b yen this fiscal year, while 
operating profit will drop only 17b yen (the write-down adds another 5b yen to that, though). That sounds good at first, as it seems to indicate that Nikon must be saving money somewhere. But it's more problematic than that: the way to look at things is: a 25b yen drop in sales (approximately 10% drop in dollars taken in) takes Nikon from a profitable position in operations to a loss. As I noted many months ago, there are only so many costs Nikon can cut. They've cut a lot in the past couple of years trying to scramble to stay ahead of this problem. It wasn't enough. 

And that brings me back to where I started: Nikon needs growth in some of their products now. What do I mean by that? Well, if DSLR sales continue to slide and mirrorless isn't replacing that revenue 1:1 or better, the sales will continue to go down, and the loss will widen (again, there's not much more room for outright cost-cutting without starting to cut off needed limbs, and we already need 5b yen in additional cost cutting to get back to breakeven before sales drop any more).

What is the model(s) that's going to grow billions of yen in revenue and get Nikon out of the hole? Olympus never found it. Pentax never found it. It's quite possible that as time goes on and the entire camera business continues to not find a 21st century product that resonates that no one will find it, and we'll just slowly watch each camera maker's head drop below the surface of the water, one by one. 

While that all sounds pessimistic, I'm actually not pessimistic overall. I believe that there is a course of action (e.g. products) that can stabilize camera sales (and grow one company's camera sales if competitors don't respond). Simply put, dedicated digital cameras don't live in the 21st century yet. Yes, it will take more R&D, more cooperation, and better understanding of the technologies that will emerge on the near horizon to fix this. But I believe it to be a possible task rather than an impossible one as some suggest. 

More pixels, more dynamic range, faster frame rates, more dots in the EVF are not the things that fix the fundamental issues with cameras. Ergonomics and workflow are putting off potential new users. Complexity is putting off casual users. Size/Weight is putting of aging users. Meanwhile, the phone makers are concentrating on their cameras, as they, too, are seeing contraction in overall market size as most people now have a more than capable mobile phone. So the bottom of the camera market keeps getting nibbled away while the top of the camera market is iterating so narrowly that it only caters to a small, committed few who'll put up with the workflow, complexity, and size issues.

This is the "squeeze" I predicted back in 2009. Had I been running a camera company back then, my Job One would have been figuring out how to find the right middle in that squeeze that protected me from the contraction. Not a single camera company has managed to do that. 

So, will a camera company figure things out in this new decade starting with 2019? So far, the answer seems to be no. But that doesn't mean it can't be done. So call me an optimistic pessimist (e.g. it can happen, but it isn't).

I won't reveal details, but all of the businesses I talk to in all aspects of the camera business are busy beavers at the moment. They're all planning lots of sales, specials, bundles, whatever, to try to bolster their holiday sales numbers (as I was typing this, I received an email from Nikon about a one-day 11% discount on refurbished items). So, market contraction has now led to price erosion. The thing I don't hear anyone talking about is what happens in January ;~). Everyone's bailing out water, but no one's fixing the boat. 

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