A lot of people are wondering about OMDS potential profitability and if the company can succeed where the Olympus Imaging Division could not. This is a fair question to ask.
NOTE: Click on images to enlarge. Photographs have been added to serve as visual breaks.
Now that the OM-1 ‘wow’ camera has been formally introduced, the typical new product debate about features and technology has started in earnest. Much of this ‘debate’ will become emotional in nature and skewed based on someone’s product preference. Olympus/OM System haters will likely always be haters and find something negative about the OM-1. *shrugs* No surprise there.
When a company cancels a product line like Nikon did with the Nikon 1 system, or Olympus did with their Imaging Division, they are basically admitting that their business strategy for that business segment or product line failed.
The products themselves could have been very good… but the strategy that was implemented simply did not create a sustainable future for them. Fundamentally this comes down to four corporate strategies. Marketing. Finance. Operations. And, Human Resources.
None of us know the internal workings of the former Olympus Imaging Division. So, any specific commentary on that would be purely speculation. What we do know is that the division was unprofitable for many years.
Pressure from some investors resulted in a decision whereby Olympus divested itself of the Imaging Division so the company could concentrate on its medical businesses. Enter Japan Industrial Partners, and the Imaging Division was transferred with Olympus holding a 5% stake in a new private corporation, OM Digital Solutions (OMDS).
Since OMDS is privately held we can assume that we will never see any public financial disclosures. No doubt there will be plenty of opinions expressed about OMDS potential profitability. Those opinions will also be speculative in nature. Any business faces the same challenges when it comes to choosing a strategy and generating a sustainable profit. So, let’s have a look at some basic considerations.
Unless a company’s management team is completely inept a business never goes bankrupt because it cannot generate gross margin. Simply put, gross margin is the revenue generated minus the direct costs (i.e. variable costs) incurred to produce the product or service. If the Olympus Imaging Division or now OMDS, doesn’t sell a particular camera body or lens, then no direct costs are incurred for that unit.
What can kill a company is when its fixed costs become bloated and there is insufficient gross margin to generate a profit. Fixed costs typically include facilities operation, rent/mortgage payments, interest expenses, fixed compensation paid to employees regardless of the hours worked or the number of goods produced, and insurance.
The break-even point is the number of units that a business has to sell to cover its fixed costs. As a formula it can be expressed as fixed costs/average gross margin. Let’s say a company has fixed costs of $50 million per year and its average margin per unit is $500. Under this scenario it would need to sell 100,000 units to cover its fixed costs. Any units sold above 100,000 would then begin to generate a profit for the business.
To lower its break-even point companies typically follow a few basic approaches. Here are a few of those tactics:
- They can raise the prices of their products while trying to hold on to current volumes. Buyers in the market will decide if they are willing to pay more or not. Competitive product positioning and the value proposition of a company’s products come into play here.
- They can try to increase unit volumes through aggressive marketing. Any price discounting will obviously reduce the effectiveness of this tactic.
- They can significantly lower their fixed costs.
These basic approaches are not mutually exclusive. For example a company could reduce its fixed costs, while at the same time increasing its pricing, and trying to increase volumes through aggressive marketing… perhaps with innovative new products.
Obviously I have no way of knowing the average gross margin of OMDS. We do know from a public announcement that on start up the company had 37 billion Yen (~$360.1 million US) in capital and 2,000 employees.
It is instructive to note that the number of employees under the Olympus Imaging Division was reduced by 66% from 6,000 to 2,000 under OMDS. This would have a significant impact in terms of reducing the fixed costs of OMDS, and also its break-even point… assuming that margins were maintained.
Olympus Corporation booked a significant financial loss when it transferred the Imaging Division to OMDS. This may indicate that OMDS did not have to assume a high degree of debt when the business was started. If this was the case, it would also help to reduce fixed costs and the company’s break-even point.
Based on some comments made by former Olympus Visionaries it appears that OMDS is pursuing a niche differentiation strategy with a focus on outdoor photography. This includes nature/birding, sports, macro, and extreme environment/travel photography. Well known professional nature photographers like Petr Bambousek, Jari Peltomaki, Andy Rouse and David Tipling made the switch to Olympus so the equipment does have acceptance and recognition at professional levels.
Focusing on outdoor photography segments makes perfect sense to me given the IBIS, weatherproofing, size/weight of OM System equipment. Some recent product introductions like the M.Zuiko PRO 150-400 TC1.25 and the M.Zuiko 100-400 mm f/5-6.3 IS also add logic to the company’s choice of market segments. From a pragmatic standpoint the company would not appear to have the financial capability to overextend itself into additional camera formats like full frame.
A key consideration when determining marketing strategy is to identify the core competencies of a company’s products as well as its competitive position in the market place. Smartphones have decimated some of the more generic segments of the market like everyday travel and family snapshots. There is no point for OMDS to try to compete in markets that are currently dominated by Smartphones. It is far more strategic to select segments where Smartphone competition is weak and likely to remain so.
As the average age of dedicated camera owners continues to increase, it is logical that the interest in smaller, lighter camera gear will increase over time. Full frame may be the ‘rage’ on photography websites but it remains to be seen how long that lasts. I think that product improvements seen with the new OM-1 will get some ‘mature’ photographers to reconsider their choice of camera equipment.
OMDS Potential Profitability
As an outside observer it appears to me that OMDS has good potential to be a profitable imaging company. The organization has taken some aggressive steps to reduce their fixed costs, and by extension their break-even point. For example, if we assume a modest annual per employee compensation of $35,000, reducing headcount by 4,000 employees would lower annual fixed costs by $140,000,000. This is not an inconsequential sum.
The company appears to be focused on leveraging the strengths of its products in market segments that don’t face aggressive competition from Smartphones. And, the increasing average age of photographers may work in its favour over the next number of years as interest in smaller, lighter gear may increase.
I don’t have a crystal ball, but I do think OMDS is doing what it needs to do in order to have a sustainable and profitable future. As is often said, “Time will tell.”
Photographs were captured handheld using camera gear as noted in the EXIF data. Images were produced from RAW files using my standard process. Crops are indicated for most images. Photographs were resized for web use. This is the 1,135 article published on this website since its original inception in 2015.
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