In Ted Butler's Archive

A Digital Bombshell

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

For the past few years, the main bearish argument against silver has been the encroachment of the digital process in photography. Particularly in the amateur consumer category, it has been argued, incessantly, that the silver-halide film process would be made extinct by digital.

It did not matter to the bears that the film process was the main source of silver recycling, and the demise of film in photography would greatly reduce the supply of recycled silver. Nor did the bears care that much of the printing of photographs from digital cameras was on paper containing silver. All that mattered in the hundreds and hundreds of articles written over the past few years was that silver was dead on arrival in photography, thanks to the explosive growth of digital cameras. People, who literally knew nothing about the real facts in silver, knew enough to pronounce digital would kill silver photography.

Certainly, there was no denying the sales growth of digital cameras. Even though the first digital camera (Sony’s Mavica) was introduced more than 25 years ago, the same year as IBM’s Personal Computer, sales of digital cameras only took hold in the past few years. But if there was a delayed reaction by the consumer to embrace digital photography, it was more than made up in a hurry. Nowadays it’s almost impossible to even find advertisements for regular film cameras. Digital cameras have been just about the hottest and most popular consumer electronic item for the past few years, sporting strong double-digit growth, year after year.

Since we have all become accustomed to the high sales growth rate of digital cameras, my reaction was nothing short of shock to this article that appeared; on April 4, in the prestigious Financial Times of London. It’s such a bombshell, in my opinion, that I am reprinting it in its entirety.


Japanese exports of digital cameras fall in February

The decline in exports reflects falling global demand and a saturated market. However, demand is still growing in North America.

By Michiyo Nakamoto

Financial Times

Exports of digital cameras from Japan fell for the first time in February, highlighting the rapid reversal of fortunes in what was once a fast-growing market.

Japanese digital camera exports in that month totaled 3.29 million units, a decline of 0.9 percent year-on-year said the Camera and Imaging Products Association.

On a value basis, the decline in exports was even steeper, at 11%, reflecting the sharp drops in digital camera prices that have plaged the industry.

The decline in digital camera exports by Japanese manufacturers, which control about 80 percent of the world market, reflects the deterioration in the balance of global demand and supply as manufacturers have increased shipments in spite of growing market saturation.

Exports to Europe, in particular, declined 10.7 percent, for reasons not clarified in the CIPA report. The large drop in shipments to Europe wiped out a 3 percent increase in exports to North America.

The deterioration in the profitability of the digital camera market was underscored recently when Sanyo Electric said it would make a bigger-than-expected loss in the year ended in March, due to declining demand for its digital cameras.

Sanyo is the world’s largest maker of digital cameras, most of which it supplies to third parties that market them under their own brands.

The group had initially forecast digital camera shipments for the year ending last month of 18 million units, but was forced to revise this figure down to as little as 11 million.

However, Sanyo said the sharpest decline came in the Japanese rather than overseas market.

Meanwhile, Olympus said it would make an $166 million operating loss in its imaging division, which is believed to be largely as a result of losses in its digital camera business.

The pressure has hit Kyocera, which last month said it would wind down production of current models and not develop new ones.

In spite of the gloomy news elsewhere, the value of digital camera shipments within Japan rose moderately in February helped by the shift to more expensive, single-lens reflex cameras.

Both Sanyo and Sony, a major supplier of digital cameras that expects to have increased shipments from 10 million in fiscal 2003 to 14 million last year, said they expected price trends to stabilize this year.


You might want to read that article again; it’s that profound. Let me highlight some of the most important facts in this article, and then give you my take and analysis.

For the first time ever, sales of digital camera fell unexpectedly – “a rapid reversal of fortunes to what was once a fast-growing market.” It was stated flatly that the digital camera market faced “growing market saturation.” The Japanese digital camera manufacturers, who control 80% of the market, were facing sudden and unexpected losses. These are the facts. Now, my take.

This should hit you like a ton of bricks. My first observation was how little distribution and comment this article and these facts generated. I bet this is the first time you have read about it. Hundreds and hundreds of articles, maybe thousands, all proclaiming how digital will just grow and grow, and then zero comment when the facts suggest otherwise. Remember, proper investment analysis is about weighing all the known facts. Why are those who raise the digital camera issue ignoring this report?

I’d like you to put this report in proper perspective. If the largest world manufacturer of anything – cars, boats, planes, computers, anything – had to suddenly, without warning, revise its yearly sales forecast down 40% in unit volume, could there be bigger news than that? If General Motors or Toyota, or Dell or IBM, or Boeing or Airbus, or Microsoft came out, without warning, that they have sold for the year 40% less than they planned on, what would the reaction be?

I’ll tell you what the reaction would be – how could that happen? Especially, how could that happen considering there was no obvious macroeconomic cause? Let’s face it; there have been no sudden shocks to the world economy. No sudden recession or depression, no world war, no giant meteor wiping out a continent or two. The world’s largest manufacturers of autos, airplanes, ships, computers, or any other broad class of manufactured good have not seen their sales fall 40% in expected annual unit volume production. So why did the world’s largest digital camera manufacturer see its expected sales fall that much?

Most importantly, why is the very word, saturation, being applied to the digital camera market? After all, this is a very new technology that was growing by leaps and bounds. This was a new technology that was universally proclaimed to replace the silver-halide photographic process. What went wrong?

I’ve been observing the digital camera phenomenon closely over the past few years, and I’d like to share with you some of my thoughts. Long-time readers should remember that I had always thought that digital photography was a great technology that would coexist with, but not replace entirely, silver-halide film photography. I still feel that way.

My first observation is that digital photography itself has changed greatly since its introduction. I’m not talking about the improved picture quality at ever-decreasing prices, as that was fully expected by all. I’m talking about the high expectations and popular perceptions that surrounded digital cameras; that’s what has changed.

For instance, it was always assumed that by freeing consumers from the necessity of buying and developing film, digital would be much cheaper than the film process. The opposite has occurred. Considering the expensive papers and inks, software, and hardware needed in the digital process, film photography has become a downright bargain in comparison. This, in spite of the glaring advantage of digital – the ability to erase unwanted shots.

Additionally, the digital photographic process is infinitely more complicated than film for the average person. And because storing and archiving digital images has become so burdensome (for most people once you put them in your computer, you can’t find them again), we have seen the ultimate and ironic change in digital photography. More and more folks now schlep to the store to get high-quality prints produced from their digital images, same as is done with film. It has become clear that the ideal way to record and store a photographic image was the very same way we were doing it for more than one hundred years; on a print you could hold in your hand or put in a photo album, to share with someone else.

This is why I think the digital camera market has become saturated – it’s just not that revolutionary. How successful do you think any new technology will be if it basically does the same thing as an older technology, but does it more expensively and with more complications? If you’re only going to end up with the same end result, a photographic print, why pay through the nose and aggravate yourself to boot?

Compare the digital camera introduction to the introduction of photography itself, a hundred and fifty years ago. Then, the world was introduced to a process dreamed about for thousands of years. All digital photography has done is provide a different mechanism, more expensive and more complicated, for an existing and firmly established process.

When George Eastman introduced the Brownie camera for Kodak 100 years ago, that set off a growth pattern that lasted a century, as the average person was exposed to an affordable and simple way to record memories. That was a world-altering event. Compared to that, the digital camera doesn’t even register.

I want to be clear that I am not trying to bash digital photography. My interest is analyzing its potential impact on the use of silver in photography. But over the course of the past few years, I have seen many wild claims being made about digital and I am taking the opportunity to try and balance the story, particularly in light of this report showing a sharp fall off in the growth of digital cameras.

I’ve long felt that the digital camera market would get saturated, for a number of reasons. For one, consumer digital photography is still a rich man’s and rich country’s game. The article mentioned Europe, the US and Japan for good reason. Digital cameras are not making big inroads in the high-growth and heavily populated areas of the world, like India, China, elsewhere. A reader sent me a news clip recently from Brazil, where film photographic growth was on fire. It won’t take long to saturate a market that excludes most of the world’s population.

Another phenomenon that I had noticed was that many digital camera buyers had previously owned older digital cameras and were upgrading to enjoy new features. I’m not being judgmental about those who must have the latest gadgets, just observing that type of buying can be saturated more quickly than buying by massive numbers of new customers.

What I am suggesting is that the bloom may be off of the digital camera rose phenomenon. I am not suggesting that digital cameras are going to disappear, but rather that the preceding report was no fluke. It may take time for people to recognize the new technology may not be that much of an improvement over the older technology, but if the older technology remains much cheaper and easier, that will be realized in time.

My main conclusion, of course, is how this digital camera sales fall-off relates to silver. Here, I think the impact could come sooner. For years, we have been conditioned to assume that digital will replace film. This is a slap in the face to that way of thinking. I think there are many people who will be shocked by this new information. The main bear argument has been dashed in an instant, by the facts. With all the bullish arguments for silver still intact, who would have thought that the main bearish argument would be seriously challenged?

The most ironic aspect to this digital camera debate is that the very time of maximum sales and recognition of their penetration in the market, over the past two years, that has occurred precisely at the same time silver has acted better in price than any time in the past two decades. I mean, if digital was making film obsolete, why would the price of silver behave so well? Now, we may have an answer – the future doesn’t bode so well for digital cameras.

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