George Gilder : The February 2004 Gilder Technology Report reported in detail about “Foveon: RAW in Vegas” and some of the contents of the issue made it into my new book The Silicon Eye , now available for pre-publication purchase on Amazon.com. Sandy Fleischmann, our Sigma SD10 photo enthusiast and queen of the http://www.gildertech.com Telecosm Lounge attended the Photo Marketing Association trade show in Orlando, FL, in February. Along with an incandescent display of photographic prowess, and some first available images from the Polaroid 530, she submitted her report (below) on the photographic scene and the investment prospects related to digital cameras. I added a few observations from my recent trip to Japan for the CLSA Forum at the Grand Hyatt.

Report from Orlando: Photo Marketing Association 2005

“Digital photography is great, but how can we make any money? We sell customers a camera – or they buy online -- then they print the pictures themselves.” That's digital photography summed up by a small southwest Virginia camera storeowner during a reception at PMA, the trade show and conference for the Photo Marketing Association held early this month in Orlando.

Digital cameras are already discomfiting the camera shops that used to dominate the industry and the PMA. But bit-based cameras still have a long way to go before they can deliver the full motion and full resolution products that can make the mobile teleputer ubiquitous.

The major news in digital cameras—and the tantalizing opportunity for Foveon as the producer of intrinsically the lowest power and most efficient pixels—is the flood of new sales in multimedia cell phones, with 180 million shipped in 2004, up 130% year over year, according to In-Stat/MDR. But with an exotic new chip, Foveon has so far gained zero percent of this market. Meanwhile, Lyra Research reports global shipments of over 63 million units of digital still cameras in 2004, up more than 35 percent from 2003, with the European market leading the way with 25 million units, the U.S. second, and Japan the third. First in shipments in the western European market since 2002 has been Canon . Among up-market specialty DSLRs (digital single lens reflex) cameras, Foveon's unique X3 imager made a qualitative dent among the digerati by its role in the Sigma 10 camera, which is becoming a cult success, with a following of thousands of photographers taking millions of dazzling images that nonetheless sunk into the phosphorescence of the Orlando extravaganza with scarcely a ripple.

Dominating the curvacious convention hall were such industry leaders as Canon, Nikon , Sony , Samsung , Kodak , Hewlett Packard , Olympus , Fuji , and hundreds of ambitious aspirants marketing a cornucopia of cameras, pixels, and printing gear to photography store owners and retailers. Particularly aggressive was Kodak, deploying its exhibits over gargantuan floor space, pushing their printing kiosks as a revenue-generator for retailers ranging from drug stores to camera shops.

Among scores of impressive compact, point-and-shoot digital cameras, Hewlett Packard's charge coupled device (CCD) powered, Photosmart models amazingly eclipsed the Japanese and Koreans. The winners of the PMA Shoot-out were the Concord Camera 3346Z (3.1 Megapixel CCD sensor) for the sub-$100 group, an array of HP models in the $100 to $500 range (HP Photosmart M22, R707, R717, 945), and the Casio EX-P700 (7 MP Sony CCD sensor) in the $500 to $599 range. Casio models are thin, pocket-sized, easy to carry and make satisfactory prints or web-viewed photos.

Still the most visible customer for Foveon's X3 imager chip technology is Sigma Corp . and PMA showed off the eye-catching results of the Sigma/Foveon collaboration. A private Japanese company founded by Michihiro Yamaki in 1961, with 901 employees and annual sales in 2004 over $137 million, Sigma had specialized in lenses and film cameras until the introduction of the Sigma SD9, with Foveon imager chip, in 2002, followed by the updated Sigma SD10 in October 2003.

My objective at PMA was to see how Sigma's cameras—with Foveon imager chip inside—and lenses compare in the market, as well as to see Sigma's “Our World” exhibit of photo prints. Why bother with a digital SLR like the Sigma SD10, since they're larger and heavier than the point-and-shoot cameras? The answer is lens variety, image quality, and RAW digital format options. The only DSLRs on the market with the Foveon imager chip's luminescence and ‘zing' are the Sigma SD9 (Foveon's F7 imager chip) and SD10 (Foveon's F7N imager chip). Users can take and print extraordinarily detailed photos. The proof hung on the walls at Sigma's PMA exhibit: a kaleidoscope of photos on display, each many square feet. Sigma featured similar displays at the Photokina trade exposition in Cologne, Germany, in October 2004, as well as Birmingham, UK, Focus on Imaging trade show in March 2005.

The Sigma DSLRs are not entry-level cameras; the DSLR market is referred to as the “prosumer” (professional-consumer) market, think of it as a move up market. In an interview VP Kazuhito Yamaki declared, “Our next camera will include features only Foveon can provide.”

But as chiefly a lens company, Sigma will not help Foveon with the cell phone camera market. Sigma's Michihiro Yamaki has the camera phone market sized up, “The high investments involved with the production compared to the small turnover from the sale to third parties does not compensate for joining this market, “ i.e. not much opportunity to make money for Sigma in these markets with cheap commodity lenses and other components.

Where is Foveon in the entry-level consumer point-and-shoot market? Here all the companies, Canon, Sony, Nikon, Samsung, Olympus, HP, Fuji, Kodak tout their models for form factor, image quality, even fashion cuteness – color coordinated to your favorite red or blue wardrobe hue. Most of the images are satisfactory to good, if rather flat, and above 4MP or 5 MP, photos permit cropping (extensively cropping a 2MP or 3MP image will show zigzag pixilation.)

Foveon's entry to the point-and-shoot market is still in the elusive Polaroid x530, manufactured by World Wide Licenses LLC of Hong Kong, under brand-name license from Polaroid, now distributed by the Petters Group which has taken the Polaroid company private. And still no x530 for sale.

The Polaroid x530 camera with Foveon's F19 imager chip was announced and on display at the Polaroid PMA2005 booth – again. This camera is harder to pin down than a quark. First announced at PMA 2004 last February, then delayed in shipment and delayed again, the x530 is now anticipated for distribution via Circuit City.com and Wal-Mart.com by mid-May 2005. We're anxious to locate one for real-world testing. The sample photo files on CD distributed by Polaroid/WWL/Petters Group look good when printed 8x10. They compare favorably in color, saturation, detail, and show the Foveon ‘zing' although the 10.2 MP F7N chip has higher resolution than the 4.5MP F19 chip. A plus: the x530 is small enough for briefcase, purse, or roomy pocket; it shoots either JPEG or RAW.

So if you're in the market for a digital SLR, consider the Sigma SD9 or SD10. For the point-and-shoot photographer, watch the Gilder Technology Report's http://www.gildertech.com subscriber message board for updates on the Polaroid x530's availability.

Foveon's announced image sensor customer in addition to Sigma and World Wide Licenses is China's HanVision . HanVision uses Foveon chips in HVDUO-5M cameras for industrial, scientific, medical and communications applications, high-end, low-volume niches that exploit the lossless accuracy of Foveon imagers. Collecting all three primary colors at each pixel, Foveon does not require guesstimated digital colors based on neighboring pixels.

Long-term public beneficiaries of Foveon's current undercover pursuit of new markets will be Synaptics (SYNA) and National Semiconductor (NSM), which are financial investors in Foveon, along with New Enterprise Associates and Franklin Templeton Investments. A GTR Telecosmic company for its world leading haptic technologies such as notebook touch pads and iPod touch wheels, Synaptics' 16% ownership of Foveon comprises is a some five times larger share of SYNA's current $600 million market cap than National's 31% share represents of its $7.4 B market cap.

The volume market in imagers centers on camera phones where image quality remains poor, despite constant claims of new products, such as Samsung's elusive new 7-megapixel SCHV770. The chief supplier of imagers for Samsung is Sony, with its superb CCDs. Sony has also announced new products, from cameras to an MP3 MiniDisk that has a 1.3 MP camera with a 2.5-inch color screen and MP3 playback. The Olympus MP3 camera/MP3 player was the worst multimedia consumer device I saw at PMA. Let's see if Sony's MiniDisk is better. Epson 's P-2000 Photoviewer, portable 40 GB multimedia storage and viewer device impressed me as a nifty gadget, but it doesn't play music or process Sigma x3F RAW photos from compact flash cards. No one has developed the perfect teleputer yet.

I don't see camera phones replacing the stand-alone camera. Cameras such as a DSLR just have too many features for the enthusiastic photographer. As counter-intuitive as it seems, I do see the camera phone bringing more users to up-market cameras. If tens of millions people use a camera phone, a percentage of them will want better photos than the camera phones offer. Thus they move up to a higher feature camera, such as the Sigma SD10.

So how do investors take advantage at present of the burgeoning digital photography market? Consider peripheral and related products. Demand for image and data storage is growing by leaps and bounds. Look at Sandisk (SNDK) as a possibility. The overall flash memory card market grew 100% in 2003, after generating $1.7 Billion in revenue in 2002, according to research firm IDC. In 2004, Sandisk alone reached $1.8B in revenues. Digital cameras have been the major growth market for flash memory, but now launching a new wafer fab with partner Toshiba , Sandisk reports that phone manufacturers will introduce 200 new models in 2005 with memory card slots. Plus Sandisk has announced it will introduce flash memory modules that connect directly to the TV, play MP3 music, or incorporate an anti-piracy technology developed by a News Corp (NWS) subsidiary. This digital-rights management technology is called mVideoGuard Mobile DRM made by NDS Group Plc (NNDS). These memory cards can be used in cell phones and other handheld devices.

Also consider software. Adobe (ADBE) sells the popular Photoshop image editing programs, ranging from the high-end professional Photoshop CS retailing at $649 to the popular consumer Photoshop Elements ($99). Adobe also markets web and print publishing programs such as the widely used Acrobat Reader, as well as video and audio software.

Micron Technology (MU) became one of the top five suppliers of CMOS sensors for cell phones in 2004 and aspires to be the second largest supplier of sensors for the camera phone market in its current fiscal year, which began September 2004. Micron can produce CMOS sensors on the fabrication lines that it formerly used for DRAM production. Moving DRAM fabrication to a 90-nanometer process, it will shift the CMOS sensor production from the current 150-nm process to 130-nm, thus continuing to use its vacated DRAM production lines to make CMOS sensors for the mobile phone market.

Whether from Micron, Hynix , Omnivision , or Sony, current CMOS and CCD devices remain intrinsically inferior to the Foveon imager with its low power vertical sensors which uniquely collect all three primary colors at each pixel and can capture high resolution images at 30 frames per second. With the cell phone camera and camcorder market still far below desirable levels of resolution and power usage, Foveon still has a huge window of opportunity in low-power digital imagers to complement its up-market products. All imagers, however, still need camera control processors to manage the information from the increasingly pervasive cell phone cameras.

Leading the field today are integrated devices from Qualcomm (QCOM) (now over 4 megapixels) and Texas Instruments (TXN) OMAP chips, which incorporate the pixel processor with the cell phone baseband device. But most cameras, on and off of cell phones, will operate co-processors that enable distinctive features, such as improved auto-focus, optical zoom, MP3 players, camcorders, and even 3D effects. Currently ascendant in photographic co-processors are two ambitious Korean companies George recently encountered in Tokyo, Mtekvision and Core Logic . Mtekvision is still private, but Core Logic is a public company on the Korean exchange, where its impressive management holds more than one-third of the shares. Core Logic supplies chips chiefly to the GSM market, including Samsung's 10 million GSM camera phones and several companies in China. The private Mtekvision provides most of Samsung's CDMA image co-processors. Together these two companies command nearly 40 percent of the global market.

Digital imagery promotes growth in portable media MP3 players/photo viewers, Apple iPods, and multi-media mobile phones. Consider the peripheral impact: new computers, more memory, faster Internet access, cheaper printing services. Kodak sells in the growing online printing market in addition to Kodak's kiosk services and cameras. Eastman Kodak (EK) is in fact a company to watch as it adapts to the new digital imagery era. Brand recognition counts. Hewlett Packard's (HP) revenue from printers, ink, and paper sales is significant and will be impacted as Dell (DELL) moves in to HP's strong printer sector. The camera market itself is dominated by the Asian companies, Canon, Nikon, Fuji, Sony; some companies trade in the U.S. market or with ADRs, for example Sony (SNE) and Fujifilm (FUJIY) both with PEs around 23. One of our favorite GTR companies, Samsung, still has no easy access for Gilder Technology Report investors.

--by Sandy Fleischmann & George Gilder, March 18, 2005