Dave Etchells: Here's a question we've been asking a lot of people at the show: Mirrorless cameras have been really popular in Japan, somewhat less so in Europe, but much less so in the U.S. What do you think is behind the slower development in the U.S. market, and do you see any evidence of this changing now and in the future? Do you see any trend of increased adoption?

Darin Pepple: What has happened in the Japanese market and even more so in Europe, is that there have been more ad campaigns about the technology and what it means, and how it works, and its differences from the SLR business. In the U.S., primarily, we have focused on comparing it to an SLR -- being like an SLR. In fact, there hasn't really been a concise definition for mirrorless. For example, you've heard all the different terminologies. Most recently what we found is the retailers, a lot of editors for example, and others have settled on "compact system camera." The reason they've selected that name is that the compact portion of the name really comes from the compact camera business.

We're finding that the compact system camera is not really stealing business or cannibalizing in any way the SLR business right now. What's really happening is we've identified about 23 million users that would love to be in an SLR, but there's a barrier to purchase because of the size, the weight and the complexity of an SLR. So, what we're discovering is they're really point & shoot users that want to step-up, still want the simplicity of a compact camera, and the size and weight issues are resolved with the compact system camera. But simplicity is really a key component there. That's kind of where the new name of compact system camera has come up. And we're starting to see a lot of retailers adopt the name, and get behind it now. It has finally in the U.S. reached the point of awareness, where editorially even in the last year, there's been a lot of photo magazine editorial based on the compact system cameras. (Of course, with different names, but more recently with "compact system camera.")

So I think now, we're at that point of break-out in the U.S., where we'll start tapping into the mainstream consumer awareness. And it really lands on our shoulders as a manufacturer to get the word out: What is the difference between compact system cameras, SLRs and compact cameras? I think you're even going to see some retailers breaking out the category physically within their retail locations, because they now realize the business isn't cannibalizing the SLR business, it's really expanding the business as a whole, as a result of being unique and different. And I think as manufacturers like Panasonic start to educate consumers, whether through workshops, through the local retailers, through ads, through magazines, through interviews such as this, that it will start to snowball and hopefully we'll get a snowman at the end, right? It will happen and I think this is the breakout year for it.

DE: So it's really an educational issue. We've seen this huge...40% of the market in Japan we've been told. To some extent I've been inclined to think, well that was just cultural differences and the Japanese liking smaller, compact things. But you're saying it didn't just happen; there was a lot of advertising push and a very concerted educational effort behind it.

Pepple: Yes. Obviously, the Japanese market is a bit more geared towards smaller, lighter, compact products. As an economy, we've a little bit lagged behind that. In America, smaller is not necessarily seen as better. So, the large SLRs were sort of interpreted as; well if it's bigger, it must take a better picture. So bigger is better was always the philosophy there. But as compact cameras got smaller and smaller, and they got more resolution, more features, touch control, these types of things, people were thinking, "Hey, this is good enough. It takes a great picture and it's small. Can't I have now an interchangeable lens on that?" In Europe, this happened faster than in the United States. But as I said earlier, it really comes down to educating the market. We have such a large, diverse market in America that it's very difficult to reach the masses. So we have to pick segments of the population and say let's focus here, let's focus here, and break out from that. And that's kind of what we've been doing. In the last portion of last year, picking regions where we think we can succeed, and breaking out from that. We're to a point now, where next year in 2011, our primary focus in going to be on the compact system camera as a digital still camera entity. So we will focus very, very intently and very heavily on it.

DE: When we interviewed Yoshiyuki Inoue from Panasonic in Osaka at last year's PMA, he noted there are actually two different markets for these compact system cameras. The GH1 and presumably now the GH2 were very popular with people who were primarily video enthusiasts, as opposed to still photographers, while the G1 and GF1, and now the G2 and GF2 appeal more to people who are mainly still photographers. How do you see those two markets playing out in the U.S.? What's the balance between them, and is that shifting?

Pepple: Taking the GH2 for example, it's really serving as a hybrid compact system camera. It's a very different animal in itself, in that its unique characteristics in video, and its high-speed capabilities in terms of just focusing, and that massive processor that's onboard that camera gives it a lot of abilities to do different and uniquely neat things. That's almost a niche market. That's probably 10-15% of the overall business, in terms of compact system cameras, within that category. So, it will probably remain that. Whether we can continually build-out from that is the question; it sort of butts up against the professional video camera business and even some of the semi-professional video camera business, or to an even smaller extent, the consumer video camera business. But it holds its own with its unique characteristics. For example, you can shoot high action photography, because you can move the camera around easily -- it's lighter, it's smaller, it's more compact. You're not worrying about a big system, and you're not worrying about rigging it up. It becomes a very unique and different product. Yes, it does have its place, but it's not going to define the category. It will probably be on its own as an entity within the compact system camera business overall. The biggest portion of it is really what I would call the rangefinder-style cameras. The old Leica-like looking product for example. We've seen that from other manufacturers as well. They've been highly successful. That style we anticipate being at least 75% of the market over time.

DE: Panasonic's Micro Four Thirds cameras have generally been aimed at the higher-end of the market. The G10, though, was priced much more towards the mass market user, but we've really heard very little about it in the U.S. I haven't seen a lot of signs of it at retail; on our site, in comparison shopping, there might be one or two retailers selling it. Is it that you're not seeing much demand for cameras at that lower price point in that category, or is it just that happened to be how the production worked out. What's behind this?

Pepple: That's an interesting observation. We thought that it was necessary as a brand to produce multiple levels of compact system cameras, developing I guess what you'd call an entry price point camera -- no frills, just price point, very simple, small, compact. It turned out that the consumers were not looking for that. They would stick with traditional DSLR or their point and shoot, rather than going to an almost me-too type of camera. What they wanted from compact system cameras was architecture that was more conducive to ease of use. So for example with the G2, which is the step up from the G10, there's touch-control, there's better video, there's a dedicated video button, it does record AVCHD versus Motion JPEG. They were willing to pay for those extra features.

Really taking a look at it, the traditional SLR-looking frame style, even though it was smaller and lighter, wasn't what they were looking for from a compact system camera: Consumers were looking for compact cameras, i.e.: the rangefinder-style looking GF1 and GF2. (Very popular, by the way). That was what consumers were asking for. So we're in the process now of evaluating that, and finding out how to expand upon the GF1's success, because that seems to be where the consumer has voted and said this is what we expect of the compact system camera market. Not necessarily that it has to look like an SLR or even have a viewfinder. Although, there is a small portion of it, maybe 15-20% of the market that still wants to have a viewfinder. It might be a generational thing. The older generation may prefer to have a traditional eye-cup viewfinder. We find that the G2 suits that need, as well as the GH2. But the compact, ease-of-use, sort of hold-the-camera-away-from-your-face type of picture taking environment where the GF2 really excels, is where the younger generation is comfortable, because, remember, they are coming from compact cameras. They're not experienced with an SLR, so to have to hold it up to your face to take a picture through a viewfinder isn't a learned experience yet for them. So it is interesting to see how the traditional SLR-looking camera is a smaller portion of the business versus the rangefinder-style.

DE: I wonder to what extent the price behavior there, and the fact that people weren't going after an entry-level model might also be reflective of where we're at in the market, in terms of the educational issues you were talking about before -- that the people who are going into the compact system cameras now are people that are more educated, more photographically inclined, as opposed to the step-up users. Maybe it'll be a timing thing -- maybe a year or two from now there might be more demand at that entry price-point?

Pepple: I think that's a very good point. When you see cameras on a camera bar in a store for example, on the counter, and they all look the same -- well, you're going to go to the traditional SLR brands that saturate the market today. You're not going to go to the off-brand. Panasonic is not technically an SLR camera manufacturer. We're very different. We've created a new category, or what we like to call a new photo culture. You're starting to see other companies join into that culture as well, because they're seeing it as an opportunity. We've been in it for a little while, so we've learned our lessons as to what works and what doesn't work. Also, we're learning now how to educate the consumer because we now understand what they are looking for: 23 million users are looking for a compact system camera, because they are looking for a small camera with easy touch-controls and quick video, but they want the inherent quality of an SLR.

DE: You mentioned ease-of-use in the context of a touch interface. This may be a generational thing too. I grew up with film cameras with knobs and dials, and I like knobs and dials, so for me touch has always been a very awkward interface on a camera. (Although Panasonic has one of the better touch interfaces and things like touch autofocus; I actually love that.) So are people really perceiving a touch-screen as something easy?

Pepple: The ease-of-use stems more from the fact that we use cellphones and things that are touch control, for example, and what do we do when we go to our banking kiosk? -- We're using touch controls. So as a generation, yes, I think we're comfortable with touch control. The older generation may not be, so they may like the dials. I personally like dials. But I've got to tell you, the way Panasonic integrated touch-control in the latest cameras, the GF2 for example, is because we've learned from two consecutive models prior to this about what did and did not work.

We were very careful when we moved the familiar dial on top of the camera, to the touch-control environment on the camera, that we retained very quick, easy response, so you can get to it very quickly. I've had many people review the camera, and they say immediately, "We just don't like the fact that you removed the dial," and I say just try it and let me know. And they called back and said, "We're still a little concerned that you removed the dial, but man, we didn't miss it. Everything we wanted was literally at our finger tips!" So it just becomes a matter of learning to use a different method, because by reducing the size of the camera, your hands cover most of the camera: You've got to remove something. And by using a touch-control, you can make it simpler and easier to use.

DE: Switching topics just a little, in the digicam arena, we want to talk about the megapixel race a little bit. The question is: Is there any hope for the megapixel race? In the last year or so, we saw across the board decreases in image quality, from all manufacturers, as we went from 12 to 14 megapixel sensors. This year now, we're seeing 16-megapixel point & shoots. There are a few models from a few manufacturers that have dropped back to 10 or 12 megapixels, like the Panasonic LX5, going after more image quality rather than pure pixel count. Do you think that trend has any hope of catching on with consumers, particularly in the States? The U.S. market often seems to just think that "bigger is better."

Pepple: Yeah, that is an issue. "Bigger is better." Faster processors mean more processing, right? A bigger engine means you go faster in your car. But I think there is now a lot more education; people realize that they have enough pixels and what they really want now from their cameras is more simplicity. So by backing off on megapixels and allowing the chips to do more work in image processing instead of just megapixel processing, we're creating a better and easier-to-use environment. I think that consumers are just now starting to realize some of that. Yes, there will still be some people that just look at price and megapixels and make the assumption that "I can afford this many megapixels for this much money, and therefore that's good enough." There will be some of that in the market, but I think less of it as consumers become more and more and more educated about it.

The other example is sensor size. A bigger sensor must mean better pictures. Bigger is better -- it has to be. But you have to look at it from three points of view. One being image processing, and one being the sensor itself. If the sensor is low quality, whether it's high or low megapixels, it's just giving the image processor bad data. If it's a good sensor, then it's giving good data to the image processor, but if the image processing is poor, you've basically blinded the sensor. And then when you look at it from an optical standpoint, there's a third point, if you try to create or dumb-down your lens to the point where you're just reaching a price point, you've got a beautiful sensor, and a beautiful processor, but you've now destroyed the image because of the optics. So it really doesn't matter the size of the sensor as much, what matters is that all three are in harmony.

With the Micro Four Thirds system, we are a little bit smaller than an APS-C sized sensor that you'd find in any one of our competitors, for example. But at the same time, they've corrupted the lens quality to try and get it down so small, that the edge detail -- they've sort of blurred out the image. Especially in the zooms, not so much in the fixed focal-lengths, but the zoom lenses. If you look at a Panasonic, the image sensor and the lens have been tuned, whether it's a zoom or what we call a pancake, a fixed focal-length lens. You can get a superior image out of that, rather than a like Nikon system for example where they have an APS sensor but maybe they've put a lens on it that's really designed to reach the masses in price point. We haven't done that. We produce very high quality optics, very high quality sensors, and image processing to match it. I think that's important to make note of. It's not always about bigger is better.

DE: Again, it's an issue of education. We've been beating the drum for years that five megapixels will make a great 8x10, but here we are at 15. It's interesting, what you're saying is you've made a very balanced approach. This is a little more back on Micro Four Thirds compact system cameras rather than the point and shoots, but you strive for a balanced approach. But that's a complicated message to try to communicate, especially across a retail counter at a big box store. How do you go about doing that educational process again, not just for the consumers, but I guess you've got to educate the sales associates as well.

Pepple: For the past couple of years, we haven't done a really good job of that. Our efforts going into 2011 are very different. We are very focused on educating the consumer about what Micro Four Thirds is, in comparison to other sensors, but more importantly, what our compact system camera really is in terms of its difference between the two worlds of compact and SLR. Our advertising campaign for 2011 will be very focused on education. We do anticipate running several workshop seminars, through photo specialty dealers, as well as larger national chains, for the first time. Through education, we think that the consumer can become an educated consumer and make the best choice, and they will overcome some of these misunderstandings about the technology.

DE: How's the bridge-camera market holding up for the U.S.? I guess there are really two components to it. One is cameras like the LX5 that are compact, very high quality; the enthusiast-oriented camera. And there are also cameras like the FZ100 and the whole FZ series, which has been a really strong product category for Panasonic. At least from our perception, they've been great cameras over the years. How is that evolving as SLRs are coming in at the high-end, then compact system cameras, and you've also got compact point and shoot cameras with longer zooms. What's happening with that bridge-camera market?

Pepple: The last introduction of those three cameras you just mentioned, the LX5, was hugely popular. It's one of the more popular cameras we've launched. We have a very strong following. But what we're finding is that we believe over time those kinds of users will become fans of the compact system camera. Because the reason they are using those cameras is they are small, and you don't have to worry about a selection of lenses, you don't have to worry about sensor dust, all these things. Whereas in a compact system camera for example, every time you mount a lens on it, the first thing it does is clean the sensor. So it knocks off the dust, so you don't have to worry about dusty environments. In terms of carrying multiple lenses around, in comparison to an SLR, the lenses are a third the size. It's very, very compact, so you can pick two or three of your favorite lenses. The beauty of that is, you buy a new body in a year; you've got your old lenses and they're backwards compatible. I think that those users will find their way into compact system cameras over time. Will it diminish it totally, will it eliminate the category? Probably not. But I think over time, that is the category that could shrink a little bit in favor of the compact system camera.

DE: Among the various market segments, which would you say are Panasonic's key customer groups? Is there a "Panasonic customer" out there, and how does that drive your camera designs?

Pepple: There is a Panasonic customer out there. We do have several pockets of interest. For example, with the LX3 and LX5. Those are just wildly popular with some people, and they're diehards. The GF1. Diehards. They love that camera. There are a few models that we have, some of our long-zoom point & shoots for example, the 10x's and such. A lot of diehards. It's a varied group though, but they're all vastly different groups. We have such an amazing range of products that go from low-cost point and shoots all the way up to the GH2. What does it mean for us? It means we can enter a lot of different markets. And we can be all things to all people.

Photography is a very emotional purchase. You're buying a product that's not like a cellphone where hey, when the next one comes along I'm going to get that one and trash the old one. You're buying something that is documenting your life, that's part of the passions of your life, that allows you to remember what happened. You don't want to buy a product that isn't going to do that faithfully. So, photography and cameras become a very emotional purchase. We make just really rock-solid, great cameras. I think the reliability factor is what keeps customers coming back to Panasonic. We were voted several times the most reliable camera, the least amount of repairs in the market, over and over. That's really what drives a lot customers back to Panasonic; and as they talk about their experience with their Panasonic camera, that grows our market.

DE: So the "Panasonic customer" is a little more knowledgeable consumer in some ways, in that they are aware of things that are not necessarily out front and center. When you're standing at the camera bar, you don't know which is a reliable camera, but you think that over time, just anecdotally amongst friends, and the influencers, people are saying they've had good experiences, and that's defined the customer.

Pepple: Yeah, I think you hit it on the head there. When you look at this daunting array of cameras, the first thing that comes to mind is, "Which one just takes a really good picture, and is going to work?" I'm not going to have to think about it. One of our ideas in advertising for example is to tie into someone's passions of their life. To not be intrusive as a device. Not just recording, but to be part of it. As you're enjoying something that could be your child's birthday, it could be a skiing trip, it could be whatever. Hey, that camera, we know it works, it takes a great picture, it's just going to be part of that event without being intrusive to it, without having to fumble through buttons, figuring out how to set it up, and all these things. We really keep that in mind.

DE: Let's go back briefly to compact system cameras again. Lenses. One thing that's distinguished some of the Panasonic models is that the lenses have been uniformly very high quality. How do you see your lens development being driven by the market? To what extent is it being driven by step-up users that want inexpensive lenses, in a broad focal-length range, versus the market being driven by enthusiasts who want a really neat pancake lens or who want some super-wide zoom or something like that?

Pepple: For the past couple of years, we spent a lot of effort in just completing the lineup. Having a traditional long-zoom, 45-200mm for example. Having a couple wide-angles, a 20mm or a good macro lens, the 45mm that we have. So then we looked at, what are those next, the third or fourth lenses that somebody would buy. A fisheye lens, we produced that. We produced a new wide-angle, a 14mm. A much longer 100-300mm long-range for people in nature or sports photography. By doing that, we've expanded the line to a point where we now have a full line of the most common lenses anybody would really ever buy.

Now we're looking at different venues. For example, we produced the first interchangeable 3D lens. Not everybody has a 3D TV, but hey, why not take pictures now in 3D of your child that was just born, so in 20 years from now they can look back and see, "Oh, that's what you looked like." Because everything will probably be 3D in 20 years. That's not to say you have to take a 3D picture, because with that lens you can also take a 2D picture. So why not have a lens that can also record 3D; record two pictures at once, a 3D and a 2D version? It's a file format called MPO, the JPEG, if you will, of the 3D world. Printing will come along eventually, and more content for more flat-panel TVs, and as the TV content becomes more popular, we'll just naturally, slowly progress into a 3D world. So, we're looking at different ways of doing lenses now.

The path to our future in lenses isn't going to be just 3D; we do have a lot of capabilities to make the lenses smaller and lighter. For example how a compact camera folds itself in. That's one technology we're looking at to make the travel capability of the lens much better. People also still power-zoom. People are familiar with how their point & shoots zoom. This is another technology we're looking at: My nine year-old doesn't know how to twist the lens, and says, "Dad, where's the zoom button?" There are a lot of things, a lot of opportunities for us to improve. Make the lenses more compact, sharper, more resistent to different types of shakes at different angles, etc., so that will probably be where we focus next; improving upon the lineup as a whole.

DE: That's also a very crafty sales scheme to suggest to parents, "Well of course you're going to want 3D pictures of your kids. You may not have a 3D TV now, but you'll have pictures that are 3D." That's a very devious plan [grins], but I suspect it might be a very effective one. Back on digicams again, and and a question we've been asking a lot of people at the show: How do you see that market evolving and what does the future hold there? On the one hand they are being crowded from the higher-end from the compact system cameras for better image quality, but on the lower end, everybody's got a camera in their cellphones. How do the digicams continue to exist and survive in this changing ecosystem?

Pepple: That is a good point. A long time ago in my prior life, there were disposable film cameras. How did that fit in with the cellphone business, and all that. They did, they stayed, they did very well until digital cameras eventually replaced them as a whole. So this will be a natural progression, but I really don't see cellphones taking over. Cellphones are really more for opportunistic photography. It's the time you don't have your camera with you, or you don't feel like carrying your camera. It's more "disposable" photography -- the image doesn't have to last. It can be just, "Hey I'm just going to text this to a friend of mine," and that's it. Let's say the younger generation is probably not into documenting life right now, so we use our cellphones as just opportunistic photography of our friends or whatever. We're not really in the cataloging portion of our lives until we reach our late 20's and early 30's. At that point, photography becomes more emotional. You want a good product that records your life, records your memories and documents everything. In that sense, I don't think a cellphone is going to cut it. So, will there always be a position for a proper camera? I really do think so. I think there will be cameras in our lives for a long time.

DE: Another huge phenomenon is social networking. Facebook has become a major way people are sharing and using images. How do you see that affecting the point and shoot camera designs, or for that matter the compact system cameras? How do you see that impacting camera design and features over the next several years?

Pepple: I guess I still see the online social networking world as part of that opportunistic photography, almost disposable photography. You take a picture of your friends and post it, that kind of thing. Granted, it's going to live a lot longer on the 'net than just the current moment, but I don't think that most people are posting images as a form of documentation or remembering their lives or whatever. So, the cameras that are utilized in that sense are oftentimes a little less expensive, have blogging modes or uploading modes. If you're buying a camera for that purpose, you probably have a second camera. You probably have a nicer camera that is for the purpose of documenting, whether you're young or old. With social-networking imaging, it's hard to say if it will become more of a location for documenting your pictures and keeping them. I haven't really seen a trend toward that recently. I can tell you that people do invest in external hard drives, to store their pictures that they really want to keep. They don't trust the 'net yet. Whether or not it can be for just backup and storage...it's not tangible, it's very difficult, even for the younger generation. There is a lot of work being done in terms of software, in terms of hard storage, to store locally. Maybe that'll change in the future, but I don't know.

DE: This is another question we're asking everybody: What's going to happen with the economy? 2009 was a terrible year. 2010 seems to have been a pretty decent year, coming back a lot. What do you see happening for 2011?

Pepple: The camera business at the end of 2010 got off to a pretty good start, but it was a little soft as the holiday season went on. I think from what I heard that's kind of common over several industries. Going into 2011, it remains to be seen what Mother's Day and Dads and Grads type of selling season is going to be like this year. But I can tell you despite that, whether point and shoots are soft or SLRs become soft, everybody that I've spoken with has been very keen on finding a way to make mirrorless compact system cameras part of the assortment, because they see that as the next wave. Everyone wants to be in on it early, to try and be part of it so as it grows they become the company of choice for purchasing.

Back in my film photography days, I used to say that photography was semi-recession proof. Because even in bad times, we kind of retrench within ourselves, with our family; we get a little closer and a little tighter. And part of that can be "let's buy a new camera instead of travelling, we'll just stay, we'll take the new camera and update our lives," that kind of thing. We look inward a little more. With digital photography, though, there is such an abundance of cameras and such an abundance of imaging capabilities, whether it's a webcam, a cellphone, or your video game with a built-in camera; there are so many opportunities for photography, that it's probably not as recession-proof as it used to be. So a higher-end camera maybe can wait until the following year. I think that's probably a little bit of what we saw with the downturn. But with the compact system cameras, I'm just seeing nothing but opportunity, and growth potential for a lot of people right now.

DE: Well said; a lot of interesting thoughts and perspectives. Thanks very much!

Pepple: Sure. You're welcome, any time.