A Printer Makes Peace With The Digital Age
If there was ever an industry with something to fear from the Internet, it's the 500-plus-year-old printing business. But you won't hear any snide remarks about e-books, dot-coms, or Web faddishness from William L. Davis, chairman and chief executive of R.R. Donnelley & Sons Co., the nation's largest commercial printer. Davis is a book lover, but he has plenty of passion left over for e-mail, the Web, and all the accoutrements of the Digital Revolution. His staff is wired and makes full use of the Internet as a communications and business tool.
When it comes to the printing business, though, there is no sign of complacency about the Net at Donnelley, which was founded in Chicago in 1864 and has grown into a $5.5 billion international corporation. In the U.S., it ranks either first or second in the printing of magazines (including BUSINESS WEEK), catalogs, advertising inserts, books, telephone directories, and mailings by mutual funds and other financial-services companies. Davis knows that the Web is threatening every one of those media, along with Donnelley's 55 printing plants. Who needs ink on paper if you can access practically everything electronically and print it yourself on demand?
Davis manages to reconcile these threats and opportunities. Donnelley's 57-year-old CEO contends that the birth of a medium does not automatically mean the death of its forebears. "I believe that for at least several generations, the printed word will be a fundamental and important part of communications," Davis says. Even as computers advance, paper still beats the screen for readability and portability, he adds. Plus, he says, paper just feels better. With the success of their companion magazines and catalogs, such Internet leaders as Yahoo! Inc. and Amazon.com Inc. lend weight to his argument.
That doesn't mean Davis isn't hedging his bets. He is pushing his 34,000-employee company into digital publishing, e-commerce, and Web-page design, with such clients as clothes retailer Limited Too. Including the company's logistics business--sorting and shipping printed products for customers--Donnelley now derives nearly 25% of sales from nonprint operations. Davis wants to see that portion top 50% in five years.
Investors remain skeptical. Donnelley shares currently trade at around $26, up from a decade low of under $20 last spring. But back in March, 1997, when Davis came to Donnelley from Emerson Electric Co., where he had been a senior executive vice-president, they sold for just above $30. Some analysts appreciate Davis' efforts to accommodate the Internet even if the stock market hasn't yet rewarded him. "You have to give them credit: They're the only one to acknowledge that print could be in trouble in the future," notes Karl Choi, an industry analyst at Merrill Lynch & Co.
Davis recently sat down in the anteroom of his eighth-floor suite overlooking the Chicago River to talk with correspondent Michael Arndt about Donnelley's future. An edited transcript follows.
Q: Donnelley epitomizes printing, but we are moving toward a digital world. Do you believe a day will come when there is no longer ink on paper?
A: We've got a long way to go before some of the advantages that print has had since the 1400s are overcome. People like print. It feels right. It reads right. It's portable. I think there's another very important component to this: the economic efficiency of print. If you're an advertiser and you're trying to sell product, the measurement of the cost efficiency is the dollar of sales generated to the cost of advertising.
For example, [in] TV, you spend 19 cents for each $1 of sales. It's 15 cents for radio. It's a little under 11 cents for online advertising, and that will come down. But for most print media, it's in a range of 8 cents to 11 cents. And for Yellow Page directories, it's down around 3.5 cents. So as long as there are these powerful economic advantages, print is going to be in good shape.
Q: Do you see particular areas where print is stronger? Books? Or magazines? Or catalogs?
A: Except for certain pockets--encyclopedias, for example--the hard evidence I have doesn't suggest that there's a fast erosion occurring in any of our businesses. It's hard to compare books with magazines. Both are going to be around a long time. Actually, the reality is that most of the work we do now to prepare something for the printing press is done digitally. That's how we store data today. So when one of our customers wants to use that in any other medium, it's a matter of a format change. That's one of the real advantages we have.
Q: Along those lines, Donnelley took its digital operations and set them up as a separate entity, Red Rover Digital, some months back. Why did you do that?
A: We set up and branded Red Rover Digital to make a statement to our customers--and, frankly, to our own employees--that we have made a substantial effort in this area and that we have a wonderful Web consulting company. Off a small base, so far, we've been able to double sales in the three years we've been in this. I'd like to see it grow a little bit faster, but I don't want to throw a lot of money away real fast on this. We've invested several million dollars. It's not an obscene sum.
Q: That makes you something of an Internet player. Why do you think the stock market is taking such a dim view of Internet players today?
A: I'm not sure the pure Internet player alone has enough substance behind it. I'm not real excited about somebody who is not a real company. I'm much more excited about real companies using the Internet. And I think that's where you're going to see [significant developments]. Our economy is learning how to meld traditional retailing and catalog methods with Internet shopping. I really think that reality today is ahead of perception about what's happening. A year ago, perception was way ahead of reality--and was probably wrong.
Q: Many Old Economy companies have been beaten down, too. Donnelley is a great example of that. It seems almost impossible for you to raise the stock price. What can you do to turn it around?
A: Reality is ahead of perception as it relates to Donnelley, certainly, and probably other Old Economy companies. We're creating valuable uses for new technology. When I see our future, it is to help our customers make their communications efforts much more effective--and it isn't just putting ink on paper. Our focus is going to be on services.
I think investor patience is probably required.
Q: Can you give me an example of these services?
A: I'll give you a fun example. Burger King has a birthday club for kids. On a child's birthday, Burger King mails a direct-mail piece we put together, addressed to your kid. Now, would you throw away something addressed to your son? Or your daughter? I don't think so. As kids open it up, there are little cutaways and stickers and little games. And inside, it mentions them by name several times because we can personalize the inside and outside of the mailing 12 to 13 times. By doing that, we more than quadrupled the response rate Burger King would traditionally get off its birthday-club mailings.
Q: You've also done work with Limited Too.
A: That's another fun story. They came to us in the summer of 1999 and said: "We don't have a catalog, but we're introducing a catalog, and we'd like you to quote on it. By the way, we're also going to set up a Web site." What is now Red Rover Digital was selected to help them develop their Web site. But we didn't get their catalog. So we put together a very powerful site. We learned with them that these young girls who shop at Limited Too want a lot of rich content. They don't just want the clothes. They want to know what Buffy the Vampire Slayer is doing. Before they even went live, they realized that the relationship with Donnelley was pretty compelling. They came to us and said: "We've had second thoughts. Can you print the catalog?" Of course we could, and we did.
Q: There have been a lot of rumors about management taking Donnelley private. What are your options?
A: Our responsibility is to build shareholder wealth. And our method of building shareholder wealth is to successfully execute the transformation strategy we've been talking about. As we do that, there are lots of things we can consider.
Q: Would one of the options be taking the company private? Are there any advantages to that?
A: I don't know, but obviously, if that were a serious consideration, I wouldn't be discussing it with you.