(Our exclusive intelligence reports are based on company sources, public SEC documents and industry consultants following the print and publishing industry. At times, it is necessary to quote unnamed sources. As a tradeoff for protecting sources, we are able to reach beyond the surface and gain a deeper understanding of key issues impacting the industry. If you have any questions about this story, please contact us.) 11.05.01 - Xerox has been under pressure recently to deliver on several fronts. Financial troubles have chased the company for almost two years and many have questioned whether Xerox has run out of good ideas. While shareholders pursue management for profits and faster innovation, companies like HP and Heidelberg are taking market share in Xerox’s prime segments. Color, led by the DocuColor iGen3 is to be the next era of growth for Xerox. Executives say color will restore the company to the glory days of the 90’s. The iGen3 will do for color what the DocuTech did for black and white. The DocuTech displaced short-run black and white offset printing on a massive scale. According to Xerox, the iGen3 will displace short-run color printing on a massive scale. The DocuColor iGen3 is aimed squarely at the commercial print market. CAP Ventures estimates that the retail value of the color print-on-demand market will grow by 18 percent a year to nearly $32 billion in 2005. Strategies for Management estimates that 78 percent of multicolor offset jobs are short-runs of 5,000 prints or less. The iGen3 will be delivered soon to beta sites with installations by the end of the fourth quarter. Heidelberg’s NexPress is already on the market. IBM, Canon, Xeikon, HP/Indigo and Oce will also have something to say about Xerox’s effort to dominate color digital printing. Who will lead Xerox into the future of color? Can Xerox sell high-end equipment to mid and large size printers? Is the iGen3 the product that opens the color print-on-demand floodgate? DocuColor iGen3 Recap The iGen3 is a toner based, color digital printing press. It creates output with the traditional look and feel of offset prints. Xerox says it offers a speed of 100 images per minute. Unlike a traditional offset press, the iGen3 incorporates variable data to create customized brochures, tailored catalogs, personalized books, newsletters, direct-mail postcards, invoices and more. Their SmartPress Technology uses microfine dry toner and built-in intelligence to create documents with accurate color. The advances are enabled by 85 microprocessors and 5 million lines of software code. The DocuColor iGen3 has a straight paper-handling design that recognizes and prints on different sizes and types of paper within the same print run. Xerox says the iGen3 is compatible with major pre-press systems and will be supported by two digital front ends - the Spire platform from CreoScitex and their own Xerox DocuSP Server. Frank Steenburgh Although not officially announced - Anne Mulcahy, Xerox’s CEO, personally asked Frank Steenburgh to lead the iGen3 effort. Steenburgh, previously head of their e-Services business, is now Senior Vice President, Worldwide General Manager, iGen3. Important, because Steenburgh was the visionary who led the DocuTech and print-on-demand revolution. He has been called the “Father of the DocuTech” and Xerox has claimed on many occasions that the DocuTech was the most important product for their company - ever. Steenburgh is respected in all circles, especially in the printing and graphic arts community. He has been in the industry since 1973. Steenburgh is internationally recognized as a digital printing and publishing pioneer. Sources say Steenburgh is rounding up his team to do it all over again. Said one consultant who knows him well, “Xerox is pinning their future here with Frank. The iGen3 is a billion dollar project already and they have tapped a man who has won before. The iGen3 is more than just a big 5000 pound press, it’s a statement about Xerox’s view of color and the future of print from the desktop to the largest jobs produced.” Learning from the DocuTech The success of the DocuTech had many factors - perfect timing and skilled execution among them. The market was ready for a new way of doing business. Steenburgh built a sales and marketing template studied by business schools today. Since October 1990, the company has placed over 25,000 DocuTechs and generated revenues of $15 billion. This product solved numerous problems. Quality: The 600 dpi resolution was satisfactory to corporate clients for black and white printing. The scan once, print many resolved registration concerns associated with document feeders. Even books and manuals printed doublesided on offset presses could now “line-up” on a DocuTech without shifting images. Halftone graphics and pictures were also acceptable with these advances. Just before the DocuTech, the Xerox 5090 machines were running over 1 million impressions per month at many firms. The 135 page per minute copier was already the fastest at the time and the DocuTech was a natural production and quality upgrade. Price: The price per image was reduced for companies who could compile volume as Xerox priced the machine with a flat monthly fee. Indirect savings, normally a challenge to explain and much harder to realize, were clear. Print-on-demand as a concept saved time and money: Archiving jobs with little to no set-up for reprints, a significant reduction in storage space and print speeds of 135 images per minute. A whole new market began to take shape. Print shops started running 24 hours a day putting 3-4 million impressions per month on the machines. Kinko’s, a $2 billion international copy chain and a major Xerox customer, was among the first adopters. Kinko’s executives have credited their Xerox partnership as one of the main reasons for their success. Even insurance firms and financial institutions yanked offset work and created in-plants. Sales: Perhaps the most compelling reason for Xerox’s success with the DocuTech was their sales and marketing efforts. Reps who sold DocuTech’s were the thoroughbreds of the copier industry pulling 6 figure incomes. Xerox invested heavily in training, not just in feature and benefit selling, but C level selling. These reps called on the CEO’s and CFO’s within major corporations. Steenburgh knew that the best way to move such a revolutionary product was to discuss overall financial advantages of the DocuTech. This wasn’t your side-by-side - show me a demo - upgrade from a lease deal. Steenburgh’s reps were trained to speak about getting products to market faster. With Xerox, a company could print training documents faster, publish marketing materials on-demand and centralize all document printing. Xerox positioned the DocuTech as a revenue enhancer as opposed to an operating expense that needed to be controlled. Meanwhile, printers without DocuTechs began to question Xerox’s loyalty to the graphic arts community. Said one Xerox customer, “Printers started to worry about Xerox cutting into their volume. There was nothing Xerox could do about it though. Literally, you had a print rep in the basement of a corporate office taking an order for 100,000 business forms. At the same time, Xerox reps ride the elevator to the board room to discuss a whole new way of printing documents. A few weeks later, the print rep witnesses a Xerox truck rolling a DocuTech into the basement where a new in-plant was being born.” It was euphoria. Xerox had something that was clearly superior to all other products and you ignored it or at least the concept at your peril. Print firms who invested in DocuTech technology benefited from Xerox’s penetration. DocuTech quality and pricing became a standard that savvy print buyers were aware of and demanded. Challenges and Opportunities Frank Steenburgh has unquestionable ability to make this work. His marching orders are less about the iGen3 and more about an overall color revolution. Success with the iGen3 will have a ripple effect throughout their entire product line. Xerox thinks that success with the commercial printer will complete their quest to dominate the print and publishing industry from concept to delivery. As a corporate officer, Steenburgh has the respect of Xerox’s employees and as mentioned before is well regarded in the print industry. Many activities from the DocuTech era will be repeated. Most are text-book moves essential for victory. However, there are serious challenges. Xerox will place the iGen3 within some current accounts, but they admit it is not a "natural upgrade" in most cases. Real success will be determined by the adoption from larger printers who may not have any relevant relationship with Xerox today. Perception from Printers: Printers are skeptical of Xerox’s commitment to their welfare because they sell direct to printers and the printer’s customers. Some printers we spoke with think Xerox is now looking to the industry to “bail them out.” Favorability research conducted by WhatTheyThink.com indicates that Xerox has work to do with this segment in order to gain their trust. Conversely, companies like Heidelberg are very much in favor with printers. Heidelberg avoids the stigma in many ways, primarily by having Canon, IBM and Danka move their products to corporate print buyers. The good news for Steenburgh is that he knows about these perceptions. Xerox’s mission is to communicate the diverse nature of their products and services. Xerox will continue to sell products to print buyers and corporations. Said one insider, “The use of Xerox products encourages a certain quality just like the DocuTech. We are branding color in the same way - rewarding (printers) who invest in our technology.” The NexPress Heidelberg: A related concern is that a printer with Heidelberg presses would most likely select the NexPress based on the relationship factor. If the quality is similar and the pricing is plus or minus even - why would a printer go with Xerox for this application? Xerox says there is no comparison on the quality factor, speed or price. Said one well placed Xerox insider, “I believe the printer would make the decision based on the quality, cost, service support and expertise in digital printing, not just on relationship. With that said, Xerox and the DocuColor iGen3 lead in all of these areas, so I think it would be an easier decision for the printer to choose the best product, since that is what his livelihood is built on.” Regardless of which machine is better, Heidelberg has the first mover advantage. The company sold 70 NexPress machines at PRINT 01. Credit Suisse First Boston (CSFB) covers both Heidelberg and Xerox. They expect the German company to have 350 installed by the end of 2002 and 2,300 by 2005. The investment firm also predicted Xerox’s fate, “Xerox is a newcomer to the commercial printing market with the unveiling of the (iGen3). Our checks indicate it will lag NexPress in acceptance. We estimate Xerox will ship 1,200 units by 2005.” In fairness, CSFB wrongly predicted that Heidelberg would sell “30-50 units by March 2002” which was vastly under the 70 they have already sold. Responding, one Xerox source said, “These predictions do not compare apples with apples. The whole NexPress versus iGen3 debate is flawed. The NexPress really competes with our DocuColor 2045 and 2060 models which are much better in terms of speed, price and quality.” Executives at Heidelberg are not complaining. One Heidelberg executive said they have been able to convince printers of their solution right now. “All the buzz (Xerox) created about us versus them is helping us sell the printers who are warm to the idea (of digital color printing). By the time they start selling the iGen, it’ll be a much tougher market.” Quality: Does the iGen3 have the same quality advantage that the DocuTech had? From all indications, the iGen3 passes the “wow” test. Many who have seen the output say it is very good. Xerox says their product offers much more functionality, including better front-ends to offer more consistent variable data printing and it’s 50% faster. That certainly goes a long way in overcoming these challenges. Anne Mulcahy, Xerox’s CEO recently said that when they show samples to customers they always ask them to pick which is iGen3 and which is offset. “80 percent of the time they choose the (iGen3) as the offset sample.” Quality is subjective and this debate will heat up as the iGen3 begins shipping next year. Most analysts agree that the burden of proof is on Xerox. Similar quality to other digital presses will not suffice. The consensus? It must be clearly better. Pricing: The price for digital color printing has ranged from twenty cents to forty cents. Several industry analysts say for color to really gain traction and ignite another revolution, the cost must be reduced to five cents per impression. Dr. Mark Fleming recently wrote in Seybold Reports (4/16/01), “At a direct printing cost of five cents per impression, this price level would yield an attractive operating profit for a commercial printer.” Xerox claims all the new technology incorporated into the iGen3 has their price at five cents per impression. Competitors call this claim “fuzzy math.” Timing: Most agree that Xerox will enter at the right time. (If the economy rebounds by next summer, it will be an even better time.) Custom, on-demand color printing is on the rise. WhatTheyThink.com surveyed 255 print buyers about their use of the variable data printing in July. The results show that use of variable print is not near mainstream. However, those that have tried it are very satisfied with the results. 96% said they were “satisfied” or “very satisfied” with the results. Generally, sophisticated database marketing has also increased. Consider a recent announcement from Xplor. Xplor International honored Clarica Life Insurance Company with its 2001 "Innovator of the Year" Award. One of their programs was a personalized direct mail campaign. The data used to create the direct mail pieces came from three different databases and included a photograph of the agent who would work with each prospective customer. Once the direct mail pieces were designed and links were created to the appropriate data, the pieces were printed on an IBM Infoprint Color 130 Plus, an AFP full color digital printing system. It generated a 9.5% response rate, with 86.7% of responses resulting in appointments, and 11.5% of responses resulting in sales. Sales: The Clarica Life Insurance example is the type of information Frank Steenburgh will use to sell Xerox color. Steenburgh will develop a stable of reps who can go to the C level and talk the C level talk. Sales to Fortune 500 companies will be an important niche for the iGen3. However, the most compelling use of the iGen3 and it’s 1 million impressions per month capacity is clearly with mid-large commercial printers. A major area of concern is the sales channel for the iGen3. Talking the C level talk to print owners will be a little different. Top sources from Xerox say sales training will be extensive and “most reps will come from the commercial printing industry.” That’s a good thing according to a consultant who attended a meeting held at Presstek this summer. The two companies joined forces to discuss DI technology and the Xerox DocuColor 233 and 400 DI presses with a group of printers. “During the question and answer session, Xerox reps were confusing the printers because they were using copier language when talking about the DI presses. On several occasions, Presstek executives had to translate to the printers what Xerox meant.” Sources say Xerox is also considering distribution partners for the iGen3 and other color products. xpedx has been discussed as well as the newly formed Enovation. Enovation is the combination of PrimeSource, Heartland Imaging and Graphic Systems, Inc. put together by Fuji Photo Film. Xerox already has a relationship with Fuji via the Fuji Xerox business. This may work for some of their products, but most experts we spoke with said Xerox will need to control their high-end digital products. That's the same conclusion Heidelberg came to about the distribution of the NexPress. Xeikon's Canopy venture with PrimeSource is a case and point. Examine this comment from Xeikon's Chairman Gino Despeghel. (Electronic Publishing, November 2001) "It has proven difficult for Canopy to keep the interest in the selling cycle focused on the application as opposed to the selling of the machine." Xeikon now sells directly to North American customers. Lining Up the Stars The iGen3 can be a modest success with little impact or the start of another revolution. Steenburgh related to Steven Schnoll, of Schnoll Media Consulting that the iGen3 will be the number one sales driver for Xerox going forward. According to Schnoll, "Steenburgh will develop a dedicated sales team with a dynamic 'go-to' market strategy." Frank Steenburgh knows that once again, he’ll need perfect timing and skilled execution. Imagine this possible description of Xerox in 2005: The stars lined up once again for Xerox. Having led the DocuTech revolution, Frank Steenburgh and Xerox have revolutionized color. Long time stock holders, who watched the troubled company teeter on financial ruin continue to praise Steenburgh’s vision of a color future. The turning point? The summer of 2002 and the iGen3. As the economy roared back from a recession, Xerox sold numerous machines into the large commercial printing market as the ROI versus the competition could not be ignored. Once firmly inside these print firms, Xerox spread like a virus throughout the commercial printer’s operation with new digital presses based on the iGen technology. Many commercial printers, once at odds with Xerox’s tactics, proudly call themselves “an all-Xerox shop.” Even smaller print firms who usually acquire a variety of color brands were now satisfied with Xerox as their complete color solution. Xerox has successfully branded their color as THE standard. Steenburgh changed their slogan from “The Document Company” to “The Color Company.” Color pricing, quality and speed based on the iGen3 was so compelling, Xerox implemented the technology throughout their product line. At the same time, color print-on-demand predictions finally came true. Marketing managers were forced to consider a better return on their print and direct mail efforts. With postage rates rising and more sophisticated consumers, Xerox’s variable solutions and color digital presses answered the call - just in time. ----- The stars will have to get moving.