RH Donnelley: Template for disaster

On Thursday, Yellow Pages publisher R.H. Donnelley filed for bankruptcy, citing debts of $12.37 billion, against assets of $11.88 billion. This follows repeated requests for forbearance from creditors, including Bank of New York Mellon and U.S. Bancorp.

Donnelley's problem is not uncommon: as consumers live more and more of their lives on line, numerous companies have found that their key business is now being done by a cheaper online provider. The key to surviving the transition seems to lie in finding one's core strength and adapting it to the needs of the online consumer.

In many ways, Donnelley could be textbook case on how not to do that. They attempted to move online by purchasing Dex Knows in 2007. While the site seems to be a valiant effort to recreate a traditional yellow pages, its basic concept is fundamentally flawed. Simply speaking, with the exception of Rain Man, nobody flips through the yellow pages for fun, and the site seems to be trying to imitate that model.

Donnelley's subsequent purchase of Business.com also was far less than stellar. The site, while potentially helpful, is bizarrely structured, with no apparent organization. As with Dex Knows, Business.com's key function is accomplished more clearly, and more completely, by a wide variety of internet search engines.

While Donnelley's online presence has been a problem, the company's biggest issue has been its unwillingness to let go of the big book model. In 2002, the company acquired Sprint Publishing for $2.23 billion; in 2004, they followed it up with the by buying SBC for $1.41 billion. The latter purchase included a 50-year licensing agreement by which Donnelley would be the sole publisher of telephone books for SBC Illinois customers. With the 2006 purchase of Dex Media for $9 billion, Donnelley became the third largest directory publisher in the United States.

At the end of its massive buying spree, Donnelley had spent approximately $12 billion. Ironically enough, that was almost the same exact sum that they had in liabilities by the end of 2008. The reason for this downfall was clear: while the company's purchases had given it a great position in the telephone directory industry, this was roughly comparable to being the top manufacturer of record needles right before the release of the compact disk. In context of the increasing power of internet searching, a license to print Illinois phone books for 50 years sounds more like a punishment than a benefit.

It's easy, and perhaps unfair, to play Monday-morning quarterback with Donnelley's decisions over the past decade. After all, in 2002, there is no way that the company could have predicted the massive popularity of Google. However, by 2004, it was pretty clear that the yellow pages was well on its way to becoming a dead technology and, by 2006, it took willful blindness to miss the writing on the wall. In this context, the purchase of Dex Media bordered on criminal negligence. The upshot, of course, is that Donnelley's primary usefulness at this point is not as a phone book provider, but rather as an object lesson. Companies that hope to thrive in the digital age are well advised to study RH Donnelley closely and do exactly the opposite.
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