Meet eBay's New Postman Pitney Bowes could have gone the way of the buggy-whip maker. Instead, it rethought the postal service and now acts like a new-economy startup.
By Duff McDonald

(Business 2.0) – In February, after eBay went looking for a company to create a system for online postage, it didn't turn to or any other dotcom whippersnapper. Rather, the nine-year-old Internet upstart tapped 84-year-old graybeard Pitney Bowes, a firm based in Stamford, Conn., that dominates the world of postal meters. Now millions of sellers on eBay download postage and print it out--with Pitney Bowes earning a click fee each time.

It's the latest ratification of Pitney's business model, which many believed would be rendered obsolete by e-mail and the Internet. Instead, the $4.6 billion company has bolstered its 80 percent share of the domestic postal-meter market with new revenue streams from the digital world. Profits are growing at a clip of 13 percent a year.

That Pitney Bowes now finds itself in the enviable position of having a stranglehold on the past while simultaneously blazing its way to the future is a surprising achievement. The maker of postage meters, which even today face the risk of becoming anachronisms in an increasingly virtual world, was threatened by the Internet like nothing else in its history. How it managed to harness new technology and ride out the tsunami will be one for the books.

On the Bubble

Pitney didn't always have such a firm grasp of the future. Initially, CEO Michael Critelli's response to the upheaval wrought by the Internet was to avoid getting excited. Pitney's near monopoly in the postal-meter business kept it comfortably profitable. The first sign of trouble, however, appeared in 1998, when Critelli, a corporate lawyer by training and cautious by nature, noticed that the company's office products division, which supplied copier and fax machines, was losing steam. He decided to spin it off in December 2000. "The rampant dropoff of our fax supply business really made me rethink what we would do going forward," Critelli says. "Something was going on in the document-management space that was very different from the previous 10 to 15 years." That something was, of course, the Net.

Wall Street, too, had noticed, and wondered where, exactly, the growth opportunities lay for the industrial-age company. Pitney's stock price had begun sinking, from $60 in April 1999 to $39 six months later--well ahead of other technology companies that would tank during the bust. In October 2000 the stock price hit $26.

By then, of course, Critelli was on the offensive, brainstorming with his top people about how Pitney should respond. He also took a novel step: He hired a team of anthropologists to go out and study the different ways businesses managed their documents. Within a year he had mapped out a bold new strategy. Since Pitney was an expert at moving around pieces of paper--mail--the company would grow by finding new opportunities in the burgeoning, if banal-sounding, field of document-management services. Moving documents around an office, after all, was not so different from moving mail. Pitney already had superior technology for identifying and tracking mail that could easily be adapted to enterprise work.

The move carried risks. Pitney would be forced to compete with Xerox and Ikon Office Solutions, both entrenched players in the $250 billion industry of managing data flow on paper and in digital form. And clearly, the company would need to build--or buy--technology to digitize interoffice communications.

Teching Up

Needless to say, Pitney has plenty of experience with technology. It spends $150 million a year on research and development, about 3.3 percent of its annual revenue. It also holds some 3,500 active patents. But many of them were for moving paper through machines--flap moisteners and sheet feeders. Until recently, the Internet world had pretty much remained a mystery.

Critelli went on a postbubble buying spree, picking up tech companies at bargain-basement prices. Since January 2002 he has bought more than 25 companies for almost $600 million. He got PSI Group, a provider of presorting services to corporate customers, for $130 million. While mundane, it's a compelling business: The postal service offers discounts to companies that sort their own mail. Though that amounts to only pennies per envelope, consider that PSI's New Jersey facility, one of 24 that Pitney runs, sorts more than 3 million letters a day for companies like behemoth Citigroup. It's easy to see how the company expects to bring in about $150 million from its sorting operations this year.

Likewise, Pitney began teaming up with companies that already had digital chops. Siebel Systems, a leading maker of customer-relationship management software, helped it develop a program that would improve the effectiveness of call centers. The software born from that relationship allows a call-center employee to track a particular piece of mail using the data stored on the letter or package's two-dimensional bar code. The software even shows an exact image of the bill sent to a customer so that any line item on it can be explained.

With new tech and a new approach, new business has been flowing in. Toyota Motor Sales U.S.A. hired Pitney to tackle its record management, mail operations, interoffice mail, and invoicing. The result: Efficiency in some departments rose by nearly 200 percent. Bristol-Myers Squibb saved $800,000 in two years through a document-management services project spearheaded by Pitney at nine of the company's sites.

Thinking Outside the P.O. Box

The Jewel in Pitney's shiny new crown is, of course, the eBay deal. And it was the company's inside knowledge of the byzantine workings of the postal system that clinched it. "We have the advantage of being deep upstream in the postal service's processes in an area our competitors don't understand," Critelli says. "The postal system is mind-bogglingly complex."

The key was a decision Critelli made as part of the new strategy to turn some of the company's R&D talent loose on merging their understanding of the post office with changes being wrought by the Internet. Last September the effort paid off: Pitney patented a system that enables instant online postage. It's technologically savvy, requires no downloading of software, and exploits Pitney's utter familiarity with arcane postal rules. (It hinges on a clever workaround to U.S. Postal Service regulations on temporarily lending postage meters to a third party.) In essence, Pitney began brokering postage. And eBay snapped it up.

Another innovation in the wings will allow a buyer with an unwanted product to print out a merchandise return label and have the postage paid by the seller's postage meter, alleviating the inconvenience for the seller of having to pick up the returned package at the local post office and pay for it there. Pitney, with its stock price near $42, isn't talking about it, but bet on that service being delivered by eBay's new postman soon.

Duff McDonald is a freelance writer living in New York City.