USPS: Fighting for survival

The U.S. Postal Service has a unique view of the Internet economy. While

most agencies have seen the Internet as a boon, providing a new venue for

spreading the word about core missions and services, USPS may consider the

World Wide Web as a threat to its survival.

Many Internet companies have begun to provide services traditionally offered

solely by USPS, eating into USPS' multibillion-dollar business of mail delivery.

As a result, USPS' profits have plummeted from $1.2 billion in 1997 to $363

million in 1999, while revenue increased more than $4 billion during that

period. USPS is projecting its net income to drop to $100 million in fiscal

2000.

The agency — a government corporation that does not receive tax revenue

but instead pays for operational costs from its income from stamps and other

services — also announced this year that it would cut about 9,000 jobs by

2004 through attrition and hiring freezes as part of an initiative to save

$4 billion in the next four years. In addition, USPS has not filled 11,000

other jobs that have been vacant for two years. The growing popularity of

e-mail was cited as one of the main reasons for the cuts.

The Postal Service also has seen dot-coms cropping up that offer related

Internet-based alternatives to traditional mail services, such as online

applications for paying bills.

"They face a terrible dilemma," said William Kovacic, a professor at

the George Washington University Law School, who follows USPS. "Electronic

substitution is going to take that first-class traffic away from them. If

their revenue from first-class traffic begins to erode...the whole rate

structure starts to implode. There's no way out of that death spiral."

USPS is also saddled with a "hopelessly ill-suited governance structure,"

including regulatory limitations on postal rates and product development,

which prevent the agency from swiftly reacting to the market for electronic

services, Kovacic said.

But USPS, which has been competing with the dot-coms since PC users

began trusting e-mail as a viable communication alternative to traditional

mail delivery, is attempting to become a dot-com itself. In April, the agency

changed its domain name from a dot-gov address to a dot-com address, arguing

that it would be easier for the public to find its site.

It's a change in more than name. Rather than give up its position as the

premier delivery mechanism for business and personal communications, the

Postal Service has been fighting back with a slew of e-commerce initiatives

this spring, attempting to stave off the competition with its own online

alternatives to traditional services.

In fact, the USPS dot-com strategy has made enough of a splash to trigger

a wave of criticism. In something of a backhanded compliment, the critics,

some of whom question whether mail delivery should be privatized altogether,

say the agency has gone too far in competing with private industry.

From Mail Service to E-service

In entering the dot-com arena, USPS is applying its traditional strength — providing universal service to all physical addresses.

For example, in May USPS began offering Post Electronic Courier Service

(PosteCS), the Internet version of certified mail. PosteCS notifies senders

when a document has been sent, when the recipient has been notified and

when the recipient has opened the document. The Postal Service hopes PosteCS

will appeal to those who want the speed of electronic messaging without

giving up the reliability of USPS' standard certified mail service.

In addition, USPS offers an electronic postmark service that can be attached

to any Internet communication and can protect documents from alterations

by detecting if a document or file has been tampered with during transmission.

USPS also wants to begin assigning e-mail addresses to individuals as soon

as they are born and deploying computer kiosks for sending and retrieving

e-mail.

All of these initiatives are designed to ensure that the Internet revolution

does not impede USPS' mission of providing universal service to the public,

whether it is hard-copy mail or e-mail, said John Nolan, deputy postmaster

general.

"We are currently the gateway to the household," he said. "Nothing that

we do is worth more to us than our core products. We're not abandoning our

core, our heart. We very much feel we can play a very important role to

make sure no one is left out" of the move to online communications.

USPS also is using the Internet to break into many markets that were

out of reach before the advent of e-mail, Nolan said. For example, USPS

is targeting the small- business market via e-mail advertising to entice

businesses to launch hard-copy direct-mail campaigns.

To ward off the revenue bite from consumers turning to the Internet to pay

bills, in April USPS began offering customers the option of paying bills

online through a secure Web portal. USPS' eBillPay portal gives customers

a central site to pay bills. Unlike commercial sites, which require an individual

passcode for each transaction, eBillPay customers enter the site once and

can pay everyone they wish.

Customers enrolled in eBillPay select the companies or people from whom

they want to receive bills electronically. Companies and individuals send

bills electronically through the Postal Service system, which distributes

the information to the customer. After viewing bills online, a customer

can pay them electronically and specify the payment date. Money will be

taken directly from the customer's account and electronically transferred

to the biller's account.

"The Postal Service kind of realized, "We better get into this racket

ourselves or we're going to have problems,' " said Edward Hudgins, director

of regulatory studies at the Cato Institute and editor of The Last Monopoly:

Privatizing the Postal Service for the Information Age.

Still, USPS stands to lose billions of dollars every year because of

e-commerce, Hudgins said. "The Postal Service is seeing [its] revenue threatened;

it's being threatened by e-commerce," he said. "[USPS] is going to be losing

more of its most profitable business to e-mail, faxes and e-commerce."

Hudgins predicts that the Postal Service stands to lose $10 billion

to $15 billion in annual revenue in the next decade as businesses and individuals

use PCs to pay bills electronically.

Projections indicate that USPS will begin seeing a decline in its first-class

mail operations in the next three years. Losses will come primarily from

the public opting for electronic bill payment as opposed to using USPS for

delivery. The Postal Service derives 25 percent of its revenue each year — about $15 billion — from traditional mailed bill statements and payments.

"The Internet is both a supportive and a disruptive technology," Nolan said.

"It can add volume and take volume away. There are opportunities to build

our core business that we've never been able to get to before."

Nolan said the new e-commerce initiatives are designed to ensure that USPS

will still be able to offer its core services and "keep those rate increases

at reasonable levels so we're still a value to customers."

USPS also has upgraded or developed new IT systems to cut costs. The

agency was the first in government to begin using an online auction system

to buy goods. Last month, USPS began receiving bids via the Internet for

pre-printed and pre-stamped envelopes, fuel and leases on trucks. USPS hopes

to save more than $10 million a year by allowing vendors to bid down the

price for these goods. USPS also has begun using older technology such as

the Remote Bar Coding System, which it developed in the early 1990s to find

bottlenecks in the mail stream.

Overstepping its Bounds?

But many private companies are unhappy with USPS' decision to offer

more electronic services and have begun campaigns to block the delivery

giant's move to the Web.

The Computer and Communications Industry Association, which last year

launched a lobbying campaign to convince Congress that the USPS should stay

out of e-services, sent a letter to Congress last month arguing that USPS'

move into the e-services industry was unfair. "We're opposed generally to

the Postal Service getting into these new e-commerce initiatives," said

Jason Mahler, vice president and general counsel for the computer organization.

"They appear to be setting themselves up as an e-commerce portal. They

are a government agency. They are not subject to the same laws as the private

sector. We just don't view it as proper for our companies...to have to compete

against a government agency," Mahler said. "They should stick to their core

mission, which is delivering the mail."

While many private-sector e-commerce customers must compete for venture

capital, Mahler said USPS customers are captive to the agency's monopoly,

becoming unwitting and involuntary venture capitalists for the Postal Service's

e-commerce efforts.

"We don't think that monopoly should be used to fund new efforts," he said.

"Perhaps consumers would believe...it's got the government's stamp of approval.

No private company can even compete with that."

For example, the Postal Service's plan to apply electronic postmarks

to e-mail would pit USPS against a vast market of digital signature corporations

offering the same services to e-mail users, he said.

In addition, Mahler said consumers have fewer privacy protections when

dealing with the Postal Service than they do using services provided by

a private company. For example, private companies are under no obligation

to turn over customer data, such as financial information, to federal investigators.

If, for example, a federal law enforcement agency asked for financial data

for an individual's USPS eBillPay account, USPS would turn over the information,

Mahler said.

Rick Merritt, executive director of PostalWatch Inc., a USPS watchdog

group, said that USPS' e-commerce initiatives mark an attempt to launch

a "cradle-to-grave" e-commerce strategy that oversteps the agency's original

charter.

"Why should the Postal Service be allowed to enter into direct competition

against private e-commerce companies?" he said. "It isn't because e-commerce

needs the vast resources of the federal government to fulfill its potential,

as was the case with the space program. The Internet and e-commerce are

growing rapidly and doing quite well with private capitalization."

The only apparent justification for allowing USPS to enter those markets,

Merritt said, is to enable the agency to offset the anticipated revenue

losses from a reduced demand for its core product.

"This amounts to no more than a "stealth tax' on private e-commerce

to subsidize the Postal Service," he said. "If polled, my guess is that

most Americans would say the Postal Service should concentrate its efforts

on delivering the mail and that its "relevance' should rise and fall with

demand for first-class mail."

If the Postal Service is going to compete in private markets, its exemption

from antitrust laws and government regulations that apply to private-sector

businesses should be eliminated first, he said.

USPS also has its own limitations. "They're not enough like a private

company to have the sorts of incentives to drive managers to improve performance,"

he said. "They have a break-even requirement, which is bizarre. Imagine

a company that is told, "You can't earn a profit.' "

The answer, Kovacic said, is for USPS to become a private firm and give

up its monopoly on first-class mail to compete effectively and fairly in

the electronic services market, he added.

"As long as you have a monopoly right, you're always going to face suspicion

when you try to operate in competitive arenas," he said. "If the status

quo prevails, they're finished. First they will be a flailing firm, then

they will be a failing firm."

However, USPS' Nolan said most of the criticism being lobbed at its

e-commerce efforts has been inspired and led by competitors in the parcel

industry. Contrary to claims that USPS will be hampering the efforts of

other e-commerce concerns, the Postal Service will be helping the economy,

Nolan said. For example, USPS is teaming with several messaging service

companies that want to embed USPS' electronic postmark into their offerings.

"We are opening up the Internet and business opportunities for probably

more people than we are competing with," he said. "We're out there to serve

our customers."

Cato's Hudgins describes USPS as the "bull in the Internet china shop"

that will lay waste to the e-commerce market with its ability to operate

like a private company without the constraints of taxes or federal regulations.

He supports freeing USPS from its governmental ties to allow it to compete

just as the New Zealand and Swedish governments have done with their postal

services.

"It's a market the Postal Service should not tamper with unless they're

privatized," he said "There is a solution. It's the "P' word — privatization."

Postmaster General William Henderson said publicly that he believes

USPS ultimately will be privatized. However, there is no "crisis" to pressure

the commercialization of the agency yet, and most moves to privatize are

spawned by a crisis, he said.

There is a bill before Congress to ease some of the restrictions on

the agency to be self-supporting and provide universal service while keeping

rates low. The bill would give USPS more pricing flexibility and allow it

to stimulate growth.

But for now, the agency has its sights set on tapping into the e-commerce

arena. New e-commerce initiatives will include additional products and services

for secure messaging services and possibly an Internet auction site run

by USPS to quickly and profitably dispose of merchandise returned to online

retailers by customers.

— Harreld is a freelance writer based in Cary, N.C.