Stick to the Mail: Postal Reform Means Radical Cost Cutting, Not “Product Innovation”

With the Senate considering postal reform legislation Congress may finally be taking action. The last time this was seriously considered was in the early 2000s when the rise of email, the recession and the Anthrax attacks were a triple whammy hitting USPS revenues. But it could not muster the votes needed. In the succeeding decade the problem has only gotten worse (USPS lost 5.1 $ billion in 2011) and is so bad that Congress may be forced to act. While the Great Recession has played some role, the real cause of USPS’ difficulties is that more and more Americans are switching to email from physical mail delivery. And this trend is only going to increase as more Americans get online and become more comfortable with things like electronic bill payment and electronic delivery of documents (e.g., bills).

When an industry is faced with declining markets and financial losses there are really only three options available to it: raise prices, cut costs, and/or expand revenues.

Raising postal prices significantly is not really an option. The problem with this is that it can quickly accelerate the death spiral. Costs go up so mailers switch to other non-USPS options and revenues fall even more.

If we have any expectation that there will be a Postal Service in  2062 its pretty clear that it will have to dramatically cut costs. The easiest way to do this is to cut service. The Senate alternative proposed by Senators Carper and Collins (S. 1789 – The 21^st Century Postal Service Act of 2012) takes at best anemic and half-hearted measures.

For example, it allows USPS to consider cutting to five days but only after two years and only after going through an onerous process. But five days a week won’t cut it. Congress needs to let USPS switch to 3 day a week delivery which would cut delivery costs in half. Does anyone really care if their junk mail gets arrives a day “late”?

Congress should also let USPS close any post office it wants anywhere in the country as long as there is a nearby post office to it arranges with a commercial retailer to provide some postal services nearby. There’s no reason stores like CVS or Safeway would not be more than happy to have self-service Postal Kiosks in their stores that would allow people to mail letters, buy stamps, etc.

But, neither of these steps are in the bill because the Postal Workers unions and rural communities whose money-losing post offices are subsidized by a money-losing USPS fight them; not to mention the few voters who might scream they need their junk mail six days a week.

Since Congress doesn't have the political will to require dramatic cost reductions it is looking at two other options. Refunding pension payments already paid by USPS and expanding revenues by proposing to allow USPS to get into new lines of business in the hope that it will somehow make enough profits to offset its massive losses in delivering physical mail. A little history is in order. USPS has tried these kinds of things in the past and each was money-losing failure. But this time, it argues, is different. For example, the USPS Inspector General’s Office (IG) proposes that USPS get in the email business, in areas such as secure email and electronic bill payment .

One argument the IG offers for why we need a government email service is that:

“While private sector technology industry standouts have developed widely used e-mail services, their business models can sacrifice consumer privacy in the interest of ad-based revenue generation. For example, these companies scan e-mails and track Internet searches to develop preference-based advertising. The Postal Service, on the other hand, has proven itself over its long history as a trusted third party entity with the legal standing of the federal government and the power to uphold federal privacy law.”

But this is wrong on two counts. First, free private email services like G-Mail, Yahoo mail, and Microsoft Windows Live email don’t have their employees or advertisers reading email. To the extent any of them target ads based on email it’s based on computer algorithms that anonymously match email text to ads. So there’s no sacrifice of consumer privacy. Second, if USPS does not plan to use ads on its email service, how does it expect to make money? If it charges money, who would pay when other services are free. USPS claims that entities would want to pay USPS to send emails. But then it goes on to say that “Advertising mail would only be allowed from entities registered with the Postal eMailbox system and with the consent of the receiver.” Hardly likely that many consumers are going to opt in to get their weekly (or even daily) credit card solicitations by email. Maybe the deal should be Congress gives USPS the authority to get into the email business as long as Americans must also affirmatively opt in to get advertisers’ physical mail. That only seems fair.

But still the IG is confident it can make money to offset the rest of its money-losing business. But it wants to be sure not to price things too low, saying “One option prices e-mail messages at the same level as single-piece First-Class Mail (FCM) to avoid concerns over the cannibalization of physical volumes.” Sure, I have an idea. Charge $10 per email and then you’d be sure there would be no cannibalization of physical letters.

At the end of the day, Congress needs to go back to core principles. What is the real reason for USPS? Unlike what some free-market organizations like Heritage say, it’s because last mile delivery is a natural monopoly, just like garbage collection is. In a natural monopoly you can either have government or a regulated private sector provider provide the service. We already have a government provider that does a pretty good job of delivering mail. There’s no reason to change that. What is needed is to recognize what its role is: to deliver mail. End of story. Notions that as we move to electronic delivery that the USPS must be given Congressional authority to also move into the digital age is fallacious. Digital delivery is not a natural monopoly and it is a job the private sector is doing a very good job at.

Unfortunately, the Senate legislation allows USPS to “provide non-postal products and services”. It also creates an Advisory Commission is to among other things, examine “additional products and services that the Postal Service could offer.” It also creates a Position of Chief Innovation Officer and requires the USPS to develop an innovation strategy.

To be sure these come with a number of caveats, one of which is it would not create unfair competition with the private sector. But this is not really the point. Why create any competition with the private sector for things that are not inherently Postal services? I have no doubt that USPS could run an email service and not even cross-subsidize it internally in a way that creates “unfair” competition with the private sector. But why bother? It is still a waste of societal resources since the market already provides robust email services. If Congress does move forward with a CIO it should require the position to focus not on product innovation (which the legislation says it should), but rather on process innovation. In other words, innovation in how to cheaply deliver physical mail.

If Congress really wants USPS to do something useful with its network of post offices that the private sector can’t do it, it should require that it develop a partnership with the private sector and the ability to provide Americans with digital signature capabilities as ITIF detailed here.

Twenty-five years ago when I was getting my doctorate, one of my more interesting graduate seminars was Business Strategy. And one of the more memorable cases we studied was the glass milk bottle industry. This once thriving industry had largely disappeared because of the innovation of plastic milk jugs. The debate in class and in the literature was over whether better corporate strategy could have played any role in stemming its decline. The conclusion was that it could not. The environment had changed. A better and cheaper product came to the market in which the glass milk bottle industry had absolutely no competitive advantage. There’s a lesson here for USPS. It can’t and shouldn't become the plastic milk bottle industry (e.g., be a leader in e-commerce and digital services). It should stick to what it can do better than anyone else: deliver mail. Unlike the glass milk bottle industry, there will long be a need for some physical mail delivery. But only if USPS can dramatically cut costs. And that requires Congress to give USPS the ability and mandate to go to 3-day a week delivery and close a large number of post offices and postal processing facilities. Anything else will consign USPS to be the glass milk bottle industry.