Postal Agency Faces Fight With High-Tech Rivals

The U.S. Postal Service is confronting a technological assault that as never before threatens its cherished monopoly over the delivery of letters, even as its mail volume this year is expected to rise to a record 177 billion pieces.

And how is it responding? Critics say the agency has an instinct to answer competition with brute force that is one of the clearest signs that it mistrusts--rather than values--its customers.

That defensive posture, say analysts, is among the many qualities that must change if the Postal Service is to survive into the 21st Century as a going concern rather than a ward of the federal government.

“The model of a mail monopoly is gone,” said Robert Reisner, the agency’s vice president for technology applications. “The customers have choices, and they will choose.”

But while postal officials may know the change is coming, it has proved hard to live with.

At the Atlanta headquarters of Equifax, armed postal inspectors arrived one day, demanding to know whether all the mail that the large financial services company was sending via Federal Express was truly urgent. They also asked why paychecks being sent to outlying offices should not go by regular mail and even wanted to open personal mail.

“They lived with me for four months,” recalls Joseph Steinbeck, Equifax’s vice president for mail distribution. “They questioned everything.”

Equifax refused to allow the personal mail to be opened, but it did eventually agree to pay the Postal Service a penalty of $30,000. It was essentially a fee allowing the firm to use Federal Express as it wished for the following year without Postal Service harassment.

The Postal Service initially maintained that it had the authority to investigate the use of express mail and levy the fine because such urgent mail is carried privately only under a special agency exemption. But the agency’s enforcement of the exemption proved so excessive that it led to a congressional investigation this year and a pledge by Postmaster General Marvin T. Runyon Jr. not to use postal inspectors to audit customer mailings.

“I pay $150,000-$200,000 a month in postage,” Steinbeck said. “That means they jumped on the people who are supporting them. It hurt my feelings more than anything else.”

These days, electronic mail, fax and electronic funds transmissions all can move information and money faster, cheaper and more securely than the Postal Service. Alternate delivery services can hang advertising material and magazines on your doorknob for less than the cost of mailing them--and their business soars every time the Postal Service wins a rate increase.

Federal Express, Roadway Express, DHL and a host of other firms beat the Postal Service by hours on express delivery--and if your business does enough volume with them they’ll do it at a price per envelope well below the Postal Service’s Express Mail minimum of $9. Private carriers typically offer faster and more reliable service and the capability to track a package’s route from sender to recipient.

Land’s End, the Wisconsin-based “mail-order” merchandiser, actually receives only 15% of its orders by post, as opposed to its 800 order line; the vast majority of customers using the mail today are those who pay by check rather than credit card. On the other end, the company forsakes the Postal Service’s parcel post to ship 98% of its merchandise by United Parcel Service.

“It wasn’t a price issue with us,” said Philip Schaecher, Land’s End senior vice president for operations, noting that parcel post rates to some locations are lower than those of UPS. “It’s that their service levels are not what we want them to be. If UPS says it will take two days, they make that 99% to 99.5% of the time. The post office is lucky to meet its standards 80%-90% of the time, and its standards are looser.”

As competition has grown the rate of increase in first-class volume has sharply leveled off, from 4% in 1990 to 1.5% in 1993. In that time business-to-business mail has declined by almost a third, to just over 20 million pieces, as businesses embrace new money-saving and lightning-fast communications media.

The shift by business customers to electronic communications cost the Postal Service about $1.8 billion in lost revenue from 1988 to 1991, according to a study by the General Accounting Office. (The GAO, the investigative arm of Congress, also warned that all of those services have been growing much faster--on average 25% to 40% a year--than mail volume.)

So far the drop has been offset by an increase in mail between businesses and consumers--much of it bills, bill payments and merchandise orders--but postal officials attribute much of that to a nationwide rise in the number of households.

“The risk to the Postal Service posed by competition and changing technology is very real,” GAO Associate Director Michael E. Motley recently told a U.S. House committee.

The Postal Service itself believes that about 10% of the growing volume of electronic mail and fax transmissions represents a “diversion” of first class mail--that is, messages that would otherwise have gone by post.

And it acknowledges that while the overall market for so-called correspondence and transaction mail--the basic business of carrying letters, documents and funds--grew to $45 billion this year from $26 billion in 1988, the Postal Service’s share of that market dropped to 55% from 75%.

Given these trends, many in the mail industry believe the Postal Service has few options in confronting the future. It can seek out or develop new services for customers; it can improve its current performance so its traditional clientele sticks with it longer; it can prepare now for its inevitable downsizing; or it can be privatized or commercialized via the abolition of its monopoly over the delivery of letters.

Each of these steps would produce a postal system radically different from what existed in 1970, when Congress abolished the Post Office Department and dropped the postmaster general from the Cabinet.

The new, putatively independent Postal Service was to operate as a business, but it was forbidden by law to make a profit or show a loss. It was denied outright government subsidies and expected to cut costs, but it remained subject to federally mandated hikes in its employee health and pension expenses and to congressional opposition to closing unprofitable post offices or cutting back service.

Even more important, it became subject to a new regulatory body, the Postal Rate Commission. The PRC has 10 months to rule on any rate increase requested by the Postal Service. It also has the power to ensure that no one class of mail subsidizes any other and that no one group of customers--big department stores, for example--gets better rates than individuals mailing greeting cards to the proverbial “Aunt Minnie.”

All of these factors contribute today to the Postal Service’s difficulties in meeting competition.

“They gave it an institutional form of the HIV virus, and now it’s weakened so much that you’re seeing opportunistic infections all over the place,” says Gene A. Del Polito, executive director of the Advertising Mail Marketing Assn., a Washington trade group for major postal customers.

“No business in America could ever succeed with the legislative and regulatory constraints that govern the Postal Service today.”

Adding to doubts about the agency’s future is the degree to which Runyon has focused on new businesses and services.

To gain a foothold on the so-called information superhighway the agency has proposed certifying delivery of e-mail messages to provide legally valid proof that they were sent and received and when--much as the postmark has traditionally been accepted as proof of legal service.

The Postal Service has also suggested that it hold the public encryption key safeguarding e-mail transmissions of credit card numbers and other financial information--generally regarded as crucial to the offering of commercial products and services over the Internet.

Under this concept, buyers of goods and services on the Internet would send the vendor an encoded version of his or her credit card number. The vendor would then turn to the Postal Service to decode the number and verify its legitimacy.

Meanwhile, the service is starting a pilot program to install kiosks in post offices offering customers information, and conceivably documents, from federal agencies. It has undertaken an experimental program in Upstate New York to take utility meter readings electronically from letter carriers’ vehicles, printing out gas and electric bills on the spot.

Finally, the agency has contracted to provide overnight delivery of merchandise ordered by customers of a new Time Warner television shopping network, set to debut next year in Orlando, Fla., with 4,000 customers.

But few believe that any of these ventures can make up for a long-term decline in its core business: delivering hard copy to offices and homes.

“Are these slam dunks, making billions of dollars risk-free to subsidize rural post offices?” asks Michael Cavanagh, a Washington-based consultant to major postal customers. “I doubt it.”

All face either stiff private competition or questions about the Postal Service’s competence. Several high-tech companies have already developed programs to certify and encrypt e-mail transmissions, raising the issue of whether a government agency is needed in a market potentially well-served by private enterprise.

Government kiosks and utility readings do not necessarily meld well with the traditional task of delivering the mail. As for Time Warner, some question whether the Postal Service can actually meet the standard of overnight delivery it promises--and if it can, whether it won’t eventually be shouldered out of the contract by a private competitor anyway.

Beyond that, many argue that the agency is trying to put its eggs into too many baskets.

“We should continue to deliver hard-copy mail, not educate ourselves to compete with private sector companies,” says Robert Setrakian, the San Francisco businessman and outgoing postal governor who was perhaps Runyon’s fiercest critic on the board.

He argues that the Runyon administration has allowed itself to be distracted by the glitter of high-tech as a means of avoiding the “drudgery” of delivering the mail. “Getting into a field it doesn’t know and that isn’t related to its main business is wrong,” he said.

Moreover, the Postal Service’s recent record in applying new technologies is not an encouraging one. Take the creation in the early 1980s of E-COM.

This was a system by which business customers could transmit advertising flyers to any of 26 post offices specially equipped with computer printers. The idea was to give users a way to quickly and reliably saturate target areas with mass mailings.

As it happened, E-COM was an idea whose time had not yet come and was bound to disappear fast. It was designed to compete with Western Union Mailgrams, which were already considered obsolescent. The post office equipment could generate only plain-vanilla text messages on white paper, depriving users of the appeal of fancy printed graphics.

Once transmitted and printed out via high technology the E-COM messages were manually sorted and distributed conventionally to local post offices, where they once again became subject to all the mail’s usual ills and delays.

Still, Runyon and his lieutenants argue that their move toward high-tech reflects the needs of their own customers--businesses as well as consumers who may not have access to the information highway other than through the post office.

“The promise of the information superhighway isn’t going to be realized until the beginning of the next century,” says Reisner, the agency’s technology czar. Meanwhile, he adds: “We’re working on new technologies not just because it’s a revenue base but because the customer demands it.”

But others say the challenge is so great that the Postal Service may be able to meet it only via a radical restructuring--such as some version of privatization.

“We haven’t had a debate about this in any depth within the last 100 years,” says Rep. Christopher Cox (R-Newport Beach), the author of one bill to repeal the postal monopoly by allowing anyone to deliver first class mail. “We ought to take a look at how the demographics of America have changed and our technology has changed.”

For his part, Runyon notes that throughout history reports of the post office’s demise have proved premature.

“When they invented the telegraph, they said the mail’s going out of business,” he said in an interview with The Times. “The telephone, too. It’s happened time after time.”

But what distinguishes today’s competitive environment from earlier eras is the extent to which the competition is coming from outside the bounds of the Postal Service’s legal monopoly over delivery of letter mail. In fact, many experts believe the single biggest obstacle to better postal service is that very monopoly, established by a series of laws dating back to 1792, the so-called private express statutes.

Critics say the monopoly saps the Postal Service of any institutional impulse to satisfy customers and deprives it of the skills needed to thrive in non-monopoly markets like parcel post and express mail. The monopoly mentality, they argue, has prevented the agency from developing such services clamored for by customers as date-certain delivery of advertising mail and detailed tracking and tracing of parcels.

“There are only two ways to increase the efficiency of a government-owned monopoly,” says Richard Geddes, a Fordham University economist who has testified before the Postal Rate Commission. “Repeal the monopoly or privatize it. Both are radical institutional changes for the Postal Service, but anything short of that won’t lead to reform.”

Postal officials fret that throwing the mails open to unbridled competition would lead to “cream-skimming”: a scramble to service the most profitable routes--inter-urban mail or business-district delivery, say--while abandoning such thankless unprofitable routes as the inner cities and rural areas.

“I think you’d see millions of small businesses go out of business if they can’t communicate the way they do today,” Runyon said. “We’ve got probably 8 million small business people who really depend on us.”

But others argue that the principle of universal mail service need not be sacrificed under a privatized or commercialized postal system; it could be protected by regulation--by requiring bidders on profit-making routes to cover the less desirable ones as well, for instance--or by charging more for delivery to outlying areas.

“Unprofitable routes would become profitable because people would pay a higher price,” says John Ryan, a former postal governor who is a leading proponent of privatization. “That’s what happens with everything else.”

Beyond that, there is little agreement on what a privatized or commercialized postal system would look like. Some proponents of change say one key would be changing the current system of postal regulation, by which the Postal Rate Commission figures the cost of all postal services and then approves a rate structure that covers it.

The postal system might be better served today by a structure in which the service is permitted a maximum overall rate, with automatic increases for annual inflation, and permitted to adjust prices as it sees fit within a given term--say, five years.

“That way the Postal Service would have much more flexibility in setting rates,” says Michael A. Crew, a Rutgers University economist who proposed this system in a study this year for the American Enterprise Institute, a Washington think tank.

Crew believes eventual privatization would be the “natural result” if such a change made the service a more effective competitor, “because it’s inappropriate for a company funded by the Treasury of the United States to compete with private companies.”

“Politically, the prospects of privatization are nil unless service gets so bad that people stop using it,” says Ryan. Rep. Cox, on the other hand, believes a radical change short of selling off the service outright “is more likely to be taken more seriously in a new Republican Congress.”

For all that, many believe the Postal Service’s problems are so deep-seated that repairing it will not be an easy job. Says Cavanagh, the Washington postal consultant: “To say this is something an idiot could fix in 10 minutes is not true.”