Postal Service Looks to Private Business Ideas; Critics Say Agency Has Unfair Advantage Because of Tax, Rules Exemptions

Postal Service Looks to Private Business Ideas; Critics Say Agency Has Unfair Advantage Because of Tax, Rules Exemptions
From WASHINGTON POST, June 20th, 2001
Felicia Morton Washtech.com The U.S. Postal Service is putting out the call to business for help in creating new online ventures, as it weighs an electronic future in which the agency might one day spin off private enterprises.

The Postal Service has received more than 700 business plans since asking for proposals in January. The 225-year-old agency has hired half a dozen people with business expertise to analyze the potential for new partnerships. For now, the ventures are set up as collaborations between the agency and private companies, but postal officials are considering the possibility of forming new businesses.

"We're acting like a real business because we're a real business," said John Nolan, deputy postmaster general.

Talk of the Postal Service getting into private enterprise angers those who say the post office would have an unfair advantage over the private sector because the agency is exempt from taxes and is not subject to the regulations that govern private companies.

But Postal Service officials say such arrangements may be necessary to ensure universal mail service remains available.

It's no secret that the Internet has already cut into the Postal Service's business. The volume of first-class mail, for the first time in history, is decreasing. The agency is losing money on its mail operations, a situation that likely will grow as more people go online to pay their bills or use e-mail, Postal Service executives said.

The post office is fighting back with its online products including eBillPay, an online bill-paying service that will compete with banks and e-commerce services such as PayMyBills, Paytrust and PayPal.

The post office has also launched partnerships with such companies as AT&T Corp. and International Business Machines Corp. to create its NetPost Certified Mail, which allows customers to send and authenticate mail online for 50 cents. Right now, the pilot program is only available to government agencies such as the Social Security Administration and the Labor Department.

However, the post office is planning to make the service available to the public as soon as next year.

Robert Krause, the Postal Service's vice president of electronic commerce, said he expects NetPost Certified to eventually bring in hundreds of millions of dollars in revenue. Government agencies alone receive 62 billion pieces of mail, and 6 billion are likely candidates for the service, he said.

"Our culture in the past has been that we love to make stuff ourselves, but our approach to the e-commerce space is to partner with the best technology firms in the world," Krause said.

Krause declined to detail the revenue-sharing deal the post office has made with AT&T and IBM, except to say that it is similar to the way its other private sector deals are structured. The Postal Service's partners invest all the capital up front, and the agency collects a percentage of the profits.

"We call it the 'OPM model.' That stands for using 'Other People's Money,' " Nolan said.

Nolan said his 12 years of experience as director of operations at Merrill Lynch Production Technologies have given him ample experience to make deals with the private sector.

Nolan said one example of the "OPM model" is the post office's new Mover's Guide change-of-address form. What used to be a simple card used to change your address is now a promotional package packed with ads. The private company that brought the idea and the capital to fund it to the post office is Imagitas in Waltham, Mass. Next month, the company is launching a Mover's Guide Web site where customers will be able to change their address online as well as opt into getting promotions from companies like Ryder Systems Inc. and Public Storage Inc.

Nick Carter, vice president for public affairs at Imagitas, said the fact that his firm has taken over all the printing and production costs of the change-of-address forms has saved the post office $50 million a year.

"We provide a way for the post office to keep the public trust and tap into the innovations of the private sector," Carter said.

Since Imagitas is a private company, Carter will not say how much revenue the firm is making by targeting the 43 million people who change their address annually through the post office. But he said Imagitas, which employs 150 people, is profitable.

Other online products the post office has rolled out, however, have yet to catch on. Mailing Online, a service targeted at small businesses, is one example. It allows customers to send mail in electronic files through www.usps.com to facilities where the documents can be printed, stuffed in envelopes and delivered for 34 cents a piece or bulk rates. So far, Mailing Online has only 700 registered users. It has generated $400,000 in revenue since it was launched in October.

Nolan, though, has high hopes. He looks to the success of Germany's Deutsche Post AG, which was privatized and went public last November. Last year, Deutsche Post acquired a majority stake in Brussels-based DHL International Ltd., the largest delivery company outside of the United States.

Also, last year, Deutsche Post acquired Air Express International Corp., the biggest U.S. air freight forwarder, for $1.1 billion.

FedEx Corp. and United Parcel Service Inc. have filed protests with the U.S. Department of Transportation, claiming that Deutsche Post is circumventing foreign ownership laws to expand in the United States.

But Nolan doesn't seem worried about Deutsche Post. It's FedEx and United Parcel Service that keep him up late at night, he said. Nolan is even thinking about partnering with Deutsche Post to offer the NetPost Certified product in Germany.

"We call it 'coopetition,' " Nolan said. "It's a mix of cooperation and competition." In fact, the success of Deutsche Post has inspired him to think about spinning off the high-tech businesses to become private companies. Eventually, he said, the revenues could fund the universal postal delivery service every American expects.

But even with the Postal Service's government-sanctioned advantage, David Schatsky, a research director for e-commerce infrastructure at Jupiter Communications, questions whether the agency has what it takes to compete online.

"The big question for the post office is how it retains relevance in the 21st century," said Schatsky, who follows the online dealings of FedEx and UPS. "Their core relevance is a money-losing proposition, and these new e-commerce initiatives are outside the scope and mission of what the Postal Service is. They're competing in a private market with private companies that have a more appropriate mandate to do that." Others, however, say that the Postal Service could be a potent force in the marketplace.

"The position of being a trusted third party and the opportunity of capitalizing on that unfairly is too great to be left to market forces alone," said Dana Gardner, research director of the Aberdeen Group in Boston. "What has been holding up commerce on the Internet is that there is no trusted third party, and the United States Postal Service is in a good position to fill that need."