Mail wars

If the U.S. Postal Ser­vice is los­ing money, why is it cut­ting these deals?

The Washington Post Sunday - - FRONT PAGE - BY CRAIG TIMBERG

The boom in In­ter­net re­tail­ing has pro­vided a rare bit of good news to the be­lea­guered U.S. Postal Ser­vice, which is de­liv­er­ing pack­ages at a his­toric pace — and reap­ing rev­enue that helps off­set bil­lions of dol­lars of losses else­where in the agency’s bud­get.¶ But the Postal Ser­vice isn’t the only one mak­ing money when a mail car­rier brings a new pair of shoes or a school back­pack to your door. ¶ Pri­vate com­pa­nies com­pete fiercely to sell postage, pre­pare la­bels and help re­tail­ers find the best deals for ship­ping their prod­ucts. And sev­eral of them ar­gue that a sin­gle com­pany, Stamps.com, is get­ting un­usu­ally good deals from the Postal Ser­vice, al­low­ing it to un­der­cut the prices of ri­vals and reap prof­its that should be go­ing to the gov­ern­ment.

As ex­hibit one, these com­peti­tors and other crit­ics within the ship­ping in­dus­try point to a run of as­ton­ish­ing quar­terly profit re­ports for Stamps.com — with gross mar­gins of­ten top­ping 80 per­cent — and a sky­rock­et­ing stock price that has in­creased by more than 500 per­cent over the past three years. It was up by more than 40 per­cent last week alone, fol­low­ing yet another ster­ling earn­ings re­port Wed­nes­day.

This comes at a time when the Postal Ser­vice has run deficits for 10 years in a row, in­clud­ing $5.6 bil­lion in losses in 2016.

The pack­age-ship­ping busi­ness that Stamps.com and its ri­vals com­pete in is not the rea­son for these losses, which are driven largely by fixed per­son­nel costs such as med­i­cal in­sur­ance and re­tire­ment. But the Postal Ser­vice’s dire fi­nances un­der­score the im­por­tance of max­i­miz­ing the agency’s rev­enue. And it is this point that has gen­er­ated sharp con­tro­versy within the in­dus­try, with of­fi­cials at sev­eral com­pa­nies com­plain­ing that the Postal Ser­vice has tipped the scales against them while wast­ing money in the process.

“Ev­ery­body’s get­ting can­ni­bal­ized, and they don’t know what to do,” said Bert Hamil­ton, founder of Har­vey Soft­ware, a de­vel­oper of ship­ping soft­ware and a ri­val of Stamps.com, who has brought his con­cerns to the Postal Ser­vice, the Of­fice of In­spec­tor Gen­eral and his rep­re­sen­ta­tive in Congress — all to no avail.

At the heart of this dis­pute is the Postal Ser­vice’s use of dis­count deals, called ne­go­ti­ated ser­vice agree­ments, that al­low some com­pa­nies to sell postage for less than oth­ers even though the un­der­ly­ing ser­vice — hav­ing the Postal Ser­vice de­liver a pack­age to a par­tic­u­lar ad­dress within a spec­i­fied pe­riod of time — is iden­ti­cal. The de­tails of these deals, and even the iden­ti­ties of com­pa­nies re­ceiv­ing them, are not public be­cause of the Postal Ser­vice’s broad ex­emp­tion from public dis­clo­sure laws when it comes to its deal­ings with pri­vate busi­nesses, leav­ing ri­vals to guess at who is get­ting bet­ter terms and why.

Sev­eral cur­rent and for­mer in­dus­try of­fi­cials say they be­lieve that Stamps.com, through sev­eral sub­sidiary com­pa­nies, has got­ten par­tic­u­larly lu­cra­tive dis­count postage deals from the Postal Ser­vice and is us­ing them in novel ways that give Stamps.com an un­fair com­pet­i­tive ad­van­tage over other com­pa­nies.

Stamps.com and Postal Ser­vice of­fi­cials say that such ne­go­ti­ated ser­vice agree­ments are mu­tu­ally ben­e­fi­cial, help­ing win cus­tomers away from pri­vate sec­tor ship­ping ri­vals FedEx and United Par­cel Ser­vice.

Stamps.com — di­rectly or through sub­sidiaries ShipWorks, Ship­pingEasy and ShipS­ta­tion — pro­vides postage for hun­dreds of mil­lions of pack­ages each year, in­clud­ing one-third of the roughly 1 bil­lion Pri­or­ity Mail ship­ments by the Postal Ser­vice. These com­pa­nies, Stamps.com said in a state­ment to The Wash­ing­ton Post, es­sen­tially act as the Postal Ser­vice’s sales force, re­cruit­ing cus­tomers, sell­ing postage and pre­par­ing de­liv­er­ies in a sys­tem that has helped to dra­mat­i­cally in­crease its ship­ping vol­ume amid fierce com­pe­ti­tion from FedEx and UPS.

“Like many other busi­nesses, the USPS al­lo­cates a part of that dis­count to be shared with the cus­tomers, and the re­main­der is to be re­tained by its part­ners in or­der to help fund their sales, mar­ket­ing, sup­port, IT in­fra­struc­ture and prod­uct devel­op­ment,” Stamps.com said in re­sponse to writ­ten ques­tions. “By shar­ing some of its rev­enue, the USPS has been highly suc­cess­ful in at­tract­ing a sig­nif­i­cant num­ber of com­pa­nies to fo­cus their busi­nesses around driv­ing USPS growth.”

Pri­or­ity Mail is a par­tic­u­larly lu­cra­tive part of the Postal Ser­vice’s ship­ping busi­ness, earn­ing $1.7 bil­lion in ex­tra rev­enue in 2016 — beyond the costs of run­ning the ser­vice — help­ing to cover mas­sive losses else­where in its bud­get as tra­di­tional sta­ples, such as the mail­ing of let­ters, con­tin­ued their long de­cline.

But sev­eral in­dus­try of­fi­cials, some of whom spoke on the con­di­tion of anonymity be­cause of their fear of dam­ag­ing re­la­tion­ships with the Postal Ser­vice and busi­ness part­ners, es­ti­mate that the Postal Ser­vice could col­lect $100 mil­lion a year more in rev­enue by re­form­ing or elim­i­nat­ing the dis­count pro­grams that Stamps.com and some other com­pa­nies use.

The star­tling growth of Stamps.com, mean­while, has drawn scru­tiny from jour­nal­ists and in­vestors as well. The Capi­tol Fo­rum, a Wash­ing­ton-based in­ves­tiga­tive news and le­gal anal­y­sis pub­li­ca­tion, has run a se­ries of ar­ti­cles over the past year de­tail­ing what it has por­trayed as Stamps.com and sev­eral sub­sidiaries tak­ing ad­van­tage of a poorly man­aged Postal Ser­vice dis­count pro­gram.

The cov­er­age has il­lu­mi­nated a com­plex web of com­pa­nies that profit from the Postal Ser­vice’s ship­ping of pack­ages. Some, like Har­vey Soft­ware, make money mainly from monthly or an­nual sub­scrip­tion fees for pro­vid­ing soft­ware por­tals that al­low busi­nesses with prod­ucts to ship to quickly find the best price, whether from the Postal Ser­vice, FedEx or UPS.

Oth­ers make money mainly by sell­ing what is called “PC Postage” — mean­ing postage sold on­line rather than from a post of­fice — and profit mainly from tak­ing a por­tion of the dis­count al­lowed by the Postal Ser­vice on each pack­age. The Postal Ser­vice has only ap­proved a few com­pa­nies, in­clud­ing Stamps.com, to sell postage in this way.

Stamps.com op­er­ates in both parts of the in­dus­try be­cause, though it once was mainly a PC Postage com­pany, in re­cent years, it has ac­quired sev­eral sub­sidiaries that more closely re­sem­ble Har­vey Soft­ware and work di­rectly with busi­nesses look­ing to ship prod­ucts through a soft­ware por­tal that com­pares prices and pre­pares la­bels. That has al­lowed Stamps.com to of­fer dis­counted postage to the cus­tomers of its Some in­dus­try of­fi­cials were par­tic­u­larly sur­prised to learn in the Capi­tol Fo­rum sto­ries that postage dis­counts had been made avail­able to busi­nesses that ship rel­a­tively small num­bers of pack­ages, rather than the high-vol­ume ship­pers that many in the in­dus­try thought were the typ­i­cal ben­e­fi­cia­ries of ne­go­ti­ated ser­vice agree­ments. That has raised ques­tions about whether the Postal Ser­vice is ad­min­is­ter­ing its dis­count pro­gram in an even­handed way.

“It’s hard for me to say whether it’s work­ing well or not work­ing well be­cause it’s opaque,” said ship­ping in­dus­try con­sul­tant Gor­don Glazer of Ship­ware, a San Diego-based ship­ping con­sul­tancy that helps busi­nesses try­ing to trim trans­porta­tion costs. “We don’t get to see how oth­ers are us­ing it. From what I can see, the pro­gram has net ben­e­fits grow­ing vol­ume” for the Postal Ser­vice. But Glazer added, “Greater over­sight would make sure that the pro­gram is used as it was in­tended, which is to drive net new rev­enue to the Postal Ser­vice while pro­tect­ing rev­enue at risk. The big ques­tion that re­mains is whether it is ap­pro­pri­ate for very small ship­pers . . . to par­tic­i­pate in a . . . pro­gram where the net costs to the USPS is the same as a larger ship­per.”

To de­ter­mine the ex­tent of the dis­counts, which are closely held se­crets by the Postal Ser­vice, the Capi­tol Fo­rum ac­quired dozens of ship­ping la­bels for three sub­sidiaries of Stamps.com and sev­eral other com­pa­nies and had them an­a­lyzed by Yousuf Lod­hia, co­founder of Mi­cronite, a de­vel­oper of postal soft­ware in Ro­seville, Calif.

Us­ing a pro­gram that reads the bar codes on ship­ping la­bels, Lod­hia was able to de­ter­mine how much the var­i­ous com­pa­nies paid the Postal Ser­vice for the postage that was even­tu­ally pro­vided to a ship­ping cus­tomer. For smaller pack­ages, Lod­hia found that dis­counts av­er­aged $1 to $2 — about 15 per­cent. It is a dif­fer­ence that adds up quickly for com­pa­nies that sell postage for hun­dreds of thou­sands of pack­ages a day. But for larger pack­ages trav­el­ing longer dis­tances, dis­counts stud­ied by Lod­hia have in some cases ex­ceeded 30 per­cent and even more when a pack­age was sent over­seas.

Lod­hia’s re­search made clear that sev­eral com­pa­nies, in­clud­ing some not af­fil­i­ated with Stamps.com, had found ways to profit from the Postal Ser­vice’s dis­count pro­grams. But other com­pa­nies, which don’t ben­e­fit from the PC Postage rates, could of­fer their cus­tomers only the of­fi­cial — and in­vari­ably more ex­pen­sive — rates avail­able to any busi­ness deal­ing di­rectly with the Postal Ser­vice.

“The post of­fice also talks about need­ing to raise postage rates, so why are they giv­ing these huge dis­counts?” Lod­hia told The Post.

A vir­tual sales force

The Postal Ser­vice has long had dif­fer­ent prices for ship­ping de­pend­ing on who was pay­ing. The rate paid by an or­di­nary cus­tomer who walks up to a post of­fice is the most ex­pen­sive. Com­mer­cial ship­pers get cheaper rates, help­ing the Postal Ser­vice bet­ter com­pete with pri­vate-sec­tor ri­vals. More than 1,000 ship­pers have got­ten even deeper dis­counts by ne­go­ti­at­ing di­rectly with the Postal Ser­vice for deals, the de­tails of which are not made public. (Ama­zon.com, whose chief ex­ec­u­tive Jef­frey P. Be­zos owns The Post, has a dis­count agree­ment with the Postal Ser­vice. Ama­zon told Forbes in July that: “As is the case with all of its cus­tomers, our part­ner­ship with USPS is re­viewed an­nu­ally by the Postal Reg­u­la­tory Com­mis­sion, which has spent decades re­view­ing and ap­prov­ing USPS cost­ing and pric­ing prac­tices.”)

The Postal Ser­vice de­clined mul­ti­ple re­quests for in­ter­views re­gard­ing its postage-dis­count pro­grams and did not re­spond to writ­ten ques­tions from The Post. The Postal Ser­vice did is­sue a state­ment say­ing, “Like any pru­dent busi­ness, the Postal Ser­vice does not pub­licly dis­cuss the specifics of our busi­ness re­la­tion­ships. Nev­er­the­less, ev­ery Postal Ser­vice [dis­count con­tract] is re­viewed by our in­de­pen­dent reg­u­la­tor and can only be ap­proved af­ter a find­ing that the ar­range­ment will in fact be prof­itable.”

Postal Reg­u­la­tory Com­mis­sion of­fi­cials said they review only whether a dis­count deal will gen­er­ate more rev­enue than it costs to pro­vide the ser­vice. They do not as­sess whether a bet­ter deal — or no deal at all — would gen­er­ate more rev­enue.

Af­ter de­clin­ing The Post’s re­quests for in­ter­views, a se­nior Postal Ser­vice of­fi­cial, Chief Cus­tomer and Mar­ket­ing Sales Of­fi­cer Jim Cochrane, discussed ne­go­ti­ated ser­vice agree­ments and other dis­count pro­grams Tues­day with a Stamps.com mar­ket­ing ex­ec­u­tive for a blog post on the com­pany’s web­site. The use of dis­count deals, Cochrane told Stamps.com, “al­lows us to com­pete bet­ter for the larger ship­pers, and re­ally cus­tom­ize a so­lu­tion that looks at ev­ery­thing from the size of the pack­ag­ing, the amount of the vol­sub­sidiaries. ume, where the pack­ages are go­ing to. So all that mat­ters, and once again the key is­sue is to grow with our cus­tomers.”

Cochrane at­trib­uted some of the Postal Ser­vice’s suc­cess to its “ex­cel­lent part­ners” such as Stamps.com.

But other com­pa­nies are not as happy with how the Postal Ser­vice is han­dling its part­ner­ships.

Win­dow Book, based in Cam­bridge, Mass., said that it has lost many cus­tomers to ri­vals of­fer­ing ship­ping dis­counts through the PC Postage pro­gram.

“We feel that the Postal Ser­vice has given an un­be­liev­able deal to the PC Postage guys be­cause no one else can get dis­counted postage. It’s an un­be­liev­able deal, and it’s not fair,” said Jeff Peo­ples, founder and chief ex­ec­u­tive of Win­dow Book. “It just killed our busi­ness.”

Peo­ples said he too has com­plained to Postal Ser­vice of­fi­cials, say­ing, “Hey, look, guys, you guys have dec­i­mated my busi­ness” by al­low­ing Stamps.com and other PC Postage providers to have ac­cess to dis­counts that Win­dow Book wasn’t al­lowed to of­fer. “If I could do that, I would be mak­ing bil­lions.”

As the con­tro­versy has grown, some in­vestors have spo­ken pub­licly about tak­ing short po­si­tions on Stamps.com’s stock, hop­ing to profit from a drop in the rapidly grow­ing stock price amid grow­ing scru­tiny of the postage-dis­count pro­grams.

Pre­science Point Re­search Group re­peat­edly tweeted about Stamps.com last sum­mer, pre­dict­ing “pre­cip­i­tous de­cline in $STMP rev­enue” in the weeks af­ter the first Capi­tol Fo­rum story.

But in the year since, the stock price for Stamps.com has more than dou­bled, not fallen as some in­vestors had ex­pected.

Walls and bridges

Many within the in­dus­try say that the ne­go­ti­ated ser­vice agree­ments were in­tended to per­suade large ship­pers to in­crease their use of the Postal Ser­vice, help­ing it bol­ster rev­enue. Many also say that the agree­ments func­tioned in a bet­ter and fairer way in an ear­lier era, when there was some­thing of a wall be­tween the few com­pa­nies that were per­mit­ted to sell PC Postage — in­clud­ing Stamps.com — and the com­pa­nies such as Har­vey Soft­ware and Win­dow Book that helped large num­bers of busi­ness cus­tomers shop for the best prices and pre­pare ship­ments.

But the mar­ket fun­da­men­tally changed when Stamps.com made a se­ries of ac­qui­si­tions in re­cent years. One move that drew im­me­di­ate at­ten­tion was the pur­chase in 2015 of PC Postage ri­val Endi­cia, one of only a few com­pa­nies that at the time were al­lowed to sell postage. Another, Pit­ney Bowes, had not yet moved into the PC Postage mar­ket ag­gres­sively, so a mar­ket­place that once ap­peared to have sev­eral com­peti­tors had con­sol­i­dated sub­stan­tially.

“When I heard they were buy­ing Endi­cia, I just pan­icked,” said Hamil­ton, who founded Har­vey Soft­ware in 1983. In ad­di­tion to fear­ing the ris­ing mar­ket power of the newly merged com­pany, Hamil­ton had con­tracted with Endi­cia for some ship­ping ser­vices and wor­ried that Stamps.com could poach his cus­tomers.

Hamil­ton said that he shared his con­cerns with the Jus­tice Depart­ment, whose an­titrust di­vi­sion was re­view­ing the deal. But the ac­qui­si­tion was ap­proved over in­dus­try com­plaints.

Less con­tro­ver­sial at the time was the com­pany’s pur­chase of sev­eral other com­pa­nies — ShipS­ta­tion, ShipWorks and Ship­pingEasy — that worked di­rectly with hun­dreds of thou­sands of In­ter­net re­tail­ers and other busi­nesses. The mas­sive vol­ume han­dled by these com­pa­nies al­lowed Stamps.com’s sub­sidiaries to bun­dle the ship­ments of many smaller re­tail­ers so that their pack­ages were el­i­gi­ble for the same dis­counts that many within the in­dus­try thought were avail­able only to larger ship­pers.

Ad­di­tion­ally, in­dus­try ri­vals ex­pressed frus­tra­tion that Stamps.com used the lure of its postage dis­counts to win cus­tomers away from them — in­clud­ing cus­tomers who al­ready were us­ing the Postal Ser­vice for most of their ship­ping. In the process, the amount paid to the Postal Ser­vice de­clined by the amount of the dis­count while the profit to Stamps.com grew.

Stamps.com, how­ever, said such com­plaints re­flected a mis­un­der­stand­ing of the Postal Ser­vice dis­count pro­grams, which Stamps.com said are in­tended to keep cus­tomers from leav­ing for ri­vals such as FedEx and UPS. Fed­eral law gives the Postal Ser­vice wide lee­way to ne­go­ti­ate prices with in­di­vid­ual cus­tomers so long as the cost of pro­vid­ing the ser­vice does not ex­ceed the rev­enue col­lected for it.

“The re­seller [dis­count] pro­gram is meant both for the ac­qui­si­tion of new pack­age vol­ume and the re­ten­tion of ex­ist­ing pack­age vol­ume, both of which must hap­pen in or­der for the USPS to gen­er­ate growth in pack­age vol­ume,” Stamps.com said in its state­ment. “The Postal Ser­vice’s over­all goal with the re­seller [dis­count] pro­gram is to grow pack­age vol­ume, and the USPS has set up the pro­gram to be equally ap­pli­ca­ble to both ‘new’ and ‘ex­ist­ing’ cus­tomers.”

But oth­ers such as Hamil­ton saw it dif­fer­ently, main­tain­ing that a dis­count pro­gram they thought was in­tended to help the Postal Ser­vice take busi­ness away from FedEx and UPS was be­ing used by Stamps.com and its sub­sidiaries to un­der­cut ri­vals’ prices.

The ul­ti­mate irony, said sev­eral in­dus­try of­fi­cials, in­clud­ing some who sup­port the Postal Ser­vice’s dis­counts gen­er­ally, is that much of the sup­posed com­pe­ti­tion for ship­ping cus­tomers was not real. The Postal Ser­vice, they said, gen­er­ally of­fered bet­ter prices for smaller pack­ages than FedEx or UPS. Most ship­pers would have used the Postal Ser­vice any­way — dis­counts or not.

“All this stuff has re­ally changed my un­der­stand­ing of the U.S. gov­ern­ment,” Hamil­ton said. “I al­ways thought they would al­ways be there to help me if things went bad. Now, I re­al­ize I was very wrong.”

PHO­TOS BY LUKE SHARRETT/BLOOMBERG NEWS

A U.S. Postal Ser­vice car­rier, top, loads mail into a truck in Shel­byville, Ky. Sev­eral pri­vate com­pa­nies are com­plain­ing that a Postal Ser­vice dis­count deal with Stamps.com to sell postage on­line has cre­ated busi­ness dif­fi­cul­ties.

LUKE SHARRETT/BLOOMBERG NEWS

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