Internet myth

The spin doctors examine Post Office financials for Q1: “The patient is a goner”

February 10, 2012

This week the Postal Service released its financial report on the first quarter of fiscal year 2012 (Form 10-Q).  As you might have expected, it’s all bad news — that is, according to the Postal Service, the mainstream media, and Congressional postal experts.  The spin doctors tell us the patient is in critical condition and radical surgery is necessary.  Let them amputate a few limbs and remove some organs, and they’ll get the patient back on its foot in no time.

The truth of the matter is that the Postal Service actually ran a profit during the first quarter.  If the economy continues to improve, the prognosis will be just fine, and the Post Office will soon be on the road to recovery.  But the spin doctors have a different story to tell.


The Spin

“More red ink at post office: Quarterly loss of $3.3B as agency struggles to avoid bankruptcy,” proclaims the Washington Post

“Postal Service Loss Widens to $3.3 Billion,” says the Wall Street Journal

“U.S. Postal Service Loses $3.3 Billion, Warns of Cash Drain,” announces Bloomberg News.

"The longer the Postal Service remains in a weak position, the more damage can be done to our business," says Chief Financial Officer Joe Corbett.  "We need to change and get back to a point where we're financially stable so that our customers and our suppliers have faith in us."

“The U.S. Postal Service ended the first three months of its 2012 fiscal year (Oct. 1 - Dec. 31, 2011) with a net loss of $3.3 billion,” states the USPS press release.  “Management expects large losses to continue until the Postal Service has implemented its network re-design and down-sizing and has restructured its healthcare program.” 

“While the situation facing the Postal Service is dire,” says Senator Tom Carper, “it is not hopeless. That is why we need to pass this bipartisan and comprehensive bill as soon as possible.  It is my hope that Congress and the Administration can come together on this plan in order to save the Postal Service before it’s too late.”

With postal management, the media, and legislators like Carper all telling us that the Postal Service is hemorrhaging money and about to fall into a coma, it’s no wonder people are ready for whatever solutions our leaders can come up with. 

But the fact of the matter is that it’s all just spin.  The only thing endangering the Post Office right now is postal management and Congress. 

On Falling Mail Volumes, A Tale of Two Stories

Nov. 28, 2011

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair." — Charles Dickens, A Tale of Two Cities

HOW FAST are mail volumes falling, and what's causing the declines?  If you've been listening to the Postal Service and reading the news, the answer is obvious: Faster than you can imagine, and all because of the Internet.  

Postal Service managers have told that storyline at thousands of public meetings on post office closings and plant consolidations, and it's been reported in thousands of news articles.  The line is repeated over and over again, like a magic mantra, and you'd be hard pressed to find anyone who doesn't believe it. 

To question the dominant narrative at this point seems like lunacy.  Does anyone really think that the Internet isn't putting the Postal Service out of business?  

But there is more to the story.  If you look closely at the projections the Postal Service is putting out, there are significant discrepancies, which suggests that they're basically just making up numbers.  The Postal Service is also offering conflicting explanations for the declining volumes, which suggests that they're less interested in trying to explain what's happening than they are in furthering an agenda — an agenda that is not being fully revealed.


Conflicting projections

Over the past couple of weeks, the Postal Service has produced two documents — the Form 10-K Fiscal Report for 2011, which came out on Nov. 15, and the Integrated Financial Plan for FY2012, which was released on Nov. 23.  Though issued a week apart, the two reports provide wildly divergent projections for mail volume in 2012.

The Form 10-K says, “Forecasting in the current economic environment is subject to significant uncertainties.”  That doesn’t stop the K-10 from coming up with an estimate: “The operational plan for 2012 anticipates a reduction in mail volume of approximately 8 billion pieces from 2011 levels with an associated drop in revenue of approximately $2 billion” (p. 69, bottom of the page; Italics added.)

The Integrated Financial Plan (IFP) offers a much worse projection: “In 2012, we anticipate total mail volume of 158.0 billion pieces, a decline of 9.9 billion pieces or 5.9 percent from 2011” (p. 2).  (Italics added.)

So what are looking at for fiscal year 2012 — a drop of 8 billion pieces or 9.9 billion pieces?  Given how bad both projections are, that discrepancy might not mean much, but that’s a big difference.  A couple of billion pieces comes to more than half a billion dollars — way more than the $200 million the Postal Service says it would save by closing 3,650 post offices next year.

How could the Postal Service issue two reports, a week apart, providing such different estimates?  It seems as though the Postal Service is pressing so hard to show how bad things are getting, it’s not satisfied with one awful projection and has to come up with an even worse one a few days later.  The Postal Service can’t even keep its own numbers straight. 

And where are these predictions coming from, anyway?  Last year, the Postal Service asked the Boston Consulting Group to make projections for the next ten years.  In March 2010, the BCG report predicted total volumes would decline at a rate of between 1.5% and 3.4% a year, with First-class declining between 3.7% and 4.7% a year. 

Now that the actual numbers for 2011 are in, we find that from 2010 to 2011, total mail volume declined 1.7% — near the low-end of the range projected by BCG (K-10, p. 18).  Given that the economy is still bad and that BCG had assumed it would be better, one would have expected a much steeper decline.

On what basis, then, is the IFP now predicting a whopping 5.9% decline in total volumes for 2012?  That is almost twice as bad the worst-case scenario predicted by BCG.  The IFP says its projections are based on a "weak economic outlook," but it says nothing about falling back into a deep recession like the one that caused the earlier steep drop.

First-class mail is suffering the most, and the actual drop from 2010 to 2011 — 6.3% — was worse than the worst-case scenario predicted by BCG (4.7%).  But why is the Postal Service now predicting an even worse decline of 8.6% for 2012? 

No one knows how things are going to go in 2012.  The way the economy is looking, perhaps we’re in for a double-dip recession, and volumes will decline just as badly as the Postal Service is predicting — or worse.  (The preliminary numbers for October 2011 do look bad.)  But the Postal Service’s projections do not assume another steep downturn.  They just seem to come out of nowhere.


Cyclical events and secular trends

The Postal Service is not just making up inconsistent projections.  It is also offering two contradictory explanations for the drops. 

These declines are being caused primarily by two factors — the ailing economy and the shift to the Internet for advertising, bill paying, email, tax returns, and so on. The first cause is considered a “cyclical event” — the economy is always going through periods of growth and recession — and generally speaking, companies try to ride out the bad times without resorting to permanent, large-scale downsizing.  In contrast, the Internet effect, or what the Postal Service calls “electronic diversion” or “substitution,” is a “secular trend,” and it’s permanent, so you can’t ride it out, and you need to make more serious — but gradual — adjustments.

The question, then, is: How much effect is each of these two causes having on mail volumes and revenues?

The Internet Myth: Why Email Isn't Killing Snail Mail

October 7, 2011

The New York Times finally gets it right — an article that explains how the Internet is not the cause of the Postal Service’s woes.  It’s called “Why the Internet Isn't the Death of the Post Office,” and it’s written by James Fallows, a highly respected, award-winning author and journalist.  Unfortunately for the Times, Fallows’ article was published on September 4, 2005.  You’ll be hard pressed to find anything in the paper written over the past year that gets anywhere near this close to the truth.

“The eclipse of ‘snail mail’ in the age of instant electronic communication has been predicted at least as often as the coming of the paperless office,” writes Fallows, but the predictions of the death of the mail are just not coming true.   Fallows doesn’t mention it, but here’s an example of the kind of bogus prediction he’s talking about: A 1976 GAO report warned of declining “demand for traditional postal services” due to increases in “electronic funds transfer” and “the use of computer terminals for direct exchange of information.”  We’re talking 1976 — who even had a computer terminal back then?  But it wasn’t too soon for the doomsayers to prophesy the End of the Post Office.

“The harmful side of the Internet's impact is obvious but statistically less important than many would guess,” writes Fallows.  People are naturally writing fewer letters, he explains, but that started fifty years ago with the telephone, and besides, household-to-household correspondence accounts for less than one percent of first-class mail. 

So just because you’re not sending old-fashioned letters very often doesn’t mean the Internet is killing the Post Office.  In many ways, Fallows notes, the Internet is actually helping the Postal Service by contributing to an increase in many types of mail — prescription drugs, eBay items, catalogs, Netflix videos, credit card solicitations, and so on.

Fallows’ article may be dated 2005, but it’s still on the money as far as the Internet Myth is concerned.  Yes, the Internet is growing, and electronic bill paying and email are causing a decline in first-class mail, but overall, the impact of the Internet on the Postal Service revenues is relatively small.  The real reason for the declines of the past four years is obvious — the recession.

Granted, it is difficult distinguishing between the impacts of the Internet and the impacts of the recession, especially because they vary for the different types of mail and because they are linked in many ways.  For example, when the recession pushes a business to switch some of its print advertising budget over to the Internet, what’s the cause of the decline in its use of the mail, the recession or the Internet? 

A study done earlier this year called “Approximating the Impact of Substitution and the Recession on Postal Volume” addressed the question of impacts and came up with some interesting conclusions.  Robert Cohen and Charles McBride, two independent postal consultants, each with over 35 years in the business, examined the impacts of the recession and “Internet substitution” on various types of mail.  They concluded that standard regular mail was the category hardest hit by the recession — down 25%, from 2007 to 2009 — while single-piece first-class was the category most affected by Internet substitution and least affected by the recession — down about 5% a year over the period 2000 to 2009.  Bulk first-class mail actually grew during 2000 to 2006 and only started to decline in 2007, when the economy started to slow down.  And that’s true of mail volumes overall, which peaked in 2006 – 2007 at about 212 billion pieces a year.

If you look at first-class mail overall for the past ten years, you’ll find this:

For the first seven years of the decade, the average annual decline was about 1% a year.  That’s because while single-piece first-class was declining at 5% annually, bulk first-class was increasing and making up for most of the losses.  Then the recession hit, and bulk first-class began declining at a rate far greater than single-piece, so average declines for 2008 to 2010 were 6.7% for first-class overall.

Given that nothing special happened in the world of email and online bill paying in the period 2007 to 2010, it’s likely that the average annual decline of 1% due to electronic divergence continued during this period.  Thus, only about 4% of the 22% decline for 2007 - 2010 should be attributed to the Internet.  The recession can take the credit for the remaining 18%.

But what do we read in this week’s Wall Street Journal?  “The rapid growth of email, online bill paying and the like has reduced the volume of first class mail by 22% since 2006, cutting into the government's monopoly.  An inexorable decline is underway.” 

The 22% figure may be correct, but that’s cherry-picking the data and attributing the wrong cause to the decline.  Now why would the Wall Street Journal want to do something like that?  And why are we seeing this sort of thing all over the media landscape?

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