Mysteries of the Amazon deal: Why the Postal Service is skimming the cream on Sundays


Last week the Postal Service announced that it would be delivering packages for Amazon on Sundays, but only to Amazon Prime members (or those willing to pay extra), and only to customers living in New York and Los Angeles.  The premium service will eventually be extended to some other big cities, but it’s not likely that those living in medium-sized cities, suburbs, small towns, and remote areas will ever see Sunday delivery.  

The practice of providing a product or a service to only the most profitable markets is called cream skimming.  It’s one of the main concerns about privatization.  If Amtrak, for example, were to be privatized, the country would end up with a train system in the Northeast Corridor, running lines between Boston and DC, and not much else. 

If the Postal Service were privatized, there are similar concerns that rural and low-income urban areas would get less service than upscale urban areas.  One of the purposes of the Universal Service Obligation is to prevent just that.  The USO is supposed to ensure that the Postal Service doesn’t cherry-pick the most profitable markets, products, and services.  Everyone gets the same service at uniform prices, and the profitable areas subsidize the others.  

The Postal Service hasn’t been officially privatized, but it’s getting there.  It has become liberalized, marketized, and commercialized, and along the way, the meaning of the USO keeps getting reinterpreted.  It becomes less "universal," the scope of “service” gets narrower and narrower, and instead of fulfilling an obligation when it delivers on Saturday or maintains rural post offices, the Postal Service acts as if it’s doing people a favor.  

The signs of commercialization are everywhere.  Just this week, the Postal Service put contract post offices in Staples and Harry Potter on a postage stamp.  With the Amazon deal, the Postal Service is skimming the cream, just as if it had already been privatized.


A win-win but weird

Even though the Amazon deal seems to fly in the face of the USO, no one is complaining — at least so far — and it looks to be a win-win for everyone.

Amazon will sell more Prime memberships (at $79 each), and these members will buy more of its products.  The deal may also help the company maintain a competitive edge against Google, E-Bay, and Wal-Mart, which are experimenting with same-day delivery (as Amazon does in a few cities). 

It’s also a win for the Postal Service, which says it will make a good profit on the deal, though it refuses to say how much.  The unions have endorsed the deal too because it means more work for letter carriers — even though most of them will be non-career carrier assistants.  

Everyone seems to think the deal is just a great idea.  Politicians like Senator Tom Carper are applauding it as a sign that the Postal Service can be “innovative," and the news media are filled with articles about how Amazon will  "rescue the Postal Service” and “save the post office.”

But is the Amazon deal really a win-win for everyone?  Is it truly a good idea for the Postal Service to deliver packages for just one company to just one particular geographic segment of the country, and only to those affluent enough to be members of Amazon Prime?  Even the business magazine Fortune was led to ask rhetorically if it wasn't a little “weird” and “unsettling” for a private corporation to be “hiring out a government agency as a contractor.” 


Speculating on the details

The media reports seem to be reveling in the fact that neither the Postal Service nor Amazon will release any details about the deal, so here’s a little guesswork about how the numbers might work out. 

For an annual membership fee of $79, Amazon Prime members get free two-day Priority delivery, which is pretty good if you order enough stuff, considering that the regular price for Priority packages ranges from $5.80 to $17.45, depending on the size.

In 2012, the Postal Service delivered 824 million pieces of Priority mail, at an average rate of $7.20 and an average cost to the Postal Service of $5.50, leaving a contribution (profit) of $1.70 per piece.  The Postal Service thus makes about 25 percent on Priority mail.  (That’s all in the PRC’s 2012 Annual Compliance Report.)

Amazon doesn’t release information about how many Prime members there are or how much business they do, but according to one report, there may be as many as 15 million Prime members around the world, 10 million in the United States, and they average 30 orders a year.  If one million of these customers live in New York and L.A. or one of the other cities that may become part of the program, that’s 30 million packages a year.  If the Postal Service has agreed to deliver, say, 10 percent of these packages on Sunday, maybe 3 million package shipments will be covered by the new deal. 

The Postal Service will be charging extra for Sunday delivery, let’s say an average of $10 per piece. That’s $30 million in revenues.  It’s probably not all new revenue, though, since Amazon may have shipped most these parcels with the USPS anyway, but let’s say it is additional income.

There will be new costs, too, but the Postal Service will keep them at a minimum by not using career letter carriers, who would be paid some serious overtime or premium.  Instead, the Postal Service will use City Carrier Assistants (CCAs), who earn about $15 an hour and get minimal benefits. 

Let's say the Postal Service ends up making a profit of 25 percent like it does on regular Priority.  The net profit on 3 million pieces and $30 million in revenues would be $7.5 million.  That’s not bad, but it represents just 0.13 percent of the 2013 deficit of $5 billion.  The Amazon deal is not going to save the post office. 

(Update: We have learned that the docket in question was not the one we surmised, and the actual docket shows that Amazon will be using Parcel Select, a much less expensive alternative to Priority. The overall profit to the Postal Service is probably less than estimated here. More to come on that.)

 A deal under seal

In many ways, the announcement of Sunday delivery is like the Postal Service’s plan to develop a line of “Rain, Heat and Snow” functional clothing, which was announced last year.  Partnering with Amazon is more of a publicity statement than a profit maker.  It tells everyone that the Postal Service knows how to be relevant in the digital age. 

The Amazon deal is much better than the clothing line, though, since it involves hooking up with a huge, sexy brand name, and behind closed doors too.  One can almost see the mischievous twinkle in the eyes of postal officials as they play it close to the vest and enjoy headlines like “Mystery shrouds postal service deal with Amazon.”  Isn't this what it means to “act like a business"?

About all we know is that a Negotiated Service Agreement (NSA) of some sort was approved by the Postal Regulatory Commission.  But if you go on the PRC website and search for “Amazon” or try to find a NSA docket that mentions “Sunday,” you’ll come up empty.

If you keep looking, though, you’ll come across one recent NSA docket that might be the Amazon deal.  Docket Number CP2014-3 was established on October 23, 2013, when the Postal Service submitted a request to the PRC to consider “Priority Express Mail & Priority Mail Contract 15.”  The PRC docketed the request the following day and approved it on November 7, 2013 — which was as fast as possible, given that there’s a fifteen-day minimum for considering such requests, as specified by statute.

There’s not much in CP2014-3 to indicate what the deal is about, but there’s also nothing to rule it out.  (Some of the other NSAs have titles or elements that would seem to exclude them.)  The spreadsheets in the docket that the Postal Service provided are completely redacted (as seen on the right), so there’s no help there either.  

But the timing is interesting.  It may be nothing more than coincidence, but the PRC approved CP2014-3 on Thursday, November 7, 2013.  The news of the Amazon deal came out the following Monday.  It was too big of a deal to announce on a Friday, so the timing makes CP2014-3 a likely candidate.

Whether or not CP2014-3 is really about the Amazon NSA doesn’t really matter, though.  The public doesn’t get to see what’s in the contract, and the Postal Service gets to keep the details of the contract secret for “commercial purposes.” 

In its order approving CP2014-3, the Commission reviews how it created the docket on October 24, appointing a Public Representative “and providing interested persons with an opportunity to comment.”  The order proceeds to note, “The Public Representative filed comments on October 31, 2013.  No other interested person submitted comments.”

It’s rather strange for the Commission to provide people with an opportunity to comment on something about which they can have no knowledge, and then to observe that no one commented.  How could they?  The whole thing was “under seal.”


In the public interest, but which public?

While NSAs can cover both market dominant and competitive products, they are almost always about competitive products.  In 2012, there was just one NSA in effect for domestic market dominant products, involving Discover Financial Services.  Another was approved during 2012, the agreement with Valassis.  That one ended up going to court when the Newspaper Association of America challenged the PRC’s order approving the agreement.  (Last week an appeals court upheld the Commission’s ruling.)

NSAs covering competitive products are much more common — and generally much more secret.  In FY 2012, the Postal Service developed 65 domestic NSAs and 383 international NSAs.  The PRC Compliance Report says there’s a list of them on the PRC website here, but it’s not available to the public.

While people do not have access to the information in most of the NSA dockets, the interest of the general public is supposed to be considered, and the Commission assigns a Public Representative to fulfill that role.  But the meaning of “general public” is not clear. Is the general public the mailing industry, individual consumers, American business generally, or Americans generally?  These groups do not share the same interests, and in many cases they have competing interests.

The PRC has procedures that allow for those not involved directly in a docket to look at the items under seal.  The problem here, however, is that even if one does get access — and that is in no way assured, since the Postal Service or other participants can object — disclosing what has been seen is prohibited.  A journalist might ask to see the docket on Amazon, but the information under seal cannot be disclosed in a news report.  In effect, then, there is no transparency, and there really is no way to know if the Postal Service is fulfilling the intent of its statutory obligations or the USO.


USO under seige

The definition and scope of the USO are a matter of debate, but it is generally understood to mean charging equitable and uniform rates, ensuring a maximum degree of service to rural areas, and not discriminating against some users of the mail.

The Postal Service has pushed for what it calls a “broad definition” of the USO.  It argues that a “more rigidly defined USO” would interfere with its efforts to adapt to changing circumstances.  And adapt it has.  The Postal Service has closed hundreds of mail processing plants, reduced the speed and reliability of First Class mail, removed thousands of collections boxes, cut hours at 13,000 rural post offices, and moved towards cluster box delivery.  These initiatives may save money, but they erode the idea of a universal network.

When the Postal Service does decide to expand services, it cherry picks the profitable markets, as it did with the Premier Post Office certification program.  That's a little known initiative to enhance services and improve the "brand image" at 3,100 post offices — the ones that generate the most revenue.  While profitable post offices in urban markets get a premier upgrade, small towns get a part-time post office with a part-time worker behind the counter, and suburban neighborhoods get a contract postal unit in a Staples.  

By the way, if you think those Staples POs are going to supplement rather than replace brick-and-mortar post offices, guess again.  There's a provision in the House postal reform bill (H.R. 2748) saying that communities can't appeal the closing of their post office to the PRC if there's a contract postal unit within two miles.  There are a lot of post offices within two miles of the 82 Staples getting a CPU, and the Postal Service says it has plans to put even more CPUs in big box retailers.

This is all just the beginning.  The USPS Office of Inspector General put out a bid notice this week looking for a company to do a quantitative survey about how people might respond to changes in the implementation of the USO.  The notice says the OIG wants to estimate “the mailing public's willingness to pay for different attributes of the USO,” such as “the number of days of mail delivery, the accessibility of post offices and the price of a stamp.”  In the not-so-distant future you may be asked to pay extra if you want your mail delivered on Saturday or if you want curbside delivery instead of a cluster box or if you want a post office in town.

The reason the USO is under assault, of course, is that it costs the Postal Service several billion dollars a year ($8 billion in this 2007 study) to fulfill its obligations to maintain post offices, provide uniform pricing, deliver everywhere, give nonprofits discounts, deliver six days a week, and so on.  Many of the big stakeholders don’t want to subsidize the unprofitable elements of the USO.  If it doesn’t serve their interests, they see no need for it.

As the Postal Service works toward becoming more corporatized, it finds itself increasingly in thrall to these stakeholders.  Decisions about what products and services to develop are shaped not by what’s good for the country, but what’s good for these business partners — the big suppliers like FedEx, UPS, and Northrop Grumman, the presort consolidators like Quad/Graphics and Pitney Bowes, the big mailers like R.R. Donnelly and Time, Inc.  

The deal with Amazon is another example of how the USO is being undermined, but rather than taking services away from one segment of the country, it’s about providing an extra service to the customers of one company, if they live in the right place.

E-Bay sellers would probably like to offer their customers Sunday delivery, and there are many other companies that would benefit from that offering.  Are they each expected to contract with the Postal Service individually?  

And what of rural America?  The Amazon agreement is touted as initially being available in New York and Los Angeles, with other areas being added in 2014.  It’s unlikely that rural or even many suburban areas would ever see Sunday delivery.  They’re barely hanging on to Saturday delivery.  Thanks to the network restructuring of processing plants, large swaths of America have become even more difficult to reach in a timely manner.


The commercialization of the Postal Service

The country’s postal network was originally conceived as a necessary and essential public service.  Over two centuries we have built a postal network that has the characteristics, capabilities, and capacities of a national infrastructure.  Over the past four decades, we have narrowed the focus of what that network should be and do. 

A recent post on Dead Tree Edition highlighted the conundrum that is at the very heart of the postal crisis: Is the Postal Service a public service or is it a business?  Is it an entity devoted to serving the American public as a whole through a broad and robust reading of the universal service obligation?  Or is it a corporate entity devoted to building and sustaining a profit-oriented business model that seeks to extract maximum commercial potential from the postal network?

On a fundamental level, the structure of the Postal Service, along with the legislation and regulations that guide it, creates tensions that are regularly at odds with each other and that may ultimately be mutually exclusive.  No corporate entity, not even regulated utilities, operates with the same sort of strictures and mandates that the Postal Service faces.  No basic infrastructure or essential public service is asked to mold itself to a corporate model of profitability in the way the PRA and the PAEA have done to the post office.

The new contract between Amazon and the Postal Service perfectly illustrates the identity crisis faced by the Postal Service, and it may become the straw that breaks the philosophical camel’s back.  The time is coming when the country will have to decide: Do we want the postal system to be a public service or a private corporation?

If you have any doubt about where the Amazon deal is taking things, consider how Cornell University professor Rick Geddes responded to the announcement.  Geddes is a fellow at the conservative American Enterprise Institute, and he’s written many articles advocating the privatization of the Postal Service. 

“It's a win-win," said Geddes of the Amazon deal.  "This is a step towards a more commercialized postal service that is going to have to occur if the postal service is going to remain viable in the new, dynamic, electronic communications marketplace."

Geddes explains further in a Cornell University press release: ““Such commercialization is sometimes confused with privatization, which refers to the sale of ownership shares in the Postal Service to investors. There are many steps that must be taken before such a step could even be considered, including liberalizing postal laws and corporatizing the Postal Service.” 

There's the Amazon deal in a nutshell.  It’s not just about delivering on Sunday.  It’s about delivering a privatized Postal Service. 

(Thanks to Mark Jamison for all his help on this one.)