Earth Class Mail - Send The Right Message

NOTE: THIS IS A PRE-RELEASE DRAFT FOR LIMITED DISTRIBUTION TO ATTENDEES OF THE 2007 NATIONAL POSTAL FORUM ONLY. FINAL RELEASE OF THIS PUBLICATION IS SCHEDULED FOR APRIL 16, 2007.

Earth Class Mail™ has been researched and written by a team of executives, advisors and board members of Document Command, Inc., the creators of the world’s first online post office, Remote Control Mail™ (www.remotecontrolmail.com). The intended audience includes not just the operators of the world’s posts, but also the politicians, analysts, financiers, automation vendors, and major enterprise customers who all have a stake in, or at least a view of, the postal industry and its future course amidst sweeping changes. The authors’ backgrounds are described in the Introduction which follows but there were many more contributors to this seminal roadmap document which describes how posts can transform themselves into healthy, robustly growing enterprises ready to take on the 21st century. Their backgrounds include current or past affiliations with postal industry giants such as Pitney Bowes and Siemens; Wall Street firms like Bear Stearns and Merrill Lynch; communications utility giants like Sprint/Nextel and Verizon; logistics giants like Amazon.com and Southern Pacific Railroad; technology leaders like Wang, Microsoft, Apple, Tektronix and Intel; as well as professors at UC Berkeley, George Washington University, University of Washington and UCLA; and executives of United States Postal Service and other world-renown postal operators.

Earth Class Mail is a “living document” constantly being expanded and revised. To make sure you always have the latest and greatest version of the publication, please visit our website at www.earthclassmail.com to request a free subscription to future editions.

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TABLE OF CONTENTS

Introduction.....................................................................................................................5 By Ron Wiener The Trillion Dollar Postal Industry: Poised for Growth or Doomed to Extinction?............................................................11 By Dr. Ken Lynn Will Postal Mail Eventually Be Delivered on the Internet?......................................23 By Cameron Powell Remote Control Mail: The First True Execution of Online Postal Mail .................35 By Cameron Powell “Untarget Marketing”: The First Dramatic Inflection Point in Direct Mail Marketing Since the 70’s ..............................................................................................43 By Natalee Roan The Next Generation of Postal Automation: MegaSorters .......................................53 By Michael Miles The Case for Liberalizing the USPS and Taking it Public .......................................65 By Chris Kwak Blueprint for a 21st Century Post Office: Combining MegaSorters with Remote Control Mail ..................................................................................................................89 By Ron Wiener

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Introduction By Ron Wiener The ubiquitous postal industry, with its 5.5 million employees and mission critical role in the economies of some 200 nations, has long been taken for granted. And why shouldn’t it be? After all, in most countries it is the largest employer, with the widest footprint of buildings, transportation fleets, and labor union influence. A country could not function efficiently without its letter post (businesses could not send bills, customers could not pay them, vote-by-mail ballots could not be collected, governments would have difficulty collecting taxes, etc.) and so citizens and businesses therefore assume that the powers-that-be will make sure that their post will always be around to serve them. Most never give it a second thought. But those of us in the postal industry know the future is not nearly so certain, at least not for every country. We are alert to rapidly changing dynamics – such as the cannibalization of transactional and advertising mail by the Internet – that impact revenue. We are also cognizant of the ever-rising costs of labor and pension obligations, and that even the very latest in automation equipment may not provide sufficient improvement in productivity to guarantee the economic survival of any post office for very long – at least not without a lot of changes and the political will to effect those changes. Postal patrons – individuals and enterprises – are also rapidly changing their behavior. On one end of the socio-economic spectrum, citizens of affluent countries spend more time traveling and less time at home or in the office. On the other end – in developing nations – there are still billions not served directly by a postal carrier, and who do not have an Internet connection. Ironically, many are far more likely to see the Internet reach their village before the postal carrier. This white paper paints a vision of the future in which posts not only survive, but once again become thriving, growing organizations at the center of the communications world. As a segment of global communications, mail has continued to drop from a once-dominant position to make up less than 15% of all communications (including cell phone calls, faxes, email, etc.) – and even that figure is declining due to the rapid proliferation of mobile and high-bandwidth digital infrastructure. In this white paper we describe a vision for how posts can catapult forward and tightly integrate to the Internet infrastructure. Yes, to make them relevant, and central, to communications in the Internet Age. This means more than just ordering postage or looking up a postal code online. It means actually receiving your mail through the Internet. On the back end, it means harnessing the power of the Internet to drastically reduce the cost and improve the efficiency of mail delivery. While the vision we paint is exciting, we stress that it is more than a discussion of concepts and ideas. Too many speeches at postal conferences have ended with the refrain, “technology will bring the solution to our current problems” – without any further elaboration. Any vision that has a meaningful chance of succeeding must be able to be put into practice. And that’s the good news. This white paper addresses not only the social, political, and technological backdrop for this discussion, it describes at a high level (we’ll avoid too much engineering-speak) how this vision can be implemented, incrementally, by any postal operator, starting today. In certain countries, like Brazil, cell phones have reached large swaths of the population before the investment in copper wire land lines to serve them could have ever been warranted. We believe the Internet-enabled posts of the future will experience a similar scenario. That is, the Internet will reach distant villages – and deliver postal mail to remote patrons – long before postal carrier routes would have to reach them.

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What is behind the name “Earth Class Mail”? Earth Class Mail™ is the next step in the evolution of an industry that hasn’t seen much fundamental change since Benjamin Franklin invented the early-American postal service 225 years ago. It is “Earth Class” because it is global, able to deliver mail to addressees no matter where in the world they are, electronically. And as you’ll see, it is “Earth Class” in its conservation of the environment. Posts are typically at or near the top of the list of targets to reduce environmental impacts in most countries. Indeed, in the United States, the Postal Service is the third-largest consumer of energy among government agencies, behind only the Department of Defense (DOD) and Department of Energy (DOE). Posts require more electrified and heated buildings, fuel more airplanes and trucks, and constitute the largest slice of paper consumption in their nations… and hence they represent one of the biggest opportunities for radical reduction in the use of nonrenewable resources and greenhouse gas emissions. As the largest or one of the largest employers in a country, the impact of posts’ employees driving to work each day is also in the extreme category, emphasizing again the importance of worker productivity to the environment, not just to the price of postage. An inflection point in postal service development was the idea that the sender pay the full postage, rather than the recipient. In the past, the challenges of delivering a letter across the countryside or across the world was sufficient to require a financial incentive for the delivery agent to complete the trip; it was thus necessary to have the recipient pay some or all of the postage to ensure (as best as possible) full delivery. Eventually Posts became so structured and reliable that senders could agree to pay the full fare, and eventually businesses began to see the opportunity in expanding and servicing their customer bases reliably and cost-effectively by using the Post and the pre-paid postage stamp. Today, disruptive technologies now have a different answer to this seemingly long-settled question of “who pays for postage?” With millions of consumers and businesses willingly paying for the convenience of faster and more mobile communications – cell phones, email and instantmessaging – we already have evidence that many will pay to receive some or all of their postal mail in electronic form. Electronic postal mail is more convenient when you’re on the road, and easier and less costly to handle than paper. It is also environmentally more sensible, and in an age when “cradle to cradle” is the new mantra of physical goods designers (e.g. computers and furniture are being designed to be nearly 100% recyclable so we don’t overflow our landfills with toxic trash), consumers are willing to pay more for something kinder to the earth for future generations, and they demand their providers do more to reduce their environmental impact. Posts are no exception. Any avid reader of Fast Company magazine will notice that each issue these days is jampacked with stories of innovative companies disrupting old-line industries with new, “green” technology solutions. It’s happening in every sector, from plastics to construction. It is ironic, though, that one of the largest environmentally-impacting sectors of the economy – the Postal Service – rarely if ever gets any coverage in this publication. Yet the alternative messaging industries – whether email-based, search engine-based, or one of the other Internet-enabled platforms – get round-the-clock coverage. The postal operators seem to be caught in a dilemma. Promoting the environment is a good thing, but if it means promoting less paper usage and results in less physical delivery, it is perceived to be “bad” for the post office (bad for revenue, employment, and profitability). A few enlightened posts have already mentally shifted to the new paradigms (e.g. Canada Post’s “ePost” service), but even these examples have so far only marginally reduced the environmental impact 6

of paper mail. These services may be new for the posts introducing them, but they are typically only mimicking innovations already proven in private industry. They’re not radical enough, and they don’t leverage enough of the posts’ intrinsic competitive advantages. We only need to look at the telco industry to see what happens when established infrastructure players allow newcomers bearing alternative technologies (here, cell phones) to steal billions of dollars of economic value while the establishment slumbers. Most postal operators are sitting in a similar hot-seat – whether they have fully realized it or not – and this is reflected most palpably in the very low market capitalization multiples the stock markets have assigned to the publicly-traded posts. Clearly, there is a coming freight train carrying dramatic changes in customer behavior, technology, and political climate. The posts of the world each have to make decisions as to whether they wish to continue to stand in front of this freight train – come what may – or take the enlightened view, get on top of the freight train, and help drive the train to a more sustainable model, a model more sustainable ecologically and economically: that’s what Earth Class Mail is about. This white paper outlines one vision for how posts can send the right message and accomplish the twin goals of economic and ecologic sustainability at the same time, ensuring the continuance of the most reliable and secure form of messaging known, and making it even more reliable, more secure, and more cost-effective than ever before.

About the structure of this white paper This document was authored by several people, each bringing a unique perspective to the issues above. What brings them together is an association with a single company, Seattle, Washington-based Document Command, Inc. As the company has moved from concept to launch of its popular Remote Control Mail™ service (www.remotecontrolmail.com), it has established hard evidence of market demand and the user behaviors that occur when postal mail recipients are given a mouse to manage their incoming mail. The results are very exciting and provide sufficient evidence of viability to certain posts, equipment vendors, major enterprises and industry associations to lead to the development of a platform that could even be implemented at a national level by Universal Service Providers (USPs) and other postal operators. This document details that vision and the practical steps for posts and related parties.

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A little about the authors and their chapters….

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en Lynn, PhD, was the son of two United States Post Office employees. Mail was in his blood, so to speak, from a young age. Over a distinguished 25-year career with the USPS Ken rose to the rank of Assistant Postmaster General of Logistics, responsible for the operations of the world’s largest postal service and some 800,000 employees, a quarter million vehicles, and half of the world’s mail volume to move. He is one of the few in these ranks to have earned a PhD, and in many other ways was always an “overachiever.” In his chapter entitled “The Trillion Dollar Postal Industry: Poised for Growth or Doomed to Extinction?”, Ken shares his experience as a “young buck” coming into USPS management with new ideas, and why the halflife of a new idea in a large, staid organization with a vested interest in its own inertia can be no more than a few minutes or hours before someone points out that such change is unlikely to occur. Ken brings us some information from the Universal Postal Union (UPU) and public market sources about how other posts around the world have successfully made the transition from government agency to privatized corporation, leading in many cases to exceptional productivity enhancements, diversification of revenue streams well beyond what was thought achievable in their “monopoly days”, and even reduced postage costs and improved delivery times for postal patrons. As a professor at six colleges, Dr. Lynn has a knack for “getting the message across,” and his message to posts is a clear one: “You’d better look at change as a good thing to be driven by your very own organization – not a bad thing to bar at the gates – or you will eventually be disintermediated by overwhelming market forces.”

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ameron Powell, as a business entrepreneur and lawyer, has for many years worked at the intersection of business, law, and public policy. He has deep experience in issues of intellectual property, monopoly, and best business practices, as well as in putting businesses online. Powell – a Harvard Law School Graduate, former adjunct professor and US Department of Justice trial lawyer before he became a business development executive in the Internet sector – dives to the very roots of our attachment to physical paper, and then explores why we nevertheless seem to want almost every form of communication to go digital. In a provocative and insightful chapter, he addresses the fundamental question, “Will Postal Mail Eventually Be Delivered on the Internet?” Cameron discusses surveys of consumer behavior relating to mail before drawing more well-founded conclusions from statistics of their actual observable behaviors, taken from Remote Control Mail™ users. Cameron’s first chapter also has a significant section devoted to the environmental impact of the printed mail matter, the postal organization that delivers it, and the corporate organization that intakes it. In his second chapter, “Remote Control Mail: The First True Execution of Online Postal Mail,” he briefly summarizes the workings of the service at the heart of this book.

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atalee Roan was the youngest faculty member in the University of California, Berkeley´s Industrial Psychology department where she designed and taught university classes in statistics, business management, leadership, and organization design. In her later life in the private sector, Natalee gained the distinction of having joined, at the pre-revenue startup stage, not just one, but three major wireless carriers which have become household names: Sprint and Nextel (now merged), and GTE Wireless (now Verizon). Sprint reached annual operating revenues of over $8 billion

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in just 4 years, where Natalee´s responsibilities included the creation and execution of marketing, sales and distribution programs and training eventually to support 35,000 sales reps at 13,000 points of distribution in consumer and business to business markets. In her previous marketing roles, Natalee of course used direct mail promotions, but also every other available media, to create such meteoric growth in these legendary companies’ customer bases. In her section on “Untarget Marketing: The First Dramatic Inflection Point in Direct Mail Marketing since the 70’s,” Natalee explores two revolutionary concepts in direct response marketing. First, by delivering postal advertising through an online service like Remote Control Mail, extensive information can be gathered about what recipients don’t want to receive, and smart marketers will begin to use this to boost their response rates by suppressing specific names and general demographic segments that are patently not interested in their offers so that marketing dollars can be focused on prospects who might be. Second, that marketers will soon be able to deliver their direct response materials, in rich-content digital format, directly to online mailboxes, where they will a) be invited by the recipient, b) not be illegal like email advertising, and c) be able to compress weeks-long sales cycles into moments-long, by drawing prospects from initial interest to placing orders in a matter of mouse clicks.

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ichael D. Miles, P.E. has spent the past 29 years as a mechanical engineer working on everything from aerospace brakes to oscilloscopes, but most relevant to this discussion he designed mail sorters for postal automation giant Siemens. Big ones that were pushing the envelope on throughput, so to speak, hundreds of feet long and with hundreds of mail container bins. As the Chief Technology Officer at Document Command, Mike got to design mail sorters with millions of mail containers in a single machine – a building-sized machine – breaking the mold of prior thinking that tomorrow’s faster, cheaper mail sorter had to fit in the same general footprint as yesteryear’s. By departing from the classical approach to postal sortation mechanization Mike was able to invent all-new, patent-pending designs that reduced labor costs by some 70%... a true breakthrough in a field which endeavors to make only single digit enhancements in productivity year-to-year. Miles’ “MegaSorter” design indeed represents a quantum leap over the first-generation mail sorter technology which has been around since the 60’s. Instead of pinch bands and horizontal conveyor belts that can “bubble sort” mail at speeds that max out at 40,000 per hour, you’ll read about how the MegaSorter can sort multiple mailstreams – letters, flats, priority mail, express mail and small parcels – all at once. And sort it all in just 90 minutes, regardless of whether it is handling 200,000 pieces or 20 million pieces at a time. For postal operators, the MegaSorter not only saves billions in labor and BTUs, but allows their customers to enjoy Remote Control Mail features from the entry point of the postal stream rather than from the exit point, creating vast new revenue opportunities while saving vast numbers of labor hours and energy resources.

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hris Kwak went straight to Wall Street after graduating from Harvard, to practice the craft of covering publicly held enterprise-software companies as an equity research analyst. Like Dr. Lynn, by a relatively young age Chris rose through the ranks to become a senior analyst covering companies such as Microsoft, Oracle, and Salesforce.com, and industries ranging from software, security, IT services, Internet, and video games having worked for prominent investment firms such as Deutsche Bank, Credit Suisse First Boston, Bear Stearns, Viking Global Investors and Susquehanna International Group.

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The world of Wall Street is much more brutal and swift in dispensing justice to bad corporate decision makers than you’re going to find in the government sector. Stock price is one highly visible way with which investors (and the analysts who cover the stocks) “vote with their wallets” as to whether they believe an enterprise is on the right track for the future or not. Government-owned posts lack this feedback mechanism and so we already see a rapidly widening gap between the fiscal track records of government-owned versus shareholder-owned postal operators. Chris takes a look at the world of posts, now an amalgam of unshackled “liberalized” private or public corporations and government agencies – and hybrids all along the spectrum – and creates an analysis for the reader of why and how the USPS must go public by early in the next decade in order to survive the oncoming tsunami of radical change in technology and consumer behavior. It is a fascinating read from a Darwinian point of view, and any postal operator is sure to glean valuable insights from it.

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on Wiener is the founder and CEO of Document Command. If Benjamin Franklin was the father of the modern Post Office, Ron was the unwitting father of the Online Post Office, known as Remote Control Mail™. (Though he claims there is no connection, his oldest son happens to be named “Benjamin.”) As a serial entrepreneur he ran companies with major catalog and direct marketing divisions, large-scaling Internet IT infrastructures, software and hardware engineering teams, and complex manufacturing operations. For Ron, this business was at the confluence of his core competencies and favorite industries. The idea for Remote Control Mail came to Ron first when he counted up the hours of his week that he spent driving to PO boxes and private mail box retail outlets, homes and offices, just to pick up his mail and see if there was anything important. He soon realized what a significant percentage of his time was being wasted chasing after this last form of communications that wasn’t hanging off his belt or sitting on his desk as a digital medium. Ron realized that the last analog tether that kept him from being “truly mobile” as he flew his Beechcraft Bonanza from place to place, was his postal mail. Everything else was portable: email, voicemail and efax were all instantly accessible wherever he landed, but as someone who needed to check his postal mail daily for legal documents, checks, RFPs and other time-critical items, he felt tethered to multiple mailboxes, forever enslaved to driving a globe-warming circuit between them. The very notion defied his sensibilities as a pilot and a technologist – there had to be a solution! Remote Control Mail was hatched in Ron’s Venture Mechanics business incubator in Portland, Oregon, where a small engineering team spent the first year working out a means of finding a veritable needle in a haystack – i.e. locating a single letter in what might be a pile of 5 million letters – so that if he were to go online from Geneva and see that he’d received an important letter from his accountant, he’d be able to read it, as a PDF file, within 5 minutes. Rather than laugh off the idea as implausible, future CTO Mike Miles scrapped four inferior material handling automation schemes before finally settling on what is today known as the MegaSorter – a mail sorter with millions, instead of hundreds, of “pockets.” The rest, as they say, is history, and today Remote Control Mail has untethered postal recipients from their mailboxes in over 80 countries, and is being actively evaluated by several national posts as a platform for serving every citizen, and every business in their country, their postal mail online. For editorial inquiries or speaking engagements please contact Melissa Milburn, VP of Corporate Communications, [email protected], 206-972-9096 cell.

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The Trillion Dollar Postal Industry: Poised for Growth or Doomed to Extinction? By Dr. Ken Lynn

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A Little History As I looked around the room, I was struck by the raw authority represented by the members of the interview team. It was April of 1975, and I was being interviewed for the top executive distribution position in the United States Postal Service. As a postal clerk, carrier, supervisor, and postal inspector during the previous eight years, I had seen their pictures in various magazines and publications of the Postal Service and had periodically read instructions and material they had sent to the field. But today I was actually in the same room with them and was about to be asked questions that I was afraid I could not answer. I recognized E.V. “Pete” Dorsey, the Senior Assistant Postmaster General for Operations. I would later be struck by Pete’s humor, mentoring ability, and political skills, but today I was only aware of his position and the authority he held. Sitting next to him, was James V. P. Conway, Chief Postal Inspector of the Postal Service. Jim was an outstanding speaker and had a very long history at the Postal Service. Next to Jim, sat Peter Del Grosso, Director of the Postal Service’s Operating Policies Office, someone that held a considerable amount of authority and political power in the organization. Pete was a “behind-the-scenes guy”; I would learn that nothing got done in the organization without his approval. There were a number of others at the table but those were the ones I recognized. I remember how nervous I was, and while Pete Dorsey had counseled me to “pretend like you’re down at the local tavern having a couple of drinks with friends,” it didn’t help much. There were a couple of simple questions that anyone who had been in the service for 8 years should have been able to answer. And I did. Then came the toughest question of the day. It came like a hardball from Mr. Dorsey (who had been the president of a professional A-league baseball league). He asked, “What makes you think that you can do a better job than any of us around this table have done in increasing the productivity of the postal service?” I certainly wasn’t very confident about my answer, but I spoke the first thing that came to my mind. “It seems to me that you guys have gotten all the productivity gains you can get from the distribution cases that Mr. Franklin made when he was Postmaster General.” Looking back at my answer, it now seems like something they might have considered “smart-mouthed.” But back then, it was a fairly accurate assessment of the Postal Service: they had created the best traditional postal service in the world in spite of limited technology, a great deal of government regulation, and their own strategic inhibition, which I discuss further below. One of the members of the interview team, Ed Brower, had been the Assistant Postmaster General for Bulk Mail Centers. He was still smarting from having built 21 bulk mail centers that had been planned when the Postal Service had over 1.5 billion parcels, but which were completed when the volume had dropped to only 300 million. As the bulk mail centers were being built, UPS was intervening in the USPS’ rate process to make sure we fully attributed costs to parcel posts. The result was that our prices had to go up, and as they did, UPS undercut them. It was only downhill from there because UPS understood their core competency as well as our ratesetting process. Distribution centers were simply not going to work for the Postal Service. But there was another reason they wouldn’t work: Distribution centers presumed that the exclusively physical delivery of mail, at very high costs to the USPS, would last forever. In this chapter, I discuss the strategic inhibition that has prevented the Postal Service from adopting the technologies and market-based strategies that may hold the key to survival. I briefly profile some of the many successful private-sector executives who came into the Postal Service as Postmasters General only to stop short of transforming the Postal Service and ultimately left after having merely maintained the organization’s traditional trajectory. I detail the liberalizing forces pushing the postal market domestically and internationally. I describe some of 12

the challenges facing the Postal Service and their need to address competitive forces. I conclude by highlighting Remote Control Mail and its transformative potential to redefine the mission of the Postal Service.

What is Strategic Inhibition? Through the years, those of us inside the Postal Service were always caught in the argument as to whether we were a communications or a physical distribution business. Having more or less settled on the fact that the USPS was a physical distribution business, most of the strategic thinking in the Postal Service was geared almost exclusively toward mechanizing and automating all of the physical distribution processes. We paid less attention to adopting emerging technologies and market-based processes to generate revenue and increase market share. I believe the commitment to the landmark Postal Reorganization Act of 1970 – the protection of the postal monopoly and the fear of losing it – not only created an organization that was completely risk-averse, but one that severely hampered postal management from pursuing emerging technologies. We were always reminded that it was not in our best interest to attempt to create new products that would infuriate the business world and invite a review of the postal monopoly. Rather than look creatively at mail as communications or documents, we looked at it far more narrowly as a commodity to be delivered through a physical distribution process. This strategic inhibition would preclude the postal service from participating in important portions of the communications market: telephone, fax, email, and emerging technologies. As communications shifted from analog to digital, new products and services started to supplant physical mail. As can be seen with hindsight, the Postal Service’s failure to adopt new technologies has had significant repercussions.

Strategic Inhibition and The Exclusively Physical Distribution Strategy Most of the companies that contracted with the postal service to create the path to the “physical distribution future” fell into the traditional and risk-averse camps. If 240 distribution pockets were good on a multi-position letter sorter, 1,000 pockets were better. For either the Postal Service Research and Development Group or the Postal Service’s favorite contractors, size was simply no object. A flat sorting machine that took up an acre and couldn’t fit into most postal distribution centers and a 10,000-pocket letter distribution machine were but two misguided efforts to mechanize and automate the manual physical distribution processes. The Postal Service suffered from what I’ve called strategic inhibition, an inability to abandon the orthodoxy in favor of embracing new technologies with market-based best practices. One continually discussed strategy for changing the strategic direction of the Postal Service was to bring an “outsider” into the position of Postmaster General. Surely someone from the private sector would make the USPS look more like the private sector, right? This idea proved so compelling that the USPS would embrace it over and over again after the reorganization of 1970. But none of the short-timer outsiders brought into the Postal Service had the strategic vision or muscle to transform the organization. Therefore, none of them moved the Postal Service one inch away from a purely physical distribution model. Elmer Klassen, formerly president of American Can Corporation, was Postmaster General from 1971 to 1973. Klassen oversaw the seminal, if incomplete, postal reorganization. Of all Postmasters General, Klassen came the closest to redirecting the vision of the Postal Service if for no reason other than the Postal Reorganization Act of 1970 was passed during his tenure. But after Klassen, no one wanted to go near the subject of postal reorganization for fear

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of risking the postal monopoly. Benjamin Bailar, Klassen’s successor, had been a financial analyst and vice-president of American Can. While he certainly tried to bring improvements to the organization, he did very little to shift the Postal Service’s direction. In 1986, many people hoped that bringing the former CEO from American Airlines, Albert Casey, into the Postal Service was a move in that the right direction. But, alas, Casey brought credentials from the logistics world, and not from the communications or technology worlds. In the end, his seven-month tenure was not enough time to make strategic changes to the institution. Al focused on having a reorganization completed within four months without the benefit of a strategic reorientation. Despite his technological innovations at American Airlines, he didn’t even develop ends statements that conveyed to the Postal Service what his final vision would look like. Rather, he focused on what had been successful for him in the airline industry – lean organizations – and the Postal Service proceeded to reorganize around the same strategic principle of physical distribution. Meet the new boss, same as the old boss. The Who had told us that a few years earlier. Preston Tisch, by all measures a successful businessman as Chairman of Lowes Coporation and owner of the New York Giants, was Postmaster General for two years. Preston was another victim of the narrow strategic vision that found solace in hiding behind the monopoly. He made no changes in strategic direction or made any attempt to bring in new technologies that could have connected the Postal Service. The fourth Postmaster General in four years, Anthony Frank had been Chairman and CEO of First Nationwide Bank, a Ford Motor Co. subsidiary that was the second-largest consumer banking operation in America. Frank stated his focus as “productivity, wage rates, and revenues . . . and seeking to make more changes in the next five years than we’ve made in the last 200.” Unfortunately he only stayed four years and most of the changes were tactical and not strategic. Next came Marvin Runyon, who had retired as a Ford Motor executive and previously served as CEO and President of Nissan USA, as well as Chairman of the Tennessee Valley Authority. He was Postmaster General for 6 years, during which time he made no discernible changes to the Postal Service’s strategic direction. He too failed to anticipate non-physical distribution strategies.

We Know What’s Good For You The ideal end-state envisioned by all of these postal managers evidently revolved around the creation of a system that would automate mail preparation and mail distribution in a homogeneous delivery order sequence of flats and letters that could be provided to the carrier. This was a dream based on the strategic design of the postal service being purely and always a physical distribution system run by an organization that knew what was best for its customers. This planned-economy omniscience was not isolated to the Postal Service. An ad from the Bell System placed in a 1948 National Geographic Magazine captured it well: “We are in the unique position of knowing what is best for our customers.” The Postal Service did share that opinion. As just one example, I was a consultant for MasterCard International in 1994, when non-carrier employees in the Postal Service were removing credit cards from mass mailings intended for customers at residential addresses. The annualized losses to MasterCard were in the range of $800 million. To combat this misuse of the mail, MasterCard developed a solution that was both truly novel and a win-win, a combination that may have held the seeds of the solution’s demise.

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MasterCard proposed using their own secure carriers to deliver the cards to their destination delivery branch. MasterCard was willing to pay the full postal rate, deliver the cards to the actual destination delivery unit themselves, and receive a signature from the delivery unit manager at the destination post office. It was an ingenious solution, securely delivering the cards to the destination post office, because most of the stolen cards were being taken by postal employees at transshipment points within the Postal Service, large offices, airport postal units, and other places where entire trays of cards could be re-addressed to fencing centers around the world. When we met with Postal Officials in Washington, they were unmoved. They would not allow MasterCard to use another carrier to deliver the cards to the destination postal unit. They were not happy about interfacing with another carrier and there were no rules that they felt would allow them to provide this service—even though they were going to receive the full, rated postage from a company that was one of their largest customers. In fact, they suggested that the cards could be sent individually registered to the billion customers worldwide that were sent the cards, at many times the cost of having the customers make a phone call to validate the cards and more than 40 times the present postage. Any manager that has ever been successful in a business based on market factors would instantly recognize the issues at play in the MasterCard case. However, the environment is quickly changing. The Postal Service can no longer afford to tell its largest customers “No!” without explanation or even logic of any kind.

We Know You Want It in Physical Form All of the Postal Service’s strategies were based on the assumption that physical mail communication was and always would be in the best interests of the consumer. While the Postal Service envisioned some loss of volume to other technologies, it nevertheless assumed a considerable combination of business and personal mail would continue to feed its requirement for volume. It is unclear if the organization ever considered a migration of bulk business mail and standard mail to other technologies, and/or their elimination simply because such mail consumed significant natural resources and had an enormous negative impact on the environment. As Cameron Powell points out in “Will Postal Mail Eventually Give Way to the Internet?”, the Postal Service’s customers are asking for something entirely different from what the Postal Service is giving them. As the Bell System and others have found, this tension has historically been resolved by the disintermediating forces of deregulation or highly disruptive technologies. This is another way of saying that if the Postal Service doesn’t answer market demand, the market may provide its own answer, one in which the Postal Service’s role will be a shadow of what it has been. The Postal Service’s physical distribution strategy has meant that mail was one type of communication and one type of document in the business stream. We gave very little consideration to the life cycle of that mail document once it entered a business and the real revenue opportunities presented to us in document management. In the 40 years since the Postal Service began to mechanize and then automate the mailstream, it has demonstrated a strong commitment to both service and cost control. Its successful movement of mail to higher automated productivity rates is very significant, especially when one considers the flexibility that Americans have to mail cards and letters of almost any size. The service levels of the Postal Service for first class mail have remained at world-class, and when one compares the universal service provided to its customers with the rest of the world, the USPS is recognized as the class of the postal world.

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But change is afoot around the world. Posts are no longer “traditional” posts. And changing a large organization requires a grand strategic vision suitable to the task. The Postal Service has not to date demonstrated an understanding of the sheer scale of the vision required. When we were told that we had a short time to complete the reorganization, I can remember sharing with Mr. Casey that I believed he did not understand how large the organization was and what a difficult task it would be to do the job. He simply said, “Size doesn’t matter. You simply must divide by more zeros.” I believe it does matter. The USPS is a behemoth and exerts tremendous impact on the economy and the environment. It is like an aircraft carrier, and you have to start steering it way ahead of the desired turn.

Is Competition Healthy? How open was the Postal Service to competition? I remember being with Postmaster General Ben Bailar after he’d watched one of the first Federal Express ads on national television. The ad showed a person waiting in line at a post office with the clock nearing 5:00. The ad was playing on a widespread public perception about postal customer service, so the window curtain was pulled down at 5:00 in the face of the waiting customer. The story line then exhorted the now famous, “When it absolutely, positively, has to be there overnight.” While the ad was very well done, the Postmaster General was quite angry. “Fred Smith has obviously not seen this”, he said, saying less about Fred Smith than about his innermost feelings about the sanctity of the Postal Service and the evils of competition. He reached over and called Fred Smith’s personal line. I didn’t hear Fred’s side of the conversation, but it became clear to me that Fred had seen the ad and thought the perceptions contained therein were right on target. Fred Smith was a recognized risk taker – his trip to Las Vegas where he bet the half of his Federal Express payroll he did have in the bank in order to win the other half became the stuff of legend – and his perception of his competitor as slow, cumbersome, and out of tune with the customer fueled his market-based strategy to provide better service to his customers. He listened to the customer telling him it did matter how long something took to get delivered, heard they’d pay more for service – and took away the lion’s share of the overnight service market. Meanwhile, still in our own world at USPS, we continued to decide on behalf of the regulators what information the regulators needed in order to regulate us. And so of course we tended to generate precisely that data that supported our position in the rate cases. I was sometimes in the thick of it. As a rate case witness in 77-1, I built a hypothetical postal service model to develop the service-related costs that were attributable to each class of mail and then tried to use postal data systems to support my position. Unfortunately, this data was a product of systems that were designed to support the strategic initiatives of postal management – not necessarily to generate strategic modeling for best practice and technology innovations. Former Postal Rate Commission Chairman Clyde S. DuPont expressed his frustration with the difficulty the Commission was having getting particular types of data: ”Although our discovery powers are generally sufficient to permit us to test and clarify evidence presented in our proceedings, the service has treated the actual collection of data as its exclusive domain. It reserves the design of its statistical systems and the data to be released as a matter of unilateral discretion. Thus the commission and the parties to our proceedings have been tied to the data the Postal Service is willing and able to make available.” In the final analysis, Federal Express, United Parcel Service, and all of the other major postal competitors did drive significant changes in the manner in which the Postal Service managed itself. If FedEx could get it there the next day, then we began to believe we could too. 16

But we wouldn’t have believed we could do it if we hadn’t seen it happen, just as Roger Bannister’s shattering of the four-minute mile barrier led dozens of runners to break it in just the next few years. This is what competition does best. UPS also affected us strongly. While UPS grew bigger and bigger and we began to talk about them having service problems like we did, the bottom line was that most postal managers recognized that UPS was providing better service than we were and it served as a motivation for us to do a better job. In other words, competition did make us better, in spite of our denials that competition had any role in what we were doing. Competition was not viewed very positively in the Postal Service for a lot of reasons, not to mention that we didn’t want any competition in the First Class letter stream, and that hiding behind the monopoly was a convenient way to leave the subject alone. We always argued that the monopoly was necessary to fulfill our mission and to provide an economically sound postal system that could afford to deliver letters between any two points in the country—no matter how remote. Unfortunately for us and the consumer, our head-in-the-sand strategy also inhibited the Postal Service from seeking out innovation, moving into new and profitable markets, and planning for the substitution of other technologies for physical mail.

Changing Markets & Competition: The High Price of Ignoring Reality Nobel Prize winning economist Milton Friedman once said “there is no way to justify our present public monopoly of the post office. It may be argued that the carrying of mail is a technical monopoly and that a government monopoly is the least of evils. Along these lines, one could perhaps justify a government post office, but not the present law, which makes it illegal for anybody else to carry the mail. If the delivery of mail is a technical monopoly, no one else will be able to succeed in competition with the government. If it is not, there is no reason why the government should be engaged in it. The only way to find out is to leave other people free to enter.” In its “Postal Market 2004—Review and Outlook,” the UPU points out that “in all regions of the world, competition from non-public postal operators is a reality. According to our survey of postal regulators, only 6% of public operators do not yet face competition from other postal operators.” While the USPS is still flexing its monopoly powers, other postal administrations have given them up and are becoming trend setters for liberalization. Liberalization is the international name for market based postal models. Germany’s postal service is now listed on the stock exchange, as is the Dutch Post, which has been liberalized since 1989. The Japanese Post is expected to be completely privatized in 2007. New Zealand and Sweden have had privatized posts for years. Great Britain is continuing to refine its liberalization of its post. China is listing its Parcel Service Company for public investment. Some former leaders of the USPS realize that the time to move out strategically has come. William J. Henderson (former Postmaster General) in his article, “End of the Route: I Ran the Postal Service; It Should be Privatized,” suggested that, “…employees now realize that the USPS is threatened by technological change, and therefore maybe less resistant to change.” Rick Geddes’ book, Saving the Mail, presents a compelling elaboration of Friedman’s argument against the postal monopoly: Many of the old arguments were never truly valid, as liberalizations around the world and economic research has shown, and some of them have been superceded by technology. In his later chapter, Wall Street analyst Chris Kwak takes up the same argument and adds real urgency and some intriguing twists.

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USPS: Will It Be Challenges or Opportunities? The USPS stands at an historic intersection. Geddes believes that the postal service has achieved a number of the goals of postal reorganization, including, but not limited to, improvements in productivity, elimination of direct subsidies, diminishment of direct congressional control, and mail users paying more of the costs. On the negative side, the Postal Service has not protected the taxpayer’s initial equity, maintained wages comparable to private industry, nor eliminated political influence over the service. In his (2003) summation, Geddes states, “Further reform of the U.S. Postal Service is timely. The Postal Service is losing substantial amounts of money, while rates are rising rapidly.” The nature of any reform, how quickly they take place, and the strategic modeling that accompanies them will be the challenge that identifies whether or not there is a window of opportunity currently available to the U.S. Postal Service. Geddes says that “once those critical institutional reforms are in place, the Postal Rate Commission can gradually reduce the scope of the Postal Service’s monopoly by contracting the size of the reserved area. The contraction would allow competition to be introduced steadily but slowly and thus build confidence in the market’s ability to provide delivery of letter mail.” While I can appreciate Geddes’ cautious optimism, I can also appreciate that the world is changing quickly enough that time is not favoring the USPS. In fact, if the substitution of email for physical mail continues at the estimated rates, and the USPS fails to reinvent itself to take advantage of those technologies, its challenges will continue to be challenges rather than opportunities. And if the USPS does not fully grasp the demands of mail recipients to receive, in electronic form, even mail that began as paper (of which more is discussed in the section entitled “Will Postal Mail Eventually Give Way to the Internet?”), it will only fall farther behind.

Some Countries Already Playing Leapfrog It is always interesting, if not critically important, to take a look outside the United States and see what other countries’ posts are doing in response to changing dynamics. For example, we increasingly see some of the trendsetting posts using vertical and horizontal integration strategies to allow them to own and manage the external physical distribution services as well as to connect to electronic document management systems within organizations. Without strategic inhibition, they are creating a supplier network that manages all of the communications needs of customers. These strategies require the posts to add to their offerings traditionally mail-aligned services, such as mail pre-sorting and international 3rd-party logistics management, plus non-traditional services such as document scanning, storing and destruction services, remittance processing, and print management. Some of these foreign posts are eyeing a market in the United States where the USPS has done little to shape the future by developing strategic initiatives that blend technology with their traditional physical distribution product. Around the world we also see examples of posts that are struggling to keep up with new economic growth. Some countries in the Arab World, for example, do not have mail delivery to households and businesses. Their citizens are required to travel to their local post office to pick up their mail (by contrast 15% of American households use a PO Box). Saudi Post and Microsoft recently announced an undertaking in which Microsoft will build the new web presence for Saudi Post, and one of the features they are considering is an email notification service to let citizens know when mail has arrived for them, so they can know that it’s time to come down and pick up their mail.

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Vietnam is another example of a country – among several in Asia – with a rapidly growing economy and a post office that is struggling to keep up its investment in automation in order to meet the demand. As new businesses launch and existing businesses grow, mail volume naturally increases. Countries like Vietnam are faced with two options. They can invest in the same generation of technology that the industrialized countries have been using for the past four decades. Or, they can make the leap to a more scalable and cost effective next-generation infrastructure, such as Michael Miles describes in his chapter on MegaSorters, and enjoy substantially better worker productivity much sooner than the industrialized countries could get there. They can do this because they have the opportunity to take a fresh mindset to their automation needs. Historically, once a post picks its automation platform, it tends to stick with it because it has gained institutional comfort with the operation and maintenance of that equipment, not to mention long-term contracts and relationships with suppliers. In general, smaller countries and those in northern latitudes are the most attuned to automation advantages, and, given that they do not enjoy the scale economics of a La Poste or a Deutsche Post, they are always seeking to make every possible improvement to their productivity. Yet they must remain competitive in a much more open market. Northern countries like Sweden and Estonia have the additional concern that sending out their carriers in the middle of brutal winter snow and ice storms is a lot more costly (and riskier to employees) than during the summer months, and so anything that can be shifted to an electronic delivery would be a blessing. Even something as simple as having a convenient electronic means of letting the carrier know that a family is on vacation and therefore their house can be skipped over would incrementally reduce their costs of operations. These countries have been more aggressive in adopting electronic services than countries to their south where the weather is less to prone to tax their productivity figures.

Why Should We Pay Attention to Postal Transformation? The transformations that are taking place in the world of posts will set the stage for the models that will replace simple physical distribution of the mail with new technologies. The connectivity of traditional mail to document management and enterprise content management technologies will drive significant markets in the future world of posts. Those organizations that have taken advantage of market opportunities will be far more likely to succeed in a competitive world than those that have maintained traditional government regulation and safety. It is of critical importance to the remaining non-liberalized posts like the USPS to reinvent themselves now, while they can still leverage their national “trust brand” to extend their offerings into the enterprise and into the homes of their customer base through the power of the Internet. Failure to do so will most certainly result in loss of monopoly, loss of market share, and loss of opportunity to take advantage of the changes in business processes as well as changes in the communications markets. In the following chapters my co-authors will further address the need for, and inevitability of, such a reinvention.

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Appendix A - Supplemental Facts about Postal Organizations For those readers not intimately familiar with the posts of the world, we’ve included here some interesting facts and figures:

The U.S. Postal Service In Perspective In 2005, the USPS had operating revenues of $69 billion dollars, assets of $25 billion dollars, and 803,000 employees or 1 in every 188 people employed in the United States works for the USPS. The Postal Service processed mail weighing 12.9 million tons or 15% of the paper produced in the United States in 2004. Each day the USPS delivers over 680 million pieces of mail….to 143 million addresses. It delivers more than twice as much mail as it did two decades ago with the same number of employees. To put that number in international perspective, the Universal Postal Union reports that 1.2 billion pieces of mail are delivered world wide each day putting the USPS at over 50% of that volume. The USPS is the third-largest employer in the United States (after the United States Department of Defense and Wal-Mart) and operates the largest civilian fleet in the world, with an estimated 214,000 vehicles. In an interview on NPR, a USPS official stated that for every penny increase in the national average price of gasoline, the USPS spends an extra $8,000,000 a year to fuel their fleet. This implies that the fleet requires some 800,000,000 gallons of fuel per year, and an estimated fuel budget of $2 billion dollars.

Some International Perspective From the Universal Postal Union Amongst the industrialized countries, the United States of America has the highest level of domestic letter-post traffic in the world, with 199 billion items a year. Meanwhile, Japan generates some 25 billion items, while Germany and Great Britain generate about 21 billion items each. Amongst the developing countries, the Peoples Republic of China generates the most letter-post items, more than 23 billion, followed by Brazil with 8.6 billion and India with 7.3 billion.” The UPU classifies industrial countries as, “Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Great Britain, Greece, Iceland, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Spain, Sweden, Switzerland, Vatican, and the USA. Other size statistics from the UPU: “Postal services employ close to 5.5 million people, making the Post one of the largest employers in the world. The industrialized countries employ almost half of all postal employees. The United States of America, with 803,000 employees, and China with 688,000, have the largest numbers of postal employees in the world. More than 665,000 permanent post offices world-wide make the Post one of the most extensive networks on the planet. Globally, India has the largest number of permanent offices (155,516).” It is clear that the “posts” are generally one of the largest employers in the country where they exist. Internationally they employ almost 6 million people and have a clearly vested interest in the reduction in first class letter volumes and the rise of other communication technologies. How they see themselves individually, and as a group, separates the trend setters from the trend followers. 20

Appendix B - Selected References UPU

The worldwide postal network in figures

UPU

Postal Market 2004—Review and Outlook

UPU

Postal Market in the Age of Globalization 2002

UPU

Strategy Conference—Dubai 2006

USPS

USPS Annual Report 2005

USPS

USPS Strategic Transformation Plan

Earth Trends

(http://earthtrends.wri.or/?Years=2004)

IDS Postal Wire Newsletter, What’s the latest on other Foreign Postals, 2003. The Global Fight on Postal Markets, Postal Sector Meeting on Multinationals, May 2001. Tappi

(http://www.livingtreepaper.com/about_faq.html)

Cohen, Ferguson, Waller, and Xenakis, Universal Service Without a Monopoly?, Office of Rates, Analysis and Planning, U.S. Postal Rate Commission, November 1999. Cohen, Robinson, Heehy, Waller and Xenakis, Postal Regulation and Worksharing in the U.S., December 2004. Cohen, Jonsson, Robinson, Selander, Waller and Xenakis, “The Impact of Competitive Entry into the Swedish Postal Market.” Rick Geddes. “Opportunities for Anticompetitive Behavior in Postal Services,” American Enterprise Institute AEI Online (http://aie.org) (2003) Rick Geddes. Saving the Mail How to Solve the Problems of the U.S. Postal Service. 2003. Milton and Rose D. Friedman. Capitalism and Freedom, University of Chicago Press, 1982, P. 29. Robert Cohen, Matthew Robinson, John Walker & Spyros Xenakis, “The Cost of Universal Service in the U.S. and its impact on Competition,” 2002. Published in the Proceedings of Wissenschaftliches Institut fur Kommunikationsdienste GmbH (WIK). William J. Henderson, “End of the Route: I Ran the Postal Service; It Should be Privatized,” Washington Post.

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Will Postal Mail Eventually Be Delivered on the Internet? By Cameron Powell

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Our ancestors loved their papyrus. It felt good and was the only medium aside from stone – which was too heavy to carry – in which words could be preserved. Papyrus scrolls, and the information on them, weren’t as portable or searchable as what followed them, and disaster recovery was unheard of. Papyrus scrolls were eventually bound into portable books, and the Chinese invention of paper in 105 C.E. transformed the transmission and storage of information. The invention of the book – with its bindings in which multiple scrolls could be embedded, and the resulting tome carried around – and, later, by the Chinese, of paper, was a twin revolution of convenience and storability, and so papyrus preceded the platypus into unplanned obsolescence. But the book, like the mail itself, invented by the Persians in around 500 B.C.E., is rooted entirely in the technology of paper, which was invented in 105 C.E.

The Technology of Paper A distaste for paper and its costs – to businesses, the environment, and productivity – has developed in recent decades, and much of those costs are now preventable by advances in technology. The future of most mail, in fact, is digital, and delivered on the Internet. Is this another way of harping on the familiar refrain that email will replace letter mail? Not at all. To be clear, this majority of mail will still begin as paper and be mailed. But its delivery to Internet-enabled residences and enterprises will be digital, so mail reception and processing will be more like email and voice mail. Electronically delivered postal mail is not, like email, a substitute for mail; it is a partial substitute for currently labor-intensive and costly mail delivery. By reducing the cost of receiving paper mail, and eliminating associated downstream costs of handling paper, mail-related companies can actually make substitution by email or fax less attractive. The Universal Postal Union (UPU) has already affirmed that “[t]he postal industry and market are about to change decisively and more rapidly than ever before. Global forces are at work: globalization, liberalization, deregulation, competition and technology; and they are bringing dramatic changes to the way we work, learn, communicate and live.”1 These forces, the UPU warns, “are unstoppable.” This chapter is primarily concerned with elaborating on one of these forces, technology, which will change the paper-based-mail business in ways the UPU has not discussed publicly. In this chapter, I present arguments for and against receiving paper mail. I examine the true and avoidably high costs of handling physical mail: direct, lost-productivity, and environmental. I then discuss the benefits of converting paper mail to digital form as early in paper’s life cycle as possible: in the mailroom upon delivery. In the next chapter, I then detail the workings of the first system applicable to all mail, Remote Control Mail™ online postal mail.

“We’ll Have a Paperless Society When We Have Paperless Toilets” So said the emcee who introduced Document Command at a recent venture capital conference, and he was right; predictions of a “paperless society” have not come true. There’s a lot to love about paper, and that’s true even of those of us who work on reducing the costs of paper. As I write this in a coffee shop where a high-tech friend sits across the table from me, I am left cold by his Sony Reader. I have no interest in storing several hundred books on an electronic device, even if I can take a single item, the Reader, on a trip, rather than the four books 1

Universal Postal Union, “The Post – Emerging Issues and Trends,” 2002, p. 5.

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and three magazines I might otherwise take with me. Electronic media has no historical or emotional resonance for me. It does not remind me of happy days reading as a young boy, or of days I soaked up the sun with a book at an outdoor café. These memories are deeply engraved, and closely associated with books made of paper. The national posts, mailers, direct mail marketers, printers, and paper manufacturers (whom we’ll collectively refer to as the Mail Partisans) will patiently explain to you that people like me just like the feel of paper and don’t like sitting in front of a computer 16 hours a day. Small children, the elderly, and the poor currently deal better with paper. Although people claim not to like what Mail Partisans call “unsolicited mail”, people’s responses to it are profitable for the mailers. Pitney Bowes’ recent study, “Mail Preference Study Shows Consumers Clearly Prefer Mail”, reported the findings of a consumer survey commissioned from International Communications Research (ICR): “even in today's electronic world, the majority of consumers (66%) prefer regular mail for documents, letters and messages, up from 62% in 2001.” Regular mail, Pitney Bowes, said, “continues to be the essential tool in communicating with the consumer. It is universal, convenient, descriptive and perceived as secured,” as well as “more persuasive” than email. Pitney Bowes also reported that consumers “overwhelmingly” claimed they “would rather receive new product and service offerings via regular mail vs. e-mail, whether or not they have done business with the company sending.2 Consumers are also more likely to discard unopened e-mail (three out of four) than unopened regular mail.” More statistics support the Mail Partisans’ side of the argument: According to the USPS’ Household Diary 2005, mail volume is growing at 3% per year. First Class mail has declined by 20% since 1998, but annual volume goes up by several billion pieces of advertising mail. per year. The growth in mail volume consistently outpaces population growth and the rate of household formation: there are 145 million delivery points, and 1.8 million new delivery points are added each year. The USPS Household Diary 2005 says 96% of all mail is generated by businesses, 80% of which is received at home, and 4% is generated by households. Mail has become by, of, and for the corporation; it just so happens that much of that mail is mailed by that corporation to individuals. Here is our first hint of what may be delicately called the lack of alignment of the interests of the corporate mailers and the residential mail recipients.

The Case against Paper Mail In March 2000, the Postmaster General and CEO of the USPS was moved to proclaim “a New Golden Age of Mail” and to report that he had “delivered” on his promise to “keep the mail relevant.”3 Only a few months later, he reported the “sobering trends” that First Class mail was not growing at historical rates, that consolidation of multiple mail pieces into one envelope was becoming common, and that electronic banking and payments were growing.4 His dual and dueling opinions well represent the ambivalence and uncertainty our society is feeling about paper-based mail.

2 3

Perhaps a subtle and artfully diplomatic reference meaning “whether solicited or not”. The Post Office, Annual Report, 1999-2000, HMSO London, Chairman’s Review.

4

William J. Henderson, “USPS Faces Sobering Trends”, statement to the Fall 2000 National Postal Forum, at Anaheim, CA, reported in dmnews.com, Sept. 12, 2000.

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The first counter-argument to the Mail Partisans concerns unsolicited mail – known as “hard spam” and “junk mail.” I’ll then discuss the costs of delivering other unwanted mail (not necessarily unsolicited, but not wanted at the time of receipt) and even wanted mail, particularly in the enterprise context.

The High Costs of “Hard Spam”: Unsolicited Mail and the Waning “Mail Moment” Studies show that the so-called Mail Moment, the degree of delight that a mail recipient experiences upon reaching into her mailbox, has been declining for decades and is at an all-time low. For more households every year, mailboxes are devoid of personal First Class mail and stuffed with bills and unwelcome Standard Mail. How can this be consistent with the Mail Partisans’ data? Pitney Bowes’ consumer survey, like studies of the Mail Moment, all suffer from the same defect: they ask consumers for their opinions and self-reports about their mail behavior, which are far less accurate and reliable than actual observations of their behavior. Indeed, when we observe actual behavior, the statistics are less comforting: consumers simply do not respond to over 99% of all prospecting advertising mail. (The tracking capability of the Internet permits us to discover what people do with their mail if that mail is received online, and users can be asked questions about why they are shredding or recycling pieces unopened. See Natalee Roan’s chapter in this book). Response rates to direct mail prospecting campaigns have sunk well below 1%. In some studies, response rates to email spam were actually higher. The environmental costs of unsolicited mail are higher than spam’s, and disposal costs time and money. The cost of dealing with unsolicited mail is arguably far higher than the cost of dealing with unsolicited email. While estimates of the cost of email to corporations vary widely, Nucleus Research reported in June 2004 that electronic spam, at that time,5 cost companies $1934 per employee per year. The true number is (or was, in the study) probably lower,6 but if it were even $50, companies would still have reason to expend significant time and money to block it. Such estimates are useful, but, once again, observable behavior is the best index of the pain of spam. The market itself is perhaps a more accurate index of the costs borne by companies: spam is considered such a nuisance that the desire for its prevention spawned a $5 billion dollar industry. In 2002, spam accounted for about 10% of email traffic; a year later, 60%. It was banned in 2003, and many consumers sensibly ask why spam has been banned while direct mail remains legal. Rick Geddes might answer them as follows: mail, unlike email, has benefitted from a more powerful and deeply entrenched political lobby. Losers include the privacy lobby, which has lost out year after year to the Mail Partisans’ argument: “Because printed mailers represent a significant cost to senders – as opposed to emails that represent no cost – economics assure that marketers don’t overly communicate to disinterested targets, and therefore we do not need to legislate.”

5

Spam had doubled in the two years between the June 2004 study and study only two years earlier, and the amount of spam has only continued to increase since 2004.

6 Nucleus claimed the figure was “conservative” because it did not include “the dollar expense of IT personnel, software, CPU hardware, and bandwidth hogged by spam.” However, the study also estimated that each of the 29 spam emails per day (in 2003) took away an unexplained 30 seconds of employee productivity. This number is perhaps supportable if it is attempting to take into account the fully-burdened costs of all employee time devoted to email, from IT SWAT teams to administrative assistants.

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Pitney Bowes, in the “Mail Preference Study,” points out that “[c]onsumers are becoming more and more inundated by unsolicited new product announcements, sales pitches and product offerings through multiple channels, including e-mail, mail, and telemarketing.” (Emphases added). But in one of those channels, telemarketing, there is an easy and effective way to opt out – the Do Not Call Registry. And email appeals to consumers have become highly regulated. The DMA’s opt-out, by contrast, is largely unknown, unwieldy, and ineffective.7 This is not an argument that direct mail become outlawed or even regulated. It is simply to say that the industry cannot afford to ignore the fact that for the man on the street, direct mail occupies an unenviable position. Direct mail is not faring as well as we’ve been led to believe. Let us not confuse a lack of political will on the part of Congress with the sentiments of the recipients of direct mail. The market, reflecting consumer demand and new technology, can do what political will cannot, as discussed further in Natalee Roan’s section on the revolutionary new concept of “Untarget Marketing.” Indeed, in our research at Remote Control Mail, we have found no more emotionally charged issue among recipients of mail, nothing that has a greater hold on their imaginations and passions, than the question of how to forever stop the delivery of mail they don’t want. As one customer put it, “No one calls spam ‘Standard Email.’ It’s just junk.” We hear stories of Standard Mail recipients who have stuffed mail and worse into bulging reply-paid envelopes and sent it all back to the unfortunate direct mailer. Postal carriers have lost their jobs because they defied company rules and heeded patrons’ demands not to deliver unsolicited advertising mail to them. These people are angry. They are real believers. So far, they have lacked only technology to effect their will. That technology is now here. Once paper mail is digitized for delivery, and the sender read by optical character recognition, an automatic rule or the pointing and clicking of a recipient are all it takes to place the recipient on a suppression file. In “The Next Inflection Point in Direct Marketing”, Natalee Roan will explain how direct mailers can actually use technology and the express preferences of recipients to mail more profitably and effectively, with less dissatisfaction from recipients. But next, some of the hard costs of receiving mail in paper form.

Paper Costs a Lot to Move, and up to 93% of Mail is Not Wanted as Paper A great deal of mail is not unsolicited, but it is unwanted. Think of the email you get: how many subscriptions do you have to emails that you guiltily delete as soon as they arrive? Mail has similar tendencies. We wanted it once, but we don’t want it right now. For example, we may like getting our favorite rock-climbing catalogs, but in Seattle we don’t climb much in January. Similarly, we like buying gifts for our wives and girlfriends from Victoria’s Secret, but we just want the catalogs to arrive before their birthdays or our anniversaries, and not once a week.

7 Aside from costing $5, the DMA opt-out lasts for five years and follows only the address submitted (if you move, you start over). And worst of all, it presents a false choice, given the capabilities of technology, of receiving all direct mail or none, with nothing in between. Because most consumers do want some direct mail, all or nothing is no improvement on all, and that’s no choice at all.

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Unwanted mail is thus a larger category that includes unsolicited mail. Some mail may be wanted but not in physical form. We might call the entire category Physically Unwanted Mail. How much of all mail is physically unwanted, and any delivery of it wasted? Below are the choices made by our customers8 when presented with mere images of the outside of their mail:

If you allow users choice, they will prevent you from delivering, and facilitate the ecologically responsible recycling of, a whopping 52% of their mail without even opening it. They’ll ask that: • • •

52% of mail be immediately recycled or shredded unopened. 44% be scanned. 4% be delivered in physical form.

Of the 44% of mail pieces whose contents are scanned, there is still a physical piece to deal with. Here’s what users start doing:

8 A quick note about the customer base reflected in this graph: these users span 80 countries, but all have a mail reception address in the United States. Users range from residential households and major corporations to military personnel, expatriates and foreign-based businesses, and baby boomer lifestyle consumers who live in an RV full time or have multiple homes. To be sure, these are segments that for the most part are highly targeted by direct mailers – they are well educated, travel frequently, earn high incomes, and have a lot of disposable income. Since most of these users have only signed up for service in recent months (Remote Control Mail was launched only in the summer of 2006) many of them have not given mailers the opportunity to catch up with their new address. Most of the mail received at their RCM accounts arrived with a yellow USPS forwarding sticker, or came from a sender they’ve contacted directly to inform of their new mailing address.

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In other words, only 7% of all pieces are ever delivered in physical form, while 93% of all mail pieces are merely shredded, recycled, or scanned – 93% are unwanted in paper form at all. With those figures in mind, let’s look at what most organizations spend unnecessarily today. Delivering mail physically is expensive. According to two studies, one by IDC and one by the accounting firm Coopers & Lybrand, the cost of delivering an envelope to an enterprise is between $.35 and $1.00. But if 85% of all mail delivered to named employees is not wanted in physical form, you need only multiply the number of pieces of mail that your named employees receive by 85% and then again by a conservative $.50 to get a sense of the daily waste incurred by your company in delivery alone of employee mail that’s unwanted in paper form. Enterprises also receive process mail – e.g. invoices, contracts, and checks – which can be handled the same way every time. We call this Automatic Rules Mail. The Association for Information and Image Management (AIIM) never tires of reminding people how expensive paper is. For example, the lifecycle cost of pushing paper is over $20 per document (something that was once a piece of mail). Coopers & Lybrand estimated this cost at $50 per document – with paper filing efforts costing $20, looking for lost paper documents costing $120, and reproducing lost paper documents costing $220. We can identify the following hard costs of mail, some applicable to personal mail but most incurred by any organization that receives mail: • • • • • • • • • • • • • • • • • • •

Taking delivery Housing all organization-based recipients at their own permanent desks with filing cabinets – including housing recipients who could be fully virtual if only they had a way of timely and reliably receiving their mail Hand-sorting mail to the mail stop (or, in certain cases, machine sorting using costly equipment) Carting mail around an office Loading mail into trucks or vans Truck mail across a corporate campus Paying fees under a private express statute for crossing a public street while trucking mail across a corporate campus Hand-casing paper mail at mail stop Filing opened mail away Locating again, or losing and trying to locate (AIIM claims that employees spend 6% of their time searching for lost paper documents) paper documents that were once mail Retrieving paper documents Copying paper documents Faxing paper documents Opening the mail for someone who is traveling and reading by phone, copying, or faxing the contents elsewhere Sharing the mail’s contents with others (by courier, fax, copy, scanning and emailing, etc.) Storing with filing systems or at expensive off-site archives Paying to haul away as trash (including by households) Destroying mail Transporting mail between almost every step

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Paper Mail: Often Costly, Inconvenient, and a Dampener on Productivity Less quantifiable, but no less real, are the lost-productivity and opportunity costs exacted from an organization when only two of the three major communications media can be checked and managed either automatically or remotely – anywhere, anytime. From delivery to destruction, paper mail unnecessarily touches many non-mailroom employees: receptionists, administrative assistants, secretaries, paralegals, janitors, colleagues. The complexity of the waste is illustrated in the following example. Let’s say a legal executive, Evelyn La Post, attends a week-long international postal convention. While walking the floor of the exhibits and in the hallways between seminars with titles like “The Future of Mail,” she is able to stay current with two of the three major streams of communications in business today: she can receive phone calls, voice mails, and text messages on her cell phone, and she can receive email and efaxes by computer or phone. The result? She can also answer and return phone calls and emails, and business continues to get done. Lost Opportunities, Lower Recipient Productivity But anything sent and delivered via paper-based mail is consigned to one of two less desirable fates. The first fate is that the messages in the mail are not acted upon at all, and not for at least a week, because the pile of mail at the office will not be diminished immediately upon her return, but rather will take several days or more. In a 48-week working year, then, profitability, growth, and productivity via mail matters are all slowed by over 2% for each week out of the office, and countless opportunities and good will are lost as the request for RFP is missed, the phone call from a potential client or customer seeking information is belatedly responded to, and so on. Nucleus Research’s estimate that email spam costs a 3.1% drop in employee productivity is a useful comparable. Lower Productivity for Other Employees The other possible fate of the mail that arrives only physically, at the office, is that the messages in them are conveyed to the executive in a manner little improved from that employed by Ben Franklin’s secretary during his tenure as Ambassador to France. First, several employees sort, cart, and hand-case the mail. Then a well-paid executive assistant with a burdened cost of between $100 and $200 an hour attempts to ascertain for himself which mail is important to Evelyn and which is not, then opens and reads the mail. He then calls Evelyn to leave messages or has conversations in which he conveys to Evelyn the contents of the mail and receives any decisions of what to do with it next. Perhaps he then takes the time to deliver it to yet another employee, and so on. For the rest of their lives, each of the pieces of mail that Evelyn did not order to be thrown away will be moved around, lost, searched for, copied, trucked away, stored, retrieved, stored again, and finally destroyed, all at far higher cost – again, $20-50 per document – than if the pieces of mail had been scanned immediately upon arrival. It is therefore decidedly not free to receive mail in paper form; it costs, in fact, far more to receive and later process mail than to send it. Yet most organizations do not track the high costs of handling incoming paper mail in the same way they set budgets for outgoing mail. That means most organizations have very little idea what they are spending, and as any business process expert can tell you, if you can’t track it, you can’t improve it.

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The Environmental Case against Delivery of Mail in Paper Form The environmental costs of paper mail delivery have become increasingly difficult, and politically risky, to dismiss out of hand. A company whose business model consists entirely of a response to the demand to stop unsolicited mail begins with the trees: “Unbelievably, we chop down 100,000,000 trees and waste 28 billion gallons of water every year producing this stuff. Most of this goes straight to the trash or recycling bin.” Each year, America9 alone dumps into landfills 22 billion pounds of mail. Of the 212 billion pieces of mail sent each year, only 16% are recycled, meaning 168 billion pieces become waste, filling up and leaching into landfills. (Six billion of those pieces were delivered to addresses that were no longer valid, and returned to sender.) Of all the materials we recycle in America, the paper of which mail is composed is the least recovered. Paper as a whole is recycled at a rate of over 50% in most municipalities. With 10 million cases of identity theft a year, plus new rules from the government demanding all sorts of things be shredded after use, shredding has become an enormous industry in America, with annual expenditures of $6 billion and growing fast. And yet when we informally poll office workers, we don’t find any who know that shredding paper also destroys its ability to be recycled into new office paper. In fact, most people don’t even know that the fiber in paper that isn’t shredded can only be remade into new paper 3 or 4 times before the fibers break down too much. That means that each year, Americans finance the felling of enough trees to make another 168 billion pieces of mail that will never be recycled, and billions more that may be recycled into something less than new printing paper or office paper. For every ton of paper we do not recycle, we increase the air pollution produced by new paper production by 74%, and water pollution by 35%. We also put more toxic ink, formaldehyde and other chemicals in landfills. For every ton of paper we do not recycle, we lose 204 trees and consume 8,190 gallons of oil. The cost of mail, in trees, oil and gas, landfills, and carbon emissions is becoming a matter of increasing urgency. Just as recycling saves oil, fewer last-mile and last-cubicle deliveries mean lower fuel usage and reduced carbon emissions that contribute to climate change. Like the political will that preceded the U.S.’s seminal environmental statutes of the early 1970s, interest in the environment is once again back on the radar. Corporations, universities, and government agencies at all levels are introducing a dizzying array of serious green initiatives. One of the Universal Postal Union’s five prime objectives is environmental sustainability, and in a recent report the UPU noted some leading industry efforts in that direction: The postal sector may also be influenced by public policy in such areas as ‘sustainable development’ [regarding] such issues as energy conservation, recycling, or other socially responsible activities. United Parcel Service (UPS), a leading global integrated nonpostal operator, provides an annual report on its contributions to the environment, and in the United States the major delivery services (the Postal Service, UPS, and FedEx) are all operating alternative fuel vehicles.”10 9

America constitutes little over half the mail volume of the world, so the global impact is roughly double these figures. Universal Postal Union, “The Future of The Postal Sector in a Changing Global Environment – 2012,” First Draft Report, April 2006, p. 8. According to the Department of Energy, the Postal Service’s mail-related activities alone, not including aviation fuel usage or the fuel consumed by 800,000 postal employees commuting to work each day, amount 10

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Corporations outside the paper-based industries are leading the way. At Sun Microsystems, for example, the company actually employs a Vice President of Eco Responsibility with a dedicated staff. Six years ago, Sun formed an Open Work group that facilitates a remote worker workforce with 50-75% participation, and which has saved the company $300-500 million over the last five years, including annual savings of $70 million in real estate, construction, and leasing, $24 million in energy costs, and 30,000 metric tons of CO2 emissions into the atmosphere.11 Wal-Mart recently announced that next year it will require consumer electronics suppliers to fill out a "sustainability scorecard" on their products’ energy efficiency, use of toxic materials, and packaging size – and will use the results to choose which electronics appear on its shelves. Last but hardly least, the messaging juggernaut that is the entertainment industry is also hard at work. From the runaway success of the documentary “In Inconvenient Truth” to about a dozen recent and about-to-be-released movies, the film industry is returning to an environmental consciousness of the kind that led 1979’s “The China Syndrome” to exert such a huge impact on the nuclear power industry. As one screenwriter put it, the environmental ethos is already “obviously leaking into the popcorn movies,” the blockbusters. The traditional villains – Soviets, “drug lords, aliens, North Korean dictators, even the news media” – are being replaced by the anti-environmental corporate predator.12 Saving Trees, One Letter at a Time If we were to recycle 100% of our mail (a task made easier by receiving, digitizing, and destroying it in a centralized, secure location), we'd save over 200 million trees and 8.2 billion gallons of oil per year. We'd reduce our landfill consumption rate by 5%. Whereas mail on average is recycled at a rate of 16%, customers of Remote Control Mail™ online postal mail recycle on the order of 85% -- an increase of over 530%.

The Future of Paper What mail delivery will survive? Packages, of course, as well as high-quality, highvalue, personalized printed matter, such as catalogs, greeting cards, magazines, and any item with sentiment attached to it. People just do not prefer to receive their sentiment electronically. DVDs and CDs will continue to be delivered, until the improvement of streaming and storage technologies, respectively. The UPU has defined six markets “in terms of the tasks that customers are attempting to accomplish.”13 I list the four not relating to packages or business and public services below, along with an assessment of the degree to which physical delivery will survive. to over 30 trillion Btu per year, making it the third-largest consumer of energy of all government agencies, behind only the Departments of Defense and Energy. “U.S. Government Energy Consumption by Agency and Source, Fiscal Years 1995 and 2005,” http://www.eia.doe.gov/emeu/aer/txt/ptb0113.html. 11

Rachael King, “Working from Home: It’s in the Details,” Business Week (2/12/2007), (http://www.businessweek.com/technology/content/feb2007/tc20070212_457307.htm); telephone conversation with Mark Monroe, Sun’s Director of Sustainable Computing, March 6, 2007. 12

Michael Cieply, “On Screens Soon, an Abused Earth Gets Its Revenge,” New York Times, March 12, 2007.

13 Universal Postal Union, “The Future of The Postal Sector in a Changing Global Environment – 2012,” First Draft Report, April 2006, p. 17.

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Market Business and personal communications (documents and letters) Financial Transactions (bills, statements, payments, and remittances) Advertising (commercial information soliciting a response) Information and Entertainment (publications, periodicals, and other media, including DVDs, tapes, and other items)

Physical Delivery Most paper-based business communications, and some personal, will not be delivered physically but electronically. Will largely be supplanted by electronic transactions. Technology will allow recipients to choose to receive and process such mail electronically These will continue in physical form, but will decline as both technology improves and user acceptance of electronic display increases

Most observers believe non-Standard Letter Mail will continue its steady decline. The UPU itself says “technological substitution, at some unforeseeable future stage, is likely to threaten letter growth.”14 While there are spots around the world where letter volume is still growing because their economy is surging (e.g. Vietnam), for most modern countries letter volume has been shrinking 1.5% to 4% per year for the past five or more years. People of all ages, but particularly the younger generations, have long ceased sending personal messages through First-Class Mail. Teens and twenty-somethings are reading newspapers far less than any generation before them. “[I]n many countries, readership is actually declining as customers turn to other sources for news, information, and entertainment.”15 With each new generation, comfort with electronic reading and transactions grows, and distaste for unnecessary paper keeps pace. Paper billing statements will largely, if not completely, die out. “Checks are rapidly being displaced at the point of sale by a variety of technologies and services, and alternatives such as Electronic Data Interchange, Electronic Bill Presentment, Pre-Authorized or Direct Debit, and Electronic Bill Payment all limit the prospects for future growth in this market.”16 On the subject of Electronic Bill Presentment and Payment (EBPP) we found a wide disparity between consumers’ perceptions and the reality in their mailboxes. While, a high percentage of high-income people who have high-bandwidth Internet connections pay their bills online, few know that many of these bill-pay services actually put a paper check in the mail on the back end (30 billion still fly through the mails annually in the US). In truth, most credit card, mortgage and banking institutions offer electronic billing in addition to, and not instead of, paper billing. This duplication is customary for two reasons. First, email is an insecure medium. Banks mail a notification with a link to their website, where users must remember their usernames and password. These are often ignored, or even trapped in spam filters, and many bank CFOs and regulators think email statements are a convenience but not a substitute for mailed statements. Second, of all the forms of direct-mail marketing, the advertising which accompanies bills inside First-Class mail envelopes is extracted 42% of the time – by far the highest opening rate of any DM campaign. The marketing departments at these companies are loath to give up such highly productive advertising, especially when the postage is already being paid for by the 14

Universal Postal Union, “The Post – Emerging Issues and Trends,” 2002, p. 5.

15

UPU April 2006 at 19.

16

UPU, April 2006, 18.

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accounting department. And thus many categories of transaction mail are indeed continuing to grow with the growth in population and credit utilization in the United States. But as the number of these “mail opt-out” customers who want to stop to paper flow grows, eventually even these stalwart mailers will begin to back off their volumes. Many will find electronic contact methods that may be even more productive. The postal industry also has no natural immunity against a phenomenon that affected the phone industry. In Europe, cheap cell phone rates took enormous market share from Europe’s expensive land lines. To an even greater extent in Africa and South America, cell phone towers have become fixtures in lands where no land line infrastructure had ever existed. Similarly, many regions of the world will have Internet communication before they get mailing addresses and postal service. Indeed, the same countries that erected cell towers are now enabled to receive postal mail wirelessly, on a cell phone interface. Once wireless phone or computer access is available in a region, a postal operator would have far less incentive to establish letter-delivery infrastructures in that region. An example of this is Mongolia, where due to the nomadic nature of native tribes, the post office is very progressively seeking electronic means of keeping up with their customer population.

Conclusion It is very expensive to receive, in paper form, even mail whose message the recipient wants. The costs to the recipient’s time, the receiving organization, and the environment are significant – far greater than the cost of spam, which is both illegal and motivated a $5 billion anti-spam software industry. But the vast majority of mail is not wanted physically. Given a choice, most organizations and recipients would rather receive their mail electronically, where its expenses, ease of handling, and convenience are more similar to email. And if enterprises, posts, and mailers are to prosper, they must move to give recipients just such a choice. In the next chapter, I discuss how.

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Remote Control Mail™: The First True Execution of Online Postal Mail By Cameron Powell

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The reader will not be surprised to learn that Document Command believes its online postal mail delivery service, Remote Control Mail, to be just what the cost-cutting, remoteworking, and convenience-seeking organization has been looking for. Today, Remote Control Mail begins its work to reduce costs and environmental impact after all the mail is delivered by the post office to a final destination. Once the mail piece exits the postal system, our work to transform it onto the web begins. In later chapters, by Mike Miles and Ron Wiener, respectively, you will read how this infrastructure can be implemented at the national post level, where the mail recipients can see and manage their mail from the moment it is first imaged shortly after pickup by the post office. But for now, let’s look at how a residential consumer or enterprise employee would use it today.

Choose one or more addresses where you’ll want to receive your mail Customers can have their mail enter the Remote Control Mail system one of two ways: • •

Use one of our “DCI Remote Addresses,” available now in 18 cities, and more to come shortly,17 just like they would use a PO Box address, or Place their mail on “firm holdout” with the USPS and assign us as their agent to pick up and process their mail daily (typically this would be for enterprise customers).

Personal, Small Business, and Enterprise Departments: Using DCI Remote Addresses Mail sent directly to a DCI Remote Address will be securely handled by DCI or a participating presort bureau in its contracted production network. Enterprise customers can have it both ways – they can have some mail continue to come to their existing addresses and some come to DCI remote addresses. For example, they may wish to arrange to have the mail of certain departments, remote workers, or any standardized, transactional mail sent to a DCI Remote Address. The advantages of using a DCI Remote Address include a low cost for your back-end mail processing, reduced costs of final storage at DCI’s National Archival Center, and elimination of both any need to purchase or maintain mail sortation or scanning equipment or to train employees in mail handling and scanning. The security and confidentiality assurance systems employed at DCI Remote Addresses are also state of the art. Users of Remote Addresses will need to complete a USPS Form 1583 – this is the USPS’ means of having you to authorize DCI as your Commercial Mail Receiving Agency. The form itself will not redirect your mail, however; you must do that by notifying mailers, as discussed in more detail below. Other Enterprise Accounts: Your Own Addresses, Employees, Vendors Enterprises have the additional choice of having their mail continue to arrive at their current operational addresses. Some enterprise users of Remote Control Mail may choose to use their own addresses in order to maintain full on-site control over their documents; some enterprise departments may be extra-sensitive about the security of certain documents and wish them to be handled only onsite, and perhaps even exclusively by their own employees. In any case, mail sent to an enterprise or its post office may be handled by the enterprise’s own employees, outsourced mailroom organizations such as Pitney Bowes, Oce’, or Xerox, or again, any of the 17

Document Command currently has remote addresses available in Atlanta, Baltimore, Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Newark, Philadelphia, Phoenix, Portland, Richmond, San Francisco, Seattle, St Louis, and Washington, D.C. More addresses are being added continuously.

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participating presort mailers in our contract production network that may be found in the largest cities in the United States. Whether you send you mail directly to a DCI Remote Address or to an address of your own, you are now ready to exercise full control over who uses that address and when.

Selectively Notify Mailers of Your New Addresses Use of Remote Control Mail does not preclude use of your existing addresses. Instead, you now have the power to choose which address to give out, and for what purpose. You might place the new address on a reply card, in the return area of an envelope, or in an email signature. You might write a letter or tell someone on the phone, “I know you usually use our standard street address for mail, but for purposes of sending X and Y types of mail, please use the following address . . .” The address will look like a regular address, but for a pound sign (#) and number, which we call the “RCM number”: Joe Postale #2215 14525 SW Millikan Way Beaverton, OR 97005-2343 This RCM number, when read using optical character recognition (OCR) together with your name or company name, will tell our software which online account to place your envelope image into, as well as where the physical piece should be cached while awaiting your command. Multiple RCM numbers may be established for segregating mail by department, for example, to reduce workflow later.

Let Your Mail Be Uploaded to the Internet While You Sleep, Travel, or Work Discretionary Mail – mail that is addressed to a named recipient and that requires some discretion over how to handle it – always goes through the same process: The image of the sealed envelope is presented online to await the recipient’s disposition. Most mail sent to employees is Discretionary Mail. On the other hand, Automatic Rules Mail – standardized or workflow process mail that is handled the same way every time – usually takes a pre-defined or automatic route. Without any need for a request from the recipient, it may, upon arrival, be instantly opened and scanned and the scanned contents uploaded to the Internet for review, or piped directly into an electronic records system of some sort. A typical large organization may have one or two hundred different “ECM” (Enterprise Content Management) systems, and each can have its flow of paper records auto-routed as captured images, straight from the mailroom, when coded with a specific RCM# or department name that OCR can translate. Log On and Command the Handling of Your Mail If you are a personal or small business user or enterprise employee to whom mail is specifically addressed by name, you will soon get an email that alerts you to new Discretionary Mail in your account. As for Automatic Rules Mail, an employee in, say, accounting may simply have that department’s account open all day, checking regularly for new already-scanned invoices to file or forward, and for checks to approve for deposit. You determine the frequency of these email alerts: in real-time, once a day, once a week, and so on.

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Either way, by means that are fully within your control, you are notified of how many new mail pieces are in your account. You click on a link in the email to go online, where the online interface may say “Remote Control Mail” or feature the identity of the user’s employer, or the outsourced mailroom management company (e.g. Pitney Bowes, Xerox, or Oce’). Once in your browser, you can see the envelope images of your mail. These images will almost always contain enough information for you to make a decision as to what to do with the entire mail piece.

On the online dashboard above, you can see the following: • • • •

• • • • • • • • • •

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The images of the envelopes you have received. Most of the time, the sender is visible in the view above, but clicking on the envelope will magnify the image, and clicking again brings it to life-size. The sender, in text form (see the “From” column). A description of the piece and estimated pages and weight. A history of all actions taken on the piece, by your or anyone who may have transferred it to you. You would then have the following choices: Transfer to a colleague an envelope image and responsibility for the associated mail piece Shred or recycle the mail piece without opening it (preferred 60% of the time) Open and scan the mail piece Deliver the mail piece to your desk Forward-ship the mail piece to another location or person or both Archive the original document / mail piece Shred or recycle the opened mail piece Archive the scanned contents in our enterprise content management system or one of your own Mark up (maybe even apply signatures digitally to) a document and have it returned to the original sender by email, mail or fax. Approve, for instant deposit at the bank of your choice, a check

The Impact on Consumers and “Prosumers” For individuals, online postal mail promises greater freedom, security, and convenience. Online postal mail is a critical means of staying connected for road warriors, leisure travelers and RVers, retirees, multiple-home owners, expatriates, and more. It's a solution for P.O. Box seekers who can’t get a P.O. Box at all because their post office has no more real estate. It’s a substitute for those who want the features of a P.O. Box but don’t want to have to drive to check a post office box that's empty or full of only unwanted mail, if they’re even in town to check it. Users can stop worrying about missing important mail. They can greatly reduce late payments, associated fees and credit problems, and identity theft.

The Impact on Businesses If you allow the user real choices, including scanning, closer to the source of mail, you slash these costs. What is the source of mail? The mailroom. Leave the mail in the mailroom until a decision, or automatic rule, tells you what to do with it. Then, on the smaller amount of mail left over, process it according to those decisions and rules. (How do you allow choice by a user while the mail is in a distant mailroom? That’s the secret sauce, though we’ll be happy to share our recipe with you if you call us.) The results are the converse of the costs that were discussed in more detail in the last chapter: Cut delivery costs Why deliver, hand-case, sort, and cart for delivery the 85+% of Discretionary Mail not needed in paper form at all? Cut cartage and destruction costs Why pay someone to pick up and transport for destruction this same mail when it could have been destroyed in the same building in which it arrived? Cut sorting, delivery, and opening costs of Automatic Rules Mail Why pay people to open and debate how to process mail when automatic rules can be set to recognize the sender and address and do the right thing every time? Cut document handling, searching, copying, and sharing costs A digital image is weightless – and waitless. In addition to being easily searched for, and difficult to lose, it can be instantly retrieved. It can be instantly shared with others, without need for additional copying, and without charge. Why scan mail at the end of its workflow, too late to garner the benefits of digitization? As Cisco’s white paper, Connected Workspace, puts it: Paper is an enemy of mobility... Workplace resources represent the largest operating expense in most companies after salaries, so this translates to substantial cost savings. Cut check-handling and manual labor costs And why on earth cash checks the old-fashioned way? Congress’ Checking for the Twenty-first Century Act (“Check 21”) makes digital checks quickly and cheaply cashable. Your

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cash goes to work faster. Recovery rates are higher (you get faster notification of bounces), and security is greater (fewer hands handle checks). Slash real estate, construction, and leasing costs while reducing time wasted in commuting The office has left the building. More and more employees work away from their mail stop: they’re mobile, telecommuting, or employed by outsource vendors. Even “office workers” are spending more time working from home and on the road than ever before. Remote workers (those working remotely at least 8 hours a week) in the U.S. are expected to increase to 51 million and 27% of the US workforce by 2008. 17% of workers will work remotely at least 16 hours a week by 2009. “The global mobile worker population will increase 7% a year between 2004 and 2008 to 850 million people.” 18 Business Week picked up on the trend in February 2007: “Benefits of letting employees work from outside the office include keeping cars off the road, helping a company to bolster its green bona fides. But the practice can also foster employee retention, boost worker productivity, and slash real estate costs.”19 How does it work? Companies like Capital One are showing the way: “’Nearly 1,200 100% mobile people are assigned to a space that's built for just over 600,’ says Dan Mortensen, SVP, Corporate Real Estate, Capital One. One way to save on office space is to encourage employees to work at home, or in the field. When they do come in . . . mobile associates take whatever space is available.”20 The savings from virtual work programs have been phenomenal. IBM’s 42% remote worker rate saves $100 million in real-estate-related expense a year. As noted in the last chapter, Sun’s Open Work Group has saved Sun $300-500 million over five years.21 But their innovation and cost-cutting are stymied in exactly one respect: how to get postal mail to employees who are now playing musical chairs? Online postal mail is the answer. It also facilitates employees’ storage of documents they bring in from the field, when they have no permanent office or file cabinets. They can mail those documents to themselves (via interoffice mail), receive their envelope remotely, and order the contents scanned into electronic images than can easily store in databases. Increase employee productivity Employees’ productivity is boosted while they’re in the office or away, while working or on vacation. There are many commonplace workforce considerations that online postal mail anticipates and addresses efficiently and cost-efficiently. For example, remote, telecommuting, or “hoteling” employees can access their mail without the expenses of real estate, desks, and file cabinets. And when employees can access mail remotely, as they do phone calls and email, their 18

Goldman Sachs analyst report on Regus Corporation, October 2006; Teleworking: The Quiet Revolution – 2005; IDC Worldwide Mobile Worker Population 2005-2009. 19 Business Week, February 12, 2007 (http://www.businessweek.com/technology/content/feb2007/tc20070212_457307.htm?chan=technology_ceo+guide+to +technology_online+video). 20

As quoted on NPR (http://marketplace.publicradio.org/shows/2007/02/13/PM200702139.html)

21

Business Week, 2/12/07.

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productivity increases and opportunity costs decrease. Personnel costs fall too, as the ultimate recipient handles his/her own mail instead of depending upon a support team to open, read, and fax or file or respond to it. And once mail is digitized, offshore or remote resources can be productive with it. For example, an outsource accounting firm can use CPAs in India, on the opposite time zone, to process new incoming documents and remittances in less than 24 hours. A catalog company can have its mail orders processed same-day by telecommuters or outsourced employees, and ship those orders the same day or the next day instead of a week or more later. Disaster recovery and business continuity Whether after disaster or during remodeling, communications must survive unavailable facilities. If a building becomes unusable, the postal service is unable to route around chokepoints or adapt to the new location of your employees. Online postal mail, however, is as independent of location as email – delivery can be changed with the flick of a switch. Employees can become productive again instantly in the wake of a disruption to facilities. Get Green Both businesses and consumers can begin to recycle over 500% more of their mail – 85100% as compared to the 16% of mail recycled today. They can also reduce miles driven, gas used, and carbon emissions – saving money, trees, and the environment. For all the above reasons, Remote Control Mail is the future of much mail’s delivery.

Contact Cameron Powell at [email protected] for more details.

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“Untarget Marketing” – The First Dramatic Inflection Point in Direct Mail Marketing Since the 70’s By Natalee Roan

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A Brief History of Inflection Points in Direct Mail Marketing Since the 1970’s Over the past forty years there have been four major inflection points – times when the evolution and growth rate of the direct marketing industry experienced a fundamental shift. The most significant – the tipping point, so to speak – was in the mid 1970’s. Ever since then there have been inflection points caused by external events like Congressional acts or terrorist acts, but there hasn’t been a truly sweeping change to affect the industry since the 70’s. That is, at least not until now, with the development of “Untarget Marketing” discussed later in this chapter. Inflection Point #1: Direct marketing did exist prior to the 1970’s, but it was minor in comparison to what occurred in the 1970s. The industry experienced a perfect storm of the following nearly simultaneous developments: -

The trend of women going into the workforce in large numbers;

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The flourishing of the list rental industry and development of list standardization and “merge/purge” software (at the time running on mainframe computers);

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New printing technology that reduced the cost of catalog and other DM formats;

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Creation of the zip code system and automation discounts for bulk mailers;

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Congressional approval of the USPS worksharing program which led to the spawning of what is today a billion dollar presort industry;

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The creation of new core competencies at advertising agencies to provide expertise in direct mail marketing and direct response print advertising;

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An economic recession that forced marketers to look for more cost-effective methods of generating new customers.

The result was a slow and steady buildup of the direct mail and catalog industry which is still exhibiting good momentum today. One of the reasons marketers like direct mail, or “DM,” is that its results are more measurable than TV, radio, newspaper and other traditional forms of advertising, it is often more scalable, and both costs and results are more predictable. For at least the two decades after the 1970s, things went swimmingly for the DM industry… every year was bigger than the last, and the most target-worthy audiences kept getting targeted more frequently and by more marketers every year. Sure, there was talk of “oversaturation of the mailbox” (reducing response rates for everyone) and “99% waste to get 1% response” (impacting the environment), but our job as marketers was to grow the business, and grow it we did. Commercial printers, ad agencies and list rental industries all thrived, and the Postal Service road the coattails of this new economic boom. Inflection Point #2: Along came the Internet and email in the late 90’s. The fast growth of this new medium led many ad agencies and marketers to decide that it was easier and cheaper to scale growth by using email prospecting than printed DM, leading to some hot IPOs and even hotter controversies over companies that generated response lists and compiled lists of email addresses. The spate of new promotional “junk mail” that appeared in people’s Outlook inboxes and slowed down their productivity led to the coining of the term “Spam,” adopted from a Monty Python skit. The fear 44

of spam’s effects on business was a well-founded fear, as we learned in Cameron Powell’s section. It eventually led to a condition today in which 60% of all email is spam, spawning a $5B anti-spam software industry. As ad agencies and marketers reconstructed themselves and shifted their prospecting activities to email marketing, a few visionaries even started buying up keywords on the search engines that sold them. Mostly people bought banner ads at outrageous CPMs because it was a land grab mentality, and if your company wasn’t spending a lot “per eyeball” someone else could grab the land and leave you out on the open waters without a raft. What is today referred to as “Web 1.0” was a time of suspension of economic reality and, as Alan Greenspan put it, an “irrational exuberance” about dot-com valuations. The commercial printing industry felt a crushing impact. Those who could shift their services to web-related did so, but thousands folded after being unable to service the debt of all the new press equipment they had just purchased for the prior boom in direct mail printing. At the October 2005 meeting of the Direct Mail Advisory Board in Bern, Switzerland, Luis Jimenez, SVP and Chief Strategy Officer of Pitney Bowes, shared the following graphs with the audience.22 While many marketers and industry pundits were tracking email as the bellwether of a potential impending decline in direct mail budgets, the real dollars were being spent on banner ads, sponsorships, and keywords. Later, keywords would dominate as “SEO Marketing” (Search Engine Optimization) went from a black art to state-of-the-art.

22

www.upu.int/news_centre/2005/en/paper_2005-10-11_pitney-bowes-dmab_en.pdf

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Mail volume growth rates in the meantime were trailing off from the boom of the 80’s, as one can see in the previous graph. And as the graphs below suggest, even advertising mail volume, that savior of the industry to many, did not grow as the USPS had predicted.

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And, then, we reached the next inflection point… Inflection Point #3: The attacks of 9/11 put a huge damper on the economy, which was followed by the double-whammy of the Anthrax scare. Suddenly, people became afraid to open their mailboxes, and direct mail response rates took a hit. Companies’ immediate knee-jerk reaction was to reduce print mailings, a reduction that one can see clearly in the actual volumes for 2001-2003 (see previous graph), especially when compared to the predicted line of growth. The USPS predicted that in 2002 there would be over 100 billion pieces of advertising mail when in actuality they only saw 87 billion come through, creating a revenue shortfall in postage alone of at least $2.4 billion. The mail presort industry also took a big hit, and from two flanks. In a general environment of gradually declining First Class mail (due to Internet cannibalization) which was survivable on its own, a larger hit came from commercial printers, who decided to make mail presort part of their service offering, stealing USPS worksharing business from traditional presorters. With the mix of mail being about 50/50 between Standard and First Class, many presorters lost half of their mail volume and at least a third of their revenue as they were left predominantly with First Class mail. Again, we saw significant financial unraveling in this sector as equipment purchased for the boom of the 80’s and early 90’s could no longer justify its debt load. Presorters were running into financial trouble so quickly that Pitney Bowes managed to “roll up” 40% market share in a couple of years by going mainly after “value acquisitions.” This turned out to be good for Pitney Bowes, where the network effect could be leveraged, but has made market conditions even tougher for the remaining independents. Inflection Point #4: How often do you hear something like this: “Then along came Congress and saved the day!”? The passing of the CAN-SPAM act, which made it a serious federal offense for a legitimate US company to use unsolicited email for prospecting new customers, did practically nothing to reduce the now exploding volume of spam e-mail, since most of it comes to us from overseas where our laws don’t have any effect. But the impact on direct mailers was powerful. The valuations of previously spectacular dot-com stocks took a huge tumble anywhere Wall Street perceived an impact from CAN-SPAM. And yet the Act is often credited with restoring faith and prosperity to the DM industry. But probably a far bigger contributing factor to the restoration of the DM industry was the creation of the FTC’s Do-Not-Call registry, now with over 100 million subscribers who have said, with a mouse click, “Don’t call me at dinnertime to sell me something - In fact, don’t call me ever!” Advertising by mail was back, and all of those laid-off direct mail campaign designers, managers, printers, list brokers, etc, came back to work, as you can see in this next graph:

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There were even some contrarians in the marketing world who believed that the ultimate opportunity was to leverage BOTH internet and direct mail marketing in so-called “integrated campaigns,” and, as it turns out, they were the visionaries who discovered that they were able to get ROI as much as 2x better by combining both mediums in simultaneous shots. So is everything hunky dory again? Absolutely not! Appearances can be very deceiving, so I’ll understand if you think that graphs don’t lie and the trends are solidly in favor of DM continuing to beat the Internet at the direct response game. But as Chris Kwak points out in his chapter, growth in Internet advertising spending is skyrocketing while growth in print DM is growing at relatively modest rates. And DM may soon be facing even greater headwinds from the environmental movement, another postal rate increase, and most importantly, more attractive new options for Internet-based marketing than ever before, just around the corner. Inflection Point #5: In the next year or two we will see the beginnings of the next major inflection point, what we at Document Command call “Untarget Marketing.” Let’s face it, we’ve extracted about as much improvement in response rates as we’re ever going to get by making finer and finer adjustments to our DM prospecting engine controls: list selection, merge/purge rules, suppression files like DMA’s MPS, geomapping, copy and format testing and other tricks of the trade. The reality is that most marketers don’t ever see 1% overall response rates in their prospecting campaigns, and the clutter in the mailbox is increasing faster than the population rate or the economy, and therefore our response rates are only going to continue to be a challenge to improve.

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Enter Remote Control Mail™ – Part I: Untarget Marketing If you’ve just recently learned about Remote Control Mail, you could be excused for not perceiving that the power of a database of mail-recipient behaviors is going to be a game-changer for mailers of all types, but especially for direct mail advertisers. Why? Let’s start with the demographics of Remote Control Mail users: On the B2C side, they are typically top-of-the-pyramid targets: affluent, well educated, high-bandwidth Internet users who travel frequently and generally get a lot of mail. While their numbers are just starting to grow, they represent the crème de la crème of DM prospects. On the B2B side, they work for some of the most progressive companies in the world. As happened during the introduction of the fax machine and cell phone – which started at the workplace – enterprise employees will start by experiencing Remote Control Mail at work but will soon bring it home as well, as they key into the benefits of paperless postal mail. Exactly what is in Remote Contol Mail’s database? When a Remote Control Mail user requests that a mail piece be shredded or recycled, she will soon be given the opportunity to give us one-click feedback as to why she wishes to destroy it without opening it first. What happens today in the physical world is she just tosses it in the trash or recycling bin. Having no relationship or a very weak one with the mailer, she is not going to bother to call, send a letter, or try to find a “take me off your mailing list” button on the mailer’s website. (Of the top 100 catalog companies, we could find none who has the foresight to make unsubscription to their print catalog easy, though every single one offers an unsubscription to their free-to-distribute email campaigns – where are their CFOs hiding?) So the marketer has no way of knowing which of the 99% of their targets tossed the catalog without even looking through it, and certainly not – and this is at least as important – why. Because of the revenue protection scheme of the list industry, marketers aren’t allowed to collect and use the names of one-time rental prospects. Even if the target prospect bothered to call their customer service department to request to be “taken off the mailing list,” most of the time the prospect can’t be found in the house file database and so her request is typically forwarded to a department that will ignore it. A few enlightened mailers recognize the economic benefit of taking that name and placing it on a suppression file, and actually complying with federal law (that is practically never enforced) which requires them to keep that name on a suppression file for five years. But the sad fact is that most direct marketers don’t want to hassle with it, and take the unproductive hits as part of the cost of doing business, justifying it to themselves with the delusion that hitting a prospect who doesn’t want your catalog twelve times a year is really just “branding” and “investing in future business”. There’s no statistical proof that this is true, and (until now) there couldn’t be, because mailers don’t know the identities of the legions of hoped-for prospects didn’t want their mailings! How many times have you yourself noticed that a certain mailer continues to send you promotions, month after month, year after year – and for certain credit card companies, week after week – even though you’ve never once requested it or responded to any of it (or even if you’re already a customer of that bank or credit card)? For most of us, this is a frequent experience. Because we’re in the industry, we know that we’re being targeted because the mailer is renting a productive list from another marketer, and we happen to be a good customer for that other marketer (not that we could ever find out which marketer keeps renting our name out). If there was a way around this problem we wouldn’t be throwing good money after bad and tolerating sub-1% prospecting response rates, would we? Of course not. But how do we prevent it? Soon Remote Control Mail is going include the UnMailMe™ list removal feature – the #1 requested feature by all Remote Control Mail customer segments – residential, enterprise and

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government – which, for marketers, represents the next big inflection point that promises to bring higher response rates than we’ve seen in many years. There are at least three ways that UnMailMe will boost your response rates including one which is specific to individual recipients and one which is based on anonymous demographic data. Method #1: Get Information about why prospects destroy your mail. When a Remote Control Mail user makes a choice to destroy a mail piece, we will ask them to make a one-click selection on why they are doing so and ask their permission to forward this information to the sender of the mail piece. The selection could include such reasons as: ¾ This person doesn’t live here anymore ¾ My address has changed, please update it ¾ We get duplicate copies every time ¾ I like this category, but not this company/offer ¾ I don’t like this category at all ¾ I like this company/offer but I only want it during specific times of the year We will take this information, along with an image of the mail piece (which we already had in our system) and forward it to the mailer, as a free service to our customers. And it’s even free to participating mailers. Why provide it for free to mailers when these names, once added to your house suppression files, will result in a profitability boost for your campaigns in the future? Simply to encourage you to put the UnMailMe button on your website to further increase your Untarget Marketing potential. We will also offer this list of specific unsubscribe requests, as a suppression file for rental by marketers through their service bureaus, which will impact not only your prospecting campaigns when selecting your next mailing list, but even your house file as described below. Note in particular the last selection above: “I like this company/offer but I only want it during specific times of the year.” Document Command is the first company to collect temporal, including seasonal, preferences from customers. For example, if you live in Seattle and love golf, golf catalogs sent during the winter months may nevertheless be entirely wasted on you. With UnMailMe, you could tell the mailer to send the catalog only between April and October. Many people only make donations to non-profits at the end of the year. With UnMailMe, they’ll be able to tell Doctors Without Borders that they only want to receive solicitations in November or December and be able to tell them that anything else would be a waste of precious funds for the organization. Since most mailing list management software has no provision for temporal preferences, Document Command will offer this list to mailers as a suppression file so they can even filter their own house file before mailing, once again improving their overall response rates. Method #2: Find out the demographics of who is reading vs. destroying your mail pieces. Wouldn’t you love to know the demographics of people who are generally not interested in your offers, and be able to suppress those segments when you rent prospecting files? Sure, we have state-of-the-art demographic profiling services that can take your house file – comprised of the sub-1% that responded to your prospect mailings – and tell you what they look like… but what about the other 99% who didn’t respond? There’s gold in that information, if only there were a way to get it! Well, the good news is that now there is. 50

Document Command has developed pattern recognition software that can compare your outgoing mail piece to every envelope image we capture in our system. That means we can identify which customers received your mailings and give you click-stream intelligence on who opened it or had it forwarded, and who destroyed it without opening. For the first time ever you’ll know not just who, specifically, to deselect from future mailings (assuming they clicked on the UnMailMe request and gave us their express permission) but you’ll also be able to know the anonymous demographic data of the people who did not respond. You can take those demographics – say, specific age groups or genders in specific zip codes, for example – and use them to make deselects on lists your rent for your next prospecting campaigns. Voila, instant boost in response rates. Method #3: Learn which mail pieces have the best “read” rates faster, cheaper, and more accurately. Every Internet marketer can know instantly what people are reading on a website, where they are clicking, and when they leave. She can know which copy or banners created action and which left them cold. And she can conduct A/B split tests of copy or imagery to see which works best, select the winner, and then test it against another contender, all the while watching response rates and click-through rates inch up to their natural ceiling. A traditional direct mailer has much less visibility to this behavior, and none of the data we are able to gather via DM testing arrives instantly so that feedback can be immediately placed into action. But a direct mailer whose mail is received online can, of course, know exactly as much as the data-filled Internet marketer: which envelope size worked best in getting the recipient to open the piece without immediately shredding or recycling it, which logo, which copy on the front, and so on. With each new piece of data, the pieces can be improved, and the response rates will go up.

Enter Remote Control Mail – Part II: Electronic Delivery of DM Campaigns Once the population of Remote Control Mail users grows to a substantial level we will offer marketers the ability to insert their mail pieces into our electronic delivery system as “prescanned content”. That is, users will not be charged for opening your direct mail pieces and having them scanned – they’ll be able to receive them in paperless digital form, from you, directly in their Remote Control Mail accounts, which they typically check daily. To be clear, this is not an illegal email solicitation, but a fully invited reception of your direct marketing offer through the user’s own secure online mailbox. “Invited” because users will have to opt-in to receive these direct response offers through their Remote Control Mail accounts. And why would we do that? Because you’re going to pay them for their time. Many schemes to offer micropayments to DM recipients have been tried and failed. Remember when marketers used to tape a quarter into the offer letter, shown through a glassine window, to entice people to open the envelope? Of course there have been plenty of online solutions to this problem, which have pretty much all failed because complicated systems were needed to track “points” or other ways of accumulating dollars and making payments to the prospects. Most of these systems got gamed and hit with massive fraud before finally shutting down. Remote Control Mail users, on the other hand, have two big distinctions from the general audiences targeted by these other schemes. First, they pay significant money for their service and they have to file a USPS 1583 CMRA Agency Form with us – which includes getting it notarized

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and supplying two forms of solid ID- - no small hurdle. Aand once they do so they know that we and the USPS Postal Inspector know their identity, so the dire consequences of attempting to commit any sort of fraud make it unlikely they would ever try. Second, because they pay for their account with a credit card, we are able to keep a credit balance for them in our system – which means if a marketer wants to offer a target prospect $0.20 to read their offer, we can easily transfer such micropayments to their wallets. That is impossible anywhere else in the mail world. As the system evolves, we will offer marketers more robust “rich content” options that will track how many screens the customer has clicked through, and other means of capturing what caught their interest, or even capturing their specific information to forward back to the marketer. The result? Marketers will be able to pay extremely small amounts to solicit interest from these top-tier prospects, and will therefore be able to pay more to those willing to sit through a more detailed presentation, such as an actual video of the new car that is being promoted – or even to request a showroom appointment. Compare this to the method we use today where each prospect costs the same amount to reach, even though there may be a tiny percentage we really want to reach with more information, and who want more information, on the spot. The sales cycle shortens, the marketing budget goes much further, the targeting profile is robust, and best of all, the campaigns are relatively instant because you don’t have to wait until the post office delivers your Standard Mail printed mail. Why consumers will love this: Simple. We know we love to see “new stuff” that we’re actually interested in. To be paid for our time to consider a new offer shows respect for the consumer, and creates real motivation to open the envelope. Why marketers will love this: Remote Control Mail’s UnMailMe feature gives marketers the potential to “mail” out instant campaigns to finely targeted prospects and pay for results, not for experiments, without the delivery risks (e.g. Katrina is still fresh in our minds) and costs of mail campaigns. And you get complete feedback on who responded, who didn’t – and for those who responded, just how much interest they exhibited. Why posts will love this: In other chapters in this book, posts can learn about how to deploy Remote Control Mail and UnMailMe to all their customers. One inherent benefit is the drastic reduction in undeliverable, forwarded and return-to-sender mail. But the overriding attraction for posts should be the unprecedented opportunity to compete with other Internet marketing media. Direct delivery of electronic advertising to a consumer’s known address of record – regardless of where in the world they may be traveling or working – is highly competitive with search engine keywords, banner ads, email campaigns, and other Internet advertising methods. If you are a marketer interested in learning more about how you can increase your profitability through Untarget Marketing or the other techniques described above, place contact me at [email protected]. If you are a corporation, educational institution or government agency interested in Remote Control Mail to deliver enterprise mail to your employees, please contact Doug MacDonald at [email protected]. If you’re a postal operator interested in a national-level service platform, please contact Cameron Powell at [email protected]. 52

The Next Generation of Postal Automation: The MegaSorter™ By Michael Miles

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The Problem with Mail Sorters Designed the Same Way Since the 1960’s (or Why the Major Postal Automation Vendors Missed Out on a $15 Billion Opportunity to Replace Aging Sorters at the USPS) At the heart of any postal operation, whether a USPS facility, a presort bureau or the mailroom of a substantial company, is the mail sorter. The sorter is the automation and mail handling device that enables the quick and accurate processing of mail without the burden of large numbers of workers fingering and examining each piece. The reader may have some familiarity with sortation equipment and the popular suppliers such as Lockheed Martin, BÖWE BELL + HOWELL, Siemens (formerly known as Electro-Com), Northrop Grumman, OPEX and the like. A visit to any postal processing facility typically includes walking past dozens of different sorters processing letters, flats, and various sized parcels. For those not familiar with sorters, a brief description is in order. The sorter takes postal material (in this example, letters) in at one end, scans an image of the envelope face, determines the addressee information using optical character recognition (OCR) software, determines the destination ZIP code, prints a barcode on the mail piece corresponding to the delivery point, and places the piece into one of its many pockets or bins – all in one motion, at a pace of up to 10 pieces per second. In order to sort mail into different pockets corresponding to the ZIP code, carrier route, and walking sequence the carrier will take, a mail piece must be processed through the sorter many times. Each sort-pass takes time and for a USPS facility handling millions of pieces daily, there must be dozens of sorters to make all the passes for all the mail to complete the total sort in a timely manner. As the reader might imagine, getting dozens of sorters to make several passes (up to as many as 12 passes to get a letter into its final sequence) of the mail through the sorters is a substantial logistical feat, and that the USPS does this day in and day out on thousands of machines in hundreds of facilities across the US is awesome. That said, this sorting process is based on the manual bubble sort processes of a century or more ago, and is very closely modeled on the technique used for sorting computer punchcards (Hollerith or IBM cards) in the 1950’s and 1960’s, a technique in turn based on the Jacquard cards used in the 1890 census. The Jacquard cards were originally developed for creating the patterns for weaving silk on automated machines. The process has been well established for automation, and the sortation methodology has been understood for over a century. With such an established process and fully depreciated infrastructure of equipment, and the criteria for delivery and operation having been well established (the inner workings humming along nicely), what’s the problem? In the postal infrastructure today, it is commonplace to find very dated equipment, some of it 20-to-40 years old or older. There is an ever-growing demand for machine performance (“match rate” of the OCR, real-time correction of changed addresses, overall processing time, jam rate, and handling of increasing annual volumes). As the fleet of sorting machines in the world’s post offices continues to age, the system is at the brink of more and more hiccups and glitches. While the likelihood of a major system breakdown is low, as with a 50-year old motorcar still driven daily, the frequency of small issues surfacing will only increase, lowering the confidence in the system’s reliability. The reader might reasonably expect that getting more and newer machines to replace the aging machines is the most appropriate and urgent task, which is a reasonable solution given the “tried and true” nature of the equipment and processes. The solution to handling ever-growing mail volume is procuring more machines, not just replacing existing ones. More machines 54

require more square footage, more personnel, more properties, more transportation and logistics equipment, and so forth. In 2003 the USPS recognized the need for a wholesale upgrade of its aging sorter infrastructure and initiated supplier development on two projects – Delivery Point Packaging (DPP) and Flats Sequencing System (FSS) – in an effort to merge the flow of letters and flats into a single automation stream, and to sort flats into carrier-route sequencing (the vast majority of flats are hand-sorted today). Particular to the DPP program was an unusually explicit charge to the vendors to “think outside the box” on the approach to sorting and mail processing as well as combining dissimilar mail types into a convenient bundle for final delivery. Previous attempts to revise sortation and processing seemed always to lead to a proposal to make a bigger version of the same equipment – if a 250-pocket sorter isn’t doing the job, perhaps a 1,000-pocket sorter will. While the basic idea of a bigger dynamic capacity as one solution is sound, the solution has been constrained by the incrementing of traditional sorting equipment and methods when what has been needed is the breaking of new ground in how mail is fundamentally processed. The four companies invited to propose solutions for the DPP project were BÖWE BELL + HOWELL, Elsag SPA, FKI Logistex, and Siemens Dematic. Phase I of the FSS program was awarded to Lockheed Martin and Northrup Grumman (Only Northrup made it to Phase II). There is no public information on the nature of the DPP solutions proposed, but it is known that the USPS suspended the DPP program shortly after February 200523. There may be several explanations for this, not the least of which was the FSS program showing promise and the DPP solutions not showing a sufficient performance improvement over current technology to warrant a multi-billion-dollar upgrade. Even the USPS has a finite budget, and it chose to expend some on FSS while the DPP program quietly went away. Sortation methods – within the USPS and from the industry providers – have not advanced significantly. The 250-pocket sorter appears destined to be the standard in the postal industry into the foreseeable future. The DPP project ultimately failed. (Rumor was that the vendors were unable to come up with a sufficiently compelling new technology platform that could combine letters and flats.) One key issue was that the vendors could not figure out a good way to bundle letters and flats which didn’t use plastic bags, a strap, or some other means that wasn’t either harmful to the environment or unappealing to customers. The FSS program proceeded in the meantime with Northrop Grumman winning the bid. On March 1st, 2007, the USPS awarded a second phase purchase of $875M for these flat sorters, which apparently cost millions of dollars per machine – dramatically more than estimated. At such a high cost, the USPS cannot afford to purchase enough of these units to machine sort all of the flats that it would like. Moreover, the program has years to go before deployment is even completed. Another drawback of both the FSS and DPP programs as originally conceived is that both were intended to work only with mail pieces already barcoded to an 11-digit destination zip code, which for all practical purposes would limit these machines to bulk mail prepared to the highest standards of customer-prepared barcoding and bundling.

23

For the complete public record on these two programs see http://ribbs.usps.gov/flatstrategy/

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Approaching the problem as a new building design, not a new machine As the reader has read in earlier chapters, the traditional process of sortation has remained largely unchanged for decades, except for vendor attempts to create larger machines doing the same thing, in the same footprint, only a little faster and a little better with each new model. In the development of the Remote Control Mail™ system, the approach to mail handling did not specifically include sortation initially. The task for the Remote Control Mail platform was to capture enough information about the mail piece (an image and physical metrics) to process digitally at a later time with more computing horsepower, to mark the piece in such a way that it could be easily identified at a later time, and to put the piece into a dynamic cache in such a way that it could be retrieved quickly. This thought process quickly did away with the need for pockets since the goal was to store a single piece of mail into a single location to be accessed at any time using equipment that is purpose-built to discretely store and retrieve individual pieces in an array of millions. Our service goal was to be able to retrieve a single piece of mail out of an inventory of millions and have its contents scanned within 5 to 10 minutes of the customer’s mouse click command over the Internet. On the surface this may seem a ludicrous engineering endeavor, as such a system would be enormous, the machine would quite literally be a building (or the building would be a machine depending on your viewpoint). Such systems exist in other industries and are referred to as Automated Storage and Retrieval Systems (AS/RS). These systems are commonly found in large university libraries, for example, where the storage and retrieval of books permits a controlled environment for storage yet rapid access to the materials when demanded. These systems typically require a large, rigid container to hold the materials being put away – these could be as large as shipping containers. In the example to the left, this parking garage in Germany puts away and retrieves entire vehicles, so long as their wheelbase and overall dimensions fit the mechanical limits of the robot. The very smallest material that AS/RS can handle which most people might be familiar with are the old tape cartridge libraries from the early days of mainframe computing. Indeed, one of the companies involved in the previously mentioned DPP program specializes in the design and construction of AS/RS (FKI Logistics), but apparently there was no cross-fertilization going on between the mail sorter designers and the AS/RS designers there when the DPP Request For Proposal was issued. Before setting off to design our own AS/RS specifically to store and manipulate mail, we contacted some 30 existing manufacturers of AS/RS systems. One by one their sales engineers demurred at the notion that something as “floppy” and inconsistent in size, shape, and weight as a piece of mail could ever be handled in an AS/RS. All of these vendors wanted us to put a lot of mail into a single bin and then store/retrieve the bin – which wouldn’t suit our design purpose at all. None could handle the delicate nature of mail pieces, their variations in size, and especially the throughput that would be required of the entire system. A traditional robotic AS/RS is constructed using a single traveling “mast” (or “crane”) zooming up and down an 56

aisle, accessing various storage locations on either side of the aisle, and transporting the items between the storage location and a centralized handling station at the end of the aisle. With multiple aisles operating independently the throughput of the system increases, along with the storage capacity. All AS/RS are constructed along these principles. So we turned to our whiteboards and CAD systems to create our own solution, which we would file fundamental patents on right before our first meeting with a major post office in October of 2004. After intensive research such a system was conceived and modeled after the structure of a random access memory (RAM) chip. In the parlance of those familiar with sorters, the system would consist of literally millions of pockets whose sole purpose was to contain one, and only one, mail piece each. The pockets, per se, are actually cassettes, approximately 13” x 16” x ½”, that can be inserted and removed from the storage array. Each cassette (a 5-sided box with a trap door on the bottom) is a rigid, uniform article which can be handled with conventional off-the-shelf material handling robotics components – thus minimizing both the technology risks and the costs associated with the system. The cassettes can be made double-wide (1”), triple-wide (1.5”) or wider, up to 4” to accommodate small parcels, yet all be stored in the array co-mingled, side-byside. This way, all of the mail destined to a particular address, regardless of the size of each piece, can be compactly stored together in the array for efficient extraction and bundling. (In fact, the mail can be presorted into geometric order so that when it is extracted the pieces can be collected with the largest/heaviest pieces on the bottom and the smallest/lightest pieces on the top.) To achieve the throughput necessary for mail applications it is necessary to load these cassettes at high speed, and so carriers were designed that could carry some 30 mail-filled cassettes at once in and out of the storage array using conventional material handling conveyors and robotics equipment. Once in place in the array, the cassettes could be discretely manipulated from the front of the carrier without disturbing the other cassettes. Once the concept of the AS/RS was applied to the handling of mail it became obvious there were multiple benefits given the massively parallel processing nature of the system. Yet there was a fundamental drawback in the ability of a traditional AS/RS to handle material fast enough to meet the demands of a typical postal sortation facility. Running a single mast in each aisle was identified as a clear choke-point in achieving high throughput of the system. The next level of “outside the box” thinking involved adding additional masts in each aisle, and then simply fixing them in place and having the material move to the mast, not the mast moving to the material. Traditional considerations for AS/RS design immediately reject such a notion simply because of the perceived installed cost of so many masts in a system. While there is a cost premium required in making masts move, the saving of the premium is rapidly diminished when multiple masts are required. Yet here again was an instance of conforming the thought process to the traditional view rather than focusing on the actual performance goals of the system.

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While a large number of masts may be expensive, the compensation occurs in multiple ways: the processing time is cut dramatically so the system is viable for handling the enormous volumes of mail in parallel; and the system has deeper redundancy which mitigates any setbacks or shutdowns that result from equipment failure or preventative maintenance processes. This architecture for the system has been given the name MegaSorter™. When a traditional sortation machine must be taken offline for service or other operational problems, it leaves a very large hole in the processing capacity of the facility. On the other hand with a MegaSorter™, if a single mast (out of 500 or more) is taken off-line for service or a failure of some kind, the remaining 499 masts can continue processing and even redistribute the tasks of the mast that was taken off-line. Such redundancy does not exist in the traditional sorter model except at the whole machine level, and with the existing systems already stretched to capacity, there is very little slack available to adjust to significant system down-time. As one might imagine, the actual movement of material in such a system is just as critical as the robotic subsystems that store and retrieve the material from the storage racks. The current state of the art in major distribution centers around the US for large companies such as Wal-Mart and Amazon have proven beyond measure the value and the architecture of the best methods in conveyors for movement of material within a facility. In similar manner, the movement of the mail materials to/from the masts must be accomplished by a comparable set of conveyors with various cutouts and bypasses such that a substantial amount of material can always be moved, even when some portions of the system are off-line for preventive maintenance.

How the Remote Control Mail AS/RS Became a MegaSorter In October 2004, we went to Washington, DC to share with the USPS our vision for how Remote Control Mail could be the perfect extension to their $800 million per year PO Box business. We brought along CAD drawings of our AS/RS in case we needed to show that we had the systems designs that could scale to the needs of the world’s largest post office. Earlier that week, in the lobby of the Washington Convention Center during the National Postal Forum conference, our CEO opened up his laptop and zipped through a quick PowerPoint presentation with Dallas Keck, the USPS District Director for Oregon and SW Washington (where Document Command’s development group is based). At one point Keck, a former electrical engineer with many years of experience in mail automation and operations, halted Wiener’s presentation where a CAD drawing of the AS/RS was displayed, and said “Wait a minute – could that thing sort mail?” Wiener replied that it was simply a matter of software, but theoretically, yes, the AS/RS could be utilized as a mail sorter. Over the next two years, substantial engineering due diligence was conducted to validate that the MegaSorter™ could not only sort mail, but since it takes advantage of sheer vertical real estate, in the right building it could do it in 80% less square footage, at 70% less cost of labor for sorter operators, and it could tray multiple sizes and shapes of mail at the same time thus saving even more in-office labor time before carriers could hit the road to perform their daily rounds. Several major posts and postal 58

automation vendors (potential technology licensees) have since visited Document Command’s prototyping facility in Beaverton, Oregon, to see the 60,000 square foot, 50-foot high superstructure where these system designs are being refined and tested. If fully outfitted with nearly 700 parallel-processing robots and 5.5 million cassettes, this facility would be able to sort all of the mail for the entire state of Oregon, for example, in 90 minutes.

“100% Air Traffic Control” on the Mailstream If the reader has grasped the big picture of the MegaSorter™ from the previous sections, the obvious question centers on control of such a massive system, how can it be managed and what happens if something goes wrong, goes wrong, goes wrong…? Referring back to the model of a RAM chip, the centralized processing of the location storage information, and the progress monitoring of the incoming mail offers the computer system the greatest possible macro view of what is occurring within the facility on a fully dynamic basis. As mail is processed by image capture, barcode printing, and automated storage – a full map of the inventory is created which represents everything that can be known about the piece of mail (addressee, length, height, width, weight, sender identity, and mail class). With that information at hand, plus the system status for all the storage robotics in the AS/RS, the central computer is very much like an air traffic controller. As bottle-necks might begin to appear in subsystems, the flow of the mail can be directed around them continuously to minimize disruptions. When some items require different forms of handling or isolation, they can be culled or redirected with little or no impact on the rest of the mail handling system. At a macro level, a network of MegaSorter-powered facilities would be able to communicate through the Internet to route around choke-points on the nation’s highways and airways, again thanks to the “100% air traffic control” concept. If a highway between two major sortation centers is shut down with storm activity, the mail that was intended to flow between them would be instantly re-routed to the most efficient open path. The result of this would be much higher delivery performance nationwide (especially during storm season) and less use of overtime labor and overflow facilities. Best of all, customers could get information on the progress of their inbound or outbound mail exactly as they do today for express courier shipments. One of the most critical constraints in processing material is time. The time a typical sortation process requires when the mail pieces are shuttled between machines, or waiting in queue for the next level of processing, cannot be recovered anywhere else. The MegaSorter architecture is built on the premise that the bulk of the time required to handle the daily volume of mail is regulated entirely by the number of feed lines into and out of the system. The feed lines (conveyors) are in turn regulated by the manner in which the mail pieces are deposited onto the conveyors, or removed from them for outbound handling. For the outbound process, the highest efficiency of the system can be attained by combining as much material as possible within the system before extracting it so it comes out in groupings or bundles rather than as discreet mail pieces.

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Competing with couriers and express mail for overnight delivery – at the price of today’s stamp Ever since the launch of Federal Express, and the later introduction of overnight delivery by UPS, USPS Express Mail, Airborne/DHL and other express couriers, more and more of the material that would have gone through First Class Mail instead goes through the more costly (30x the price of a stamp), but timely, express alternative. One reason is traceability, so that even if a package does not arrive “absolutely, positively by 10:30 AM,” the receiver and the sender can both verify that the package is on its way. But what if the sortation and distribution network for First Class Mail became so efficient that letters could be delivered within a very predictable timeframe depending on the distance between originating and destinating city, with online traceability – for just the cost of a stamp? That would be fairly disruptive, and would turn the tables on the express carriers in terms of service value and operational efficiencies. One way to achieve such a capability would be to deploy MegaSorters where traditional sortation centers stand today, and to network them through the Internet. If the reader considers this in the context of “air traffic control,” the knowledge base of information about every single piece of mail in the system, and its specific location at any time, can be combined to push and redirect items within the postal network to achieve unprecedented delivery times. Whether through use of “Intelligent Mail” barcoding schemes or through tight integration with Remote Control Mail, postal customers can be given even more power to direct their incoming mail than anything they have ever experienced before.

Consolidating Multiple Mailstreams into Two: Mail and Large Parcels Current mail processing involves 6 different mailstreams: cards/letters, flats, small parcels, large parcels, Priority Mail, Express Mail (in the case of USPS; other posts may have slightly different configurations but most rely on the same available equipment solutions made by a finite number of automation vendors). Express Mail is currently handled directly by personnel but all other mailstreams have automated or semi-automated handling today. Within each postal facility each one of those mail steams results in a tote of mail pertaining to that mail type for the carrier to deliver. (Express Mail has to travel in separate trucks in order to meet the 10:30 AM delivery time requirements.) During truck route delivery for example, the driver arrives at the mailbox and has to finger through several totes that might each contain some items for the recipient(s). As described in the previous section, the optimal efficiency of the MegaSorter occurs when bundles of material for a given recipient are extracted rather than the individual pieces having to be combined sometime later. The melding of those ideas results in using the MegaSorter to merge 5 of the 6 mailstreams into one bundle per address. That means that everything except large parcels can be bundled together for a given recipient and placed in the outbound totes in the delivery sequence desired and in the shortest possible timeframe. The benefits of combining the mailstreams means that the carrier only deals with a single tote at any given time and that the full intent of DPP (mail bundled together for delivery) can be realized. Although not obvious, the merging of various types of mail in the walk sequence desired is actually somewhat trivial when using the AS/RS described above. When all the pieces are stored in the storage array, the master computer can determine the sequence in which each piece should be extracted for the optimum result.

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When the computer controller begins to create the bundles of mail in the walk sequence desired, each of the pieces pertaining to one individual are retrieved from the storage array from their respective locations. When they are retrieved they are also retrieved in the order of size – large pieces such as flats and Express or Priority envelopes are pulled together and the smaller material such as letters is pulled immediately before or after the flats. This is important in that it allows the resulting bundle to also be assembled in order of size which simplifies the manner in which it can be contained or bound together. For mail that goes to organizations with a specific internal delivery sequence such as mail stops, the bundles can also be created with sub-sequences based on supplemental address information, to reduce the need for mailroom staff to process the mail in additional passes.

Repurposing of Existing “Pocket Sorters” - How to cannibalize existing MLOCR transports as induction machines Everything discussed to this point might give the impression that the large installed base of mail sorters (MLOCRs) would be disposed of or scrapped. Actually, they would be repurposed to provide some of the equipment needed to process the incoming mail for the MegaSorter. The fundamental requirement of capturing the image of a mail piece and applying a barcode to it does not change with the MegaSorter architecture. Because the MLOCRs in use today can still accomplish this task, they can be altered to be the entry point systems for the MegaSorter. The pocket section of the MLOCR is not necessary but the transport section can continue to be used, thereby recovering a substantial asset in the existing system. As a mail piece passes through the transport section of the MLOCR (without the pocket section), the image capture and barcode printing will still occur. The requirement to have the address match against an address database before the barcode is printed is no longer important however. Once the piece has the image captured, and a generic barcode applied, the electronic database of the two (image and barcode) is synchronized and the processing of the address for OCR can occur while the mail piece is being conveyed to an arbitrary storage location in the MegaSorter storage array. As long as the system knows where the piece was placed in the system the piece can be retrieved at a later time. It is no longer necessary to identify the addressee before the piece leaves the transport section and identify a pocket assignment for it, the pockets no longer serve any purpose.

Implementation by Pre-sorters and Express Couriers The MegaSorter takes a completely different approach to the problem of processing mail than has been the tradition, yet the principal advantage is that each piece is handled the fewest number of times (only once if the mail is destined within the same sortation center’s region, to a maximum of twice if it is destined to any other sortation center), and that the power of computers for OCR functions and sequencing of material is utilized to the utmost. As might be supposed there are other applications that can make use of this technique and even on a smaller scale. The presort industry has followed the USPS and equipment suppliers in adopting the traditional bubble sort using large count pocket sorters, and they have been successful at it. On the other hand, they have a challenge in being able to blend mail from multiple customers to the same zipcode sorts in order to achieve the maximum discounts. Typically they run only one customers mail at a time in order to achieve the sortation needed. If they were able to implement a MegaSorter that could handle as little as 200,000 pieces of mail they would be able to handle each customer in a single pass and for some smaller markets, be able to combine multiple

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customers mail in the storage array simultaneously, enabling them to get higher counts of outbound mail for each of the zipcodes they would sort to, potentially enabling deeper discounts to be shared by their customers. A similar benefit in timely processing of items, and bundling of pieces to the same recipient can be realized by the various express courier companies such as FedEx, UPS, and DHL. They already have vast material handling systems to process items serially on large parallel conveyor arrays. However, the potential for combining items is not very straightforward in their installed systems. The MegaSorter approach is a major alteration to the way they would process their material yet it would reduce the re-sortation that occurs at their outlying distribution hubs since the items would arrive in the sequence of the truck fleet deliveries.

What if Post Offices Don’t Bite… Will Presorters or UPS Do It First and Reduce Post Offices to Mere Trucking Networks? The whole notion of a massively parallel processing facility is a break-through concept in processing large amounts of mail. It may be the scale of processing that would permit a forward thinking company such as one of the carriers to seriously consider handling regular mail as a competing provider to the USPS. That is not the specific intent of the system yet the companies that can capture the vision and act upon it are the next generation of leaders in the industry. There is no concern that the USPS is at risk of going away altogether, yet there is a real risk of fierce competition within the market and there may be ramifications for the USPS that result in a less prominent position than they now enjoy. If one or more of the courier companies adopts the MegaSorter approach to mail handling, and they entered the mail market as direct competition (especially if integrated with Remote Control Mail), there is a real potential that the distribution network of the USPS would be reduced to only that, a distribution network, and not enjoy the real fruits of increased margins that would result from increased traffic as a direct result of the improved overnight delivery completions as well as the simplified operations model. The famous story surrounding the basis of FedEx and the notion that centralized sortation of packages could yield overnight transportation and next day delivery is now well known in the industry, if not everywhere. As a proposed business practice it was not considered viable yet it was proven to be a “game changer” for the courier industry and has had its impact on the USPS. The proposal of a MegaSorter of the kind described here is also typically looked at with a skeptical eye, and in a similar manner as the FedEx proposition. Can it really be that simple? Approaching the issue of sortation from a different perspective, using conventional types of material handling robotics hardware but in a new and innovative manner, and selecting tradeoffs that yield high performance (efficiency) despite initial capital cost are the basics of the proposition. A highly parallel processing system has far more potential than simply running the material back through the same equipment repeatedly.

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Afterthoughts There are still more markets to consider than implementation of the MegaSorter for postal mail within the USPS or the express courier services. A single MegaSorter with capacity for a million pieces of mail can handle ALL the mail processing for small countries such as Holland or Dubai. In practicality at least a handful of facilities would be constructed in order to minimize transportation costs and create network redundancy. At the other end of the size spectrum, the same technology approach as the MegaSorter can be applied to a compact system that serves as a self-service postal kiosk, to serve an office building, apartment building, campus, military base, or general neighborhood. The same type of system can be applied to other media wherever it is important to be able to retrieve a single unique item out of a mixture of thousands of varieties, where the inventory may or may not be uniform in size, shape and weight. Items such as music CDs or movie DVDs, medications, aircraft parts for kitting, archives, etc are all reasonable applications for the MegaSorter technology.

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The Case for Liberalizing the USPS and Taking it Public By Chris Kwak

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Cultural and economic forces that begin elsewhere will inevitably engulf any island, no matter how large and seemingly isolated. And these forces, awakened around the world, will change the U.S. Postal Service as we know it. In 1999, the Dutch Post (TNT) made an initial public offering. In 2003, Deutsche Post sold a 29% stake to the public in what was a highly oversubscribed initial public offering. Singapore’s SingPost, Japan’s Post, and the UK’s Royal Mail, among some 100 other nations, have all begun to open the postal industry to private competition. After a decade of gradual moves toward liberalization, within the next several years all EU postal operators are expected to be fully deregulated. In what has been a government monopoly in most countries for centuries, what is catalyzing national posts to push forward with liberalization? In most industries, monopolies are the most sought-after organizational structures. Universal consumer and business demand coupled with pricing power should make national posts extremely attractive financial structures whose financial inertia should suffice to maintain status quo. There are complex reasons why the post offices should have been monopolies. However, there are several reasons this normative claim must inevitably yield: the emergence of global competition and its impact on financial solvency, and restrictive regulatory hurdles that handcuff national posts from moving quickly and nimbly. In this chapter, we outline a few of the arguments marshaled by those seeking to maintain the government monopoly on the United States Postal Service (USPS). We then turn to the phenomenon of postal liberalization and detail why we believe this process has been building momentum over the past decade. Next, we argue why the USPS may have little choice but to seek to privatize some, if not all, of itself, and why privatization should benefit consumers, employees, and the country. Finally, we detail why Remote Control Mail will enable the USPS to go public with a compelling story to tell investors. When Function Follows Form The USPS has been a government monopoly since 1775. In the colonial period, the United States government was in the midst of immense economic growth and geographic expansion in the face of political turmoil. The framers of the country deemed the safeguarding of communications a necessity in the time of war. In the 19th century, westward expansion demanded the continuity of state management of the post office. The prevailing populist mores dictated that postal service to the outer regions of the expanding country was not only a public good but a necessity that powered the engine of commerce. Despite attempts by the private sector to open the USPS to competition, the United States government has steadfastly argued for a monopoly for letters. The arguments presented by partisans of the monopoly have become axiomatic: Rural delivery would suffer without universal service, as rural delivery – regarded as more costly – would be underserved by private mail companies who, it is generally feared, would be more interested in cream-skimming more lucrative city routes. Therefore, as a public good, the post office requires its monopoly status in order to service all addresses in the union. There are several problems with this claim. In Saving The Mail, Rick Geddes of American Enterprise Institute cites a PRC study from 1992: The average time per day per possible delivery is 1.04 minutes for city delivery and 1.07 minutes for rural delivery.24 24

Cohen, Ferguson, and Xenakis of the Postal Rate Commission titled, “Rural Delivery and the Universal Service Obligation” (written 1992, published 1993 in Published in Regulation and the Nature of Postal and Delivery Services, Ed. Michael A. Crew and Paul R. Kleindorfer, Kluwer Academic Publishers, 1993.) 66

The report goes on to argue that while the per-minute cost per piece in rural delivery was 8% higher than in cities, the per-minute cost per delivery point in rural areas was 7% lower than in cities: Full-time rural carriers' compensation is slightly lower than full-time city carriers. They incur less overtime and the rural carrier work force has a higher proportion of casual employees. As a result, rural carrier labor cost to the Postal Service in 1989 averaged $20.60 per work hour, or 34.3¢ per minute. In contrast, in 1989 city carrier labor cost the Postal Service $24.49 per work hour, or 40.8¢ per minute.25 While the time per day per possible delivery is slightly higher in rural versus city delivery, the cost per work hour is materially lower in rural. Rural delivery has become practically as cost effective as city delivery as a result of 1) the clustered structure of P.O. Boxes in rural areas, and 2) the use of a different army of contract delivery personnel than those official USPS employees who carry mail in dense urban areas. Of the 20 million USPS P.O. Boxes, a significant percentage are provided free of charge or at reduced rates to rural customers that the USPS would rather not deliver to. Rural delivery contractors are generally cheaper than city delivery employees. Even adjusting for higher vehicle costs, according to the study there is greater parity in the rural and city delivery than conventional wisdom suggests. Technology advances (mobile and Internet) are bringing into relief numerous claims about rural delivery and raising questions about the very definition of mail as a physically transported material (vs. digitally communicated correspondence). The breadth, cost, and accessibility of modern communications demand a revaluation of the reasons the Universal Service Obligation (USO) was established nearly 150 years ago in cities (1863) 26 and at the turn of the 19th century for rural free delivery (RFD). Technology today, one could argue, weakens the premise of the USO. While the post office has evolved in the 200 years since inception, this evolution has been marked by periods of punctuated evolution in synchrony with technologic advances. The carriage gave way to the train which gave way to the automobile which gave way to the airplane, and likewise manual sortation to automation. Despite these bursts of technology that tore the fabric of the post office, the organization has remained a physical delivery infrastructure that has availed itself of technology to increase the speed of sorting and delivering mail. From Engine of Commerce to Advertising Engine Various factors are responsible for the rise in direct mail volume in the 1970s, including changing demographics of women entering the workforce in greater number, the advent of computers and software for more targeted mail campaigns, and automation and worksharing discounts. After the Postal Reorganization Act of 1970, the post office – with the urging of Congress to lower capital expenditures – began more aggressively to offer worksharing arrangements with private partners. In the 1970s, the post office initially offered a fraction of a penny discount to partners to presort classes of mail. This initial discount was followed by larger discounts. These discounts helped create an entire industry of worksharing partners of the post

25 26

Ibid., section 2.2. History of the United States Postal Service 1775-1993. http://www.usps.com/history/his2.htm

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office.27 Coupled with automation discounts for barcodes and zip codes, among other innovations, marketers with the help of presort bureaus found direct mail as an advertising medium increasingly more appealing. In the U.S., the majority of mail today takes the form of advertising from businesses to consumers. The volume of advertising mail has increased 470% over the past twenty-five years (1972 to 2006), from 21.9 billion pieces to 102.5 billion pieces in 200628, a compound annual growth rate (CAGR) of 6.35%, more than three times the CAGR of the general population29 over the same period.

Exhibit: The Rise of Advertising Mail

Source: PRC

Today a little over half of USPS mail volume is Standard Mail. This Standard Mail generates 27.3% of total mail revenue ($19.9 bln in FY06), or nearly a third (31.6%) of the revenue between First-Class (average 37.9¢ per piece), Standard (19.4¢), Priority ($5.46), and Express ($16.41) in FY06. We note that about 18% of advertising mail is sent by First-Class (10.5 billion pieces of standalone advertising, plus 7.5 billion pieces of transactional mail which included a “bill stuffer”)30. More advertisers are shifting to First-Class mail in order to enjoy higher response rates, given that many mail recipients dispose of anything sent using recognizable standard mail indicia. Advertising inserted into transactional First-Class mail also enjoys the highest extraction rate; 42% of these envelopes are opened by recipients. And given that getting a recipient to open the envelope is the most difficult challenge of a direct marketer, wherever the opportunity exists to insert advertising with statements or bills, advertisers will take it. Growth in the volume of advertising mail has had a powerful effect on the post office’s identity. In attempting to mitigate ever-rising capital expenditures at the USPS, Congress championed worksharing agreements in the 1970s. It had the desired effect. According to Robert 27

The Impact of Using Worksharing to Liberalize a Postal Market. Robert H. Cohen, William W. Ferguson, John D. Waller, Spyros S. Xenakis. Office of Rates, Analysis and Planning. U.S. Postal Rate Commission. Published in the Proceedings of the Wissenschaftliches Institut für Kommunikationsdienste GmbH 6th Köenigswinter Seminar on Postal Economics. “Liberalization of Postal Markets”. February 19-21, 2001. 28 Postal Regulatory Commission, United States. www.prc.gov 29 Bureau of the Census, United States. www.census.gov 30 Source: USPS 2006 Annual Report and USPS 2005 Household Diary Report 68

H. Cohen of the Postal Rate Commission, “Advertising mail accounts for nearly sixty percent of the total cost savings for all presorted and barcoded mail.”31 In trying to alleviate the burden of capital expenditures at the USPS, Congress in effect put into play the very competitive forces that are shaping the postal landscape even today. The EU’s Vision The EU has been driving toward postal liberalization for the past decade. Most every EU post has reached a significant stage of privatization; many have gone public; many have been sold to private equity investors. What has driven and continues to drive this march toward deregulation? The prime mover has been the EU and its vision of a political-economic organization – unified by shared laws, currency, and open borders – capable of more frictionless commerce. As with the USPS, European posts were staggering in the 1980s and 1990s. In the face of strong worldwide economic growth, the EU member states had been saddled by a legal and regulatory legacy – including unique currencies and country-specific legal codes – that made cross-border commerce increasingly more cumbersome. Against this macro-economic backdrop, and in the face of slowing growth, heavy overhead and rigid labor practices, increasing competition from private providers, and the emergence of technology for alternative communications (fax, mobile phone, Internet), national posts (along with the Euro) formed a locus of opportunity for cross-border integration. In tight geographic quarters with national borders fading under the EU umbrella, member states saw nimble private corporations drive wedges into post offices. To navigate freely in this sea of competition, the EU began to urge postal liberalization. Not only were post offices competing against private providers, they were going to have to compete against each other. Post Privatization In the face of declining mail volume and revenue, TNT and Deutsche Post opened up to the public markets through initial public offerings. The executives at the helm had to balance intransigent unions with profitability and growth. The first few years were difficult for these monolithic companies. (It did not help that both TNT and Deutsche Post IPO’d within a couple of years of the global stock market collapse around the year 2000.) Each company could do very little to stave off the secular tidal wave of competition. Private providers (such as UPS, DHL, and FedEx) were expanding geographically, and their brands and operational efficiency gave them enormous advantages. It comes as no surprise that UPS and FedEx (among other private providers) have found a rich growth environment in Europe. Specifically, while UPS’s Domestic Package revenue has grown 25% from 2000-06, International Package revenue (of which Europe is a significant portion) has grown 125% in the same period.

31

Testimony before the President’s Commission on the Postal Service, Robert H. Cohen, Director, Office of Rates, Analysis and Planning, Postal Rate Commission, February 20, 2003.

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Exhibit: UPS and FedEx Look to International Calendar Years UPS U.S. Domestic Package International Package

2000 $ 29,771 24,002 4,166

2001 $ 30,321 24,391 4,280

2002 $ 31,272 24,280 4,720

2003 $ 33,485 25,362 5,609

2004 $ 36,582 26,960 6,809

2005 $ 42,581 28,610 7,977

2006 $ 47,547 30,456 9,089

FedEx Domestic Package International Priority

$ 15,727 10,285 3,860

$ 15,300 9,763 3,841

$ 15,919 9,514 4,055

$ 16,793 9,674 4,650

$ 18,531 10,204 5,695

$ 20,527 10,967 6,548

$ 22,287 11,436 7,470

Note: FedEx fiscal year ends May 31. We assume calendar year ends November. Source: Company Reports, Document Command

The U.S. service providers are not the only ones tapping the international markets for growth. For both Deutsche Post and TNT, international growth is outpacing domestic. This should not be surprising given the predominant Mail revenue.

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Exhibit. TNT and Deutsche Post Look to International 2005

2006

2007

2008

TNT Mail Mail Netherlands European Networks Data & Document Mgmt Cross Border

€ 3,984 2,647 597 225 515

€ 4,072 2,598 747 195 532

€ 4,158 2,550 933 143 532

€ 4,250 2,443 1,130 145 532

Express Express Europe International Express

€ 5,334 4,349 985

€ 6,011 4,904 1,108

€ 7,076 5,452 1,624

€ 8,002 6,061 1,941

Growth % Yr-Yr TNT Mail Mail Netherlands European Networks Data & Document Mgmt Cross Border

2.4% (0.2%) 23.3% 9.8% (6.5%)

2.2% (1.9%) 25.1% (13.3%) 3.3%

2.1% (1.8%) 24.9% (26.7%) 0.0%

2.2% (4.2%) 21.1% 1.4% 0.0%

Express Express Europe International Express

8.3% 7.6% 11.7%

12.7% 12.8% 12.4%

17.7% 11.2% 46.6%

13.1% 11.2% 19.5%

€ 12,165 6,442 2,820 805

€ 12,448 6,141 2,750 819

2,098

2,738

€ 15,036 5,457 2,725 836 2,610 3,408

€ 14,905 5,041 2,668 844 2,689 3,663

€ 17,775 11,746 3,300 8,446 4,578 2,424 873 (1,846)

€ 16,805 10,002 1,775 8,227 4,517 2,532 970 (1,216)

€ 13,850 6,027 6,027 4,833 2,760 1,098 (868)

€ 15,014 6,328 6,328 5,287 3,105 1,235 (941)

0.6% (4.9%) 0.4% 1.0%

2.3% (4.7%) (2.5%) 1.7%

20.8% (11.1%) (0.9%) 2.1%

22.3%

30.5%

24.5%

(0.9%) (7.6%) (2.1%) 1.0% 3.0% 7.5%

2.2% 0.1%

(5.5%) (14.8%) (46.2%) (2.6%) (1.3%) 4.5% 11.1%

(17.6%) (39.7%)

8.4% 5.0%

(26.7%) 7.0% 9.0% 13.2%

5.0% 9.4% 12.5% 12.5%

Deutsche Post Mail Letter Products Direct Marketing Press Distribution Parcels Solutions & Internationa DHL Express Total Europe of which DHL Freight of which DHL Express Americas Asia-Pac Emerging Markets Reconciliation Growth % Yr-Yr Mail Letter Products Direct Marketing Press Distribution Parcels Solutions & Internationa DHL Express Total Europe of which DHL Freight of which DHL Express Americas Asia-Pac Emerging Markets

5.8% 23.2% 13.5%

Source: Company Reports, Document Command, Morgan Stanley Research

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Some may argue that the “growthier” divisions inside Deutsche Post and TNT have grown through acquisition. We would argue that at least acquisition is a viable option for businesses outside of domestic mail. But for a postal monopoly, within domestic mail, there is nothing to acquire. After years of stagnant revenue performance, these newly-minted public companies sought growth. The letters business was not getting any better. Apart from greater efficiency with labor and end markets, privatization empowered post offices to diversify more quickly away from the letters business. Each of these posts has been an active acquirer. Specifically, Deutsche Post flexed its newfound balance sheet and acquired large companies in freight, logistics, and banking, among other sectors.

Exhibit: Deutsche Post: M&A, Path to Growth Acquisitions Deutsche Postbank AG DSL Bank 2) DHL International GmbH Ducros Services Rapides SA Danzas Holding AG Van Gend & Loos BV Securicor Omega Holdings Ltd. Nedlloyd Logistic group Narrondo Desarrollo SL ASG AB Air Express International AEI DHL Express (Canada) Ltd. Former May DHL Sinotrans Intern. Air Courier Ltd.4) Airborne Inc. SmartMail Total Revenue Growth % Yr-Yr

Germany Germany Germany France Switzerland Netherlands UK Netherlands Spain Sweden USA Canada China USA USA

1998 % 17.5

1999 % 99.99

2000 %

2001 %

2002 % 100

2003 %

25 -

46.39 99.25 100 100 25 100 49 99.86 96 -

48

2004 % 67 100

100

100

100 51

75

100

100 100 -

-

100 50 -

100 -

100

$ 14,669 $ 22,363 $ 32,708 $ 33,379 $ 39,255 $ 40,017 $ 43,168 52.5% 46.3% 2.1% 17.6% 1.9% 7.9%

Source: Deutsche Post World Net, Document Command

TNT NV has also had a voracious appetite, announcing over 20 acquisitions since 2000.

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Exhibit. TNT: M&A, Path to Growth Acquisitions, joint ventures and strategic alliancesDescription TNT acquires Mercúrio, the express market leader in Brazil TNT signs final agreement to acquire Hoau Group TNT acquires Speedage TNT to acquire Spanish domestic express distribution company TG+ TNT acquires print and mailing house Euro Mail TNT Express acquires 'Door-to-Door' TPG acquires global freight forwarder Wilson TPG acquires 60% majority share in Prime Vision B.V. TPG acquires Italian print & mail company Full Service TPG acquires DocVision, a leading document management company TPG acquires German unaddressed mail distributor blitzpunkt TPG acquires 60% stake in the DIMAR Group TPG acquires a leading Italian pre-mail handling company Cerilly TPG acquires French logistics group Transports Nicolas TPG acquires fashion distributor Bleckmann Group TNT Lojistik acquires Turkish logistics company TPG to acquire leading Domestic Express company of Thailand TPG acquires Italian Logistics and Transport company ALS TPG acquires 90% stake in CD Marketing Services Group Ltd TPG to acquire Lason UK TPG acquires 51% stake in Barlatier S.A. TPG acquires German based Schrader Group TNT Post Group N.V. acquires 60% stake in Mendy Développement S.A. TNT Post Group N.V. acquires Jet Services S.A.

Year 2007 2006 2006 2005 2005 2005 2004 2003 2003 2003 2003 2002 2002 2002 2001 2001 2001 2001 2001 2001 2000 2000 2000 1998

Country Brazil China India Spain Netherlands Slovenia Sweden Netherlands Italy Netherlands Germany Czech Republic Italy France Netherlands Turkey Thailand Italy United Kingdom United Kingdom France Germany France France

Division Express Express Express Express Mail Express Logistics Mail Mail Mail Mail Mail Mail Logistics Express Logistics Express Logistics Mail Mail Logistics Logistics Logistics Express

Source: Company Reports, Document Command

European posts like TNT (Netherlands) and La Poste (France) have been actively acquiring dozens of document outsourcing and management companies through their Cendris and Dynapost divisions, respectively. This has been a strategic change to diversify their revenue streams. These organizations already scan, archive and destroy hundreds of millions of mailborne documents each year, and they compete against private corporations in the remittance processing (lockbox) industry and even the corporate managed mailroom business. Acquisitions have served not only to fuel growth but also to diversify revenue streams. Pre-IPO, these post offices generated the bulk of revenue from letters and parcels. Post-IPO, having surrendered monopoly status to win independence and flexibility, these posts acquired revenue diversification. Now they are generating revenue less from letters and parcels and more from new business lines.

Exhibit: Deutsche Post: Diversified Revenue Streams Revenue Mail Express Logistics Financial Services

1998 € 11,272 3,818 0 81 _______

1999 € 11,671 4,775 4,450 2,871 _______

2000 € 11,733 6,022 8,289 7,990 _______

2001 € 11,707 6,421 9,153 8,876 _______

2002 € 12,129 14,637 5,817 8,676 _______

2003 € 12,495 15,293 5,878 7,661 _______

2004 € 12,747 17,792 6,786 7,349 _______

2005 € 12,165 17,775 7,807 6,636 _______

2006 € 12,448 16,804 21,599 9,083 _______

Corporate Divisions Total Other/Consolidation

€ 15,171 (502) _______

€ 23,767 (1,404) _______

€ 34,034 (1,326) _______

€ 36,157 (2,778) _______

€ 41,259 (2,004) _______

€ 41,327 (1,310) _______

€ 44,674 (1,506) _______

€ 44,383 211 _______

€ 59,933 145 _______

Total

€ 14,669

€ 22,363

€ 32,708

€ 33,379

€ 39,255

€ 40,017

€ 43,168

€ 44,594

€ 60,078

76.8% 26.0% 0.0% 0.6%

52.2% 21.4% 19.9% 12.8%

35.9% 18.4% 25.3% 24.4%

35.1% 19.2% 27.4% 26.6%

30.9% 37.3% 14.8% 22.1%

31.2% 38.2% 14.7% 19.1%

29.5% 41.2% 15.7% 17.0%

27.3% 39.9% 17.5% 14.9%

20.7% 28.0% 36.0% 15.1%

% of Revenue Mail Express Logistics Financial Services

Source: Deutsche Post World Net, Document Command

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Having successfully sold a stake to the public, these post offices have raised capital, acquired businesses, entered new markets, diversified their sources of revenue, shored up their balance sheets, and put to bed concerns about their financial solvency. No longer dependent on government subsidies, they continue to transform into cashflow generative companies. Their balance sheets are a testament to their healthier capital structures.

Exhibit: Deutsche Post: Bill of Health (Balance Sheet and Cash Flows) 1998 14,669 827 5.6%

1999 22,363 851 3.8%

2000 32,708 2,235 6.8%

2001 33,379 2,376 7.1%

2002 39,255 2,520 6.4%

2003 40,017 2,656 6.6%

2004 43,168 2,977 6.9%

2005 44,594 3,755 8.4%

2006 60,078 3,840 6.4%

925 6.3%

1,029 4.6%

1,527 4.7%

1,587 4.8%

1,590 4.1%

1,342 3.4%

1,725 4.0%

2,235 5.0%

1,956 3.3%

Cash flow from operating activities Cash Flow Margin %

(397) -2.7%

4,514 20.2%

2,216 6.8%

3,059 9.2%

2,967 7.6%

3,006 7.5%

2,336 5.4%

3,339 7.5%

3,509 5.8%

Noncurrent assets Current Assets (incl. def'd tax assets) Total assets Shareholders' Equity

9,485 5,635 15,120 1,765

9,791 65,225 75,016 2,564

11,081 139,199 150,280 4,001

12,304 144,397 156,701 5,353

14,536 148,111 162,647 5,095

15,957 138,976 154,933 6,106

16,028 137,329 153,357 7,217

24,471 136,213 171,893 10,707

24,396 180,064 220,090 14,553

Revenue EBIT EBIT Margin % Net profit for the period Net Margin %

Source: Company Reports, Document Command, Morgan Stanley Research

These post offices have successfully metamorphosed from government-mandated monopolies with little flexibility, relatively narrow business lines, stagnant revenue in the face of increasing competition, and burdened capital structures to publicly traded corporations with growing revenue, unfettered avenues of growth, and stable and healthy balance sheets. Darwin’s Turn, or How Inertial Forces May Drive USPS to Self-Select Itself out of Existence On its current path, the USPS could face challenges. Even after Congress in 2006 relieved the USPS of its large, off-balance-sheet military retiree liability, the USPS still maintains, on its balance sheet, a significant deferred liability. In order to fund this deferred liability, the USPS will have to sustain profitability for years to come. Under the current model, sustaining profitability could prove daunting. There are many reasons to be pessimistic about the USPS’s financial performance in the years to come. First, competitive forces are intensifying, not abating. Competition from domestic parcel providers persists. In time, market forces from private vendors in the EU will only add to pricing pressures and deepen market share losses. Like Moore’s Law in semiconductors, improvements in sorting and delivery speed have begun to reach diminishing marginal returns. Physical delivery of letters is giving way to digital communications media. While some had feared the fax machine, now email and file sharing via the Internet are shining a spotlight on the future of letters. As more of the mailstream moves online (bills and personal correspondence), what will be left? Given the multi-decade trend, the answer is advertising mail. An ever-increasing percentage of the mailstream will be advertising mail. In a matter of decades, the USPS has become the largest advertising distribution network in the world, channeling billions of marketing letters, brochures, and offers from corporations to residences. (In revenue terms, the USPS is nearly seven times larger than the largest Internet advertising network, Google.) 74

In time, Direct Mail too could become vulnerable. Historically, Direct Mail was the method of choice for marketers who wanted to measure advertising ROI. The revenue-protection structure of the mailing list rental industry, however, makes Direct Mail an imperfect medium. Even with Direct Mail, advertisers typically have only small samples of data from which to extrapolate response results, and they have zero data on non-responders (usually over 99% of a campaign’s targets fall into the latter category). As Natalee Roan details in her chapter, digitization of mail gives us essentially 100% statistical capture of who is doing what when, including non-responders, so that future campaigns can perform even better. Internet and Direct Mail can have shared interests, as Dell can attest. Companies using both Internet and Direct Mail are getting higher response rates and higher order size. But going forward, this may not be good enough. The Internet is getting better faster. And unlike Direct Mail, the Internet can measure what consumers are doing today. As the Internet attracts a larger percentage of total advertising spend, corporations will move away from less effective media. Specifically, marketing departments will demand ROI and campaign-effectiveness, and businessintelligence reports. And here, the physical mail system today is at a distinct disadvantage. In time, the Internet will become a larger advertising platform, and advertising mail will likely be the biggest loser of market share. We note that the Internet is not the only medium that is a quantum leap from Direct Mail. Today, millions of users of Tivo and DVRs, connected video game consoles and PC game systems, satellite radio sets, and mobile devices are consuming and even purchasing digital content. The move to digital is a necessary step for each of these mediums. Direct Mail, alas, cannot make this leap without a paradigmatic shift. As we detail below, Remote Control Mail can effectively energize the Direct Mail industry to leapfrog over many of these advertising mediums. Unless the USPS recognizes these manifold trends and moves to action, the U.S. government may once again have to bail out, reform, and reorganize the USPS. As post offices across the globe turn to public markets for self-sufficiency, it may become difficult for the USPS (outside of itself) to find a compassionate ear, especially if consumers see a string of annual rate increases. How many times will the American public tolerate the price of stamps going up? Each time the cost of a stamp rises is a fresh opportunity for progressive companies to re-energize paperless initiatives. In an era marked by environmental consciousness, corporations have allthe-more reason to consider digital solutions. USPS: Getting to the Bottom of It Nothing clarifies how massive is the structure of the USPS better than its financial statements and operating metrics. Based on CY06 revenue, USPS ($72.8 bln) is 1.5x larger than UPS ($47.5 bln) and 5.5x larger than TNT. However, in 2006 USPS generated $966 mln in operating profit while UPS generated $6.6 billion and TNT generated $1.6 billion. UPS accomplished this with 426,000 employees (as of December 2006), and TNT accomplished this with 140,000 employees. The USPS has 796,000 employees. Unlike the liberalized corporations, USPS’ profit margins are governed by the Postal Rate Commission. Until the Postal Reform Act of 2006, they had a forced breakeven target; since the Act the USPS has been given a little more liberty to create its own profitability targets but postage rate increases have been capped to the rate of inflation in return. It will be interesting to see how the future unfolds financially for USPS given this nuance. Will they start performing more in line with some of their international peers?

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Exhibit: Selected Metrics of Deutsche Post, TNT, USPS, UPS, and FedEx Revenue (in bln) Deutsche Post TNT USPS UPS FedEx

2000 € 32,708 € 9,936 $64,476 29,771 15,727

2001 € 33,379 € 11,218 $65,767 30,321 15,300

2002 € 39,255 € 11,782 $66,463 31,272 15,919

2003 € 40,017 € 11,866 $68,529 33,485 16,793

2004 € 43,168 € 9,106 $68,996 36,582 18,531

2005 € 44,594 € 10,105 $69,907 42,581 20,527

2006 € 60,078 € 10,058 $72,650 47,547 22,287

Operating Income (in bln) Deutsche Post TNT USPS UPS FedEx

€ 2,235 € 746 $1,484 $4,512 $1,288

€ 2,376 € 898 $127 $3,962 $1,083

€ 2,520 € 936 $1,229 $4,096 $1,363

€ 2,656 € 937 $4,627 $4,445 $1,144

€ 2,977 € 1,096 $3,145 $4,989 $2,236

€ 3,755 € 1,151 $1,624 $6,143 $2,666

€ 3,840 € 1,229 $966 $6,635 $3,263

Employees (end of period) Deutsche Post TNT USPS UPS FedEx

324,203 129,657 785,913 359,000 171,924

321,369 138,563 774,657 371,000 185,490

371,912 150,365 854,376 360,000 192,445

383,173 163,028 826,955 355,000 191,061

379,828 128,061 807,596 384,000 215,805

347,607 126,300 803,000 407,000 221,730

459,895 139,222 796,199 428,000 238,866

Revenue per Employee Deutsche Post TNT USPS UPS FedEx

€ 100,887 € 103,865 € 105,549 € 104,436 € 113,651 € 128,289 € 130,634 € 76,633 € 80,960 € 78,356 € 72,785 € 71,107 € 80,008 € 72,244 $82,040 $84,898 $77,791 $82,869 $85,434 $87,057 $91,246 $82,928 $81,728 $86,867 $94,324 $95,266 $104,622 $111,091 $91,476 $82,484 $82,720 $87,893 $85,869 $92,577 $93,303

Oper Income per Employee Deutsche Post € 6,894 TNT € 5,754 USPS 1,888 UPS 12,568 FedEx 7,492

€ 7,393 € 6,481 164 10,679 5,839

€ 6,776 € 6,225 1,438 11,378 7,083

€ 6,932 € 5,747 5,595 12,521 5,988

€ 7,838 € 8,558 3,894 12,992 10,361

€ 10,802 € 9,113 2,022 15,093 12,024

€ 8,350 € 8,828 1,213 15,502 13,660

Note: Financials updated for restatements when possible. Adjustments made for both Deutsche Post and TNT when appropriate. Specifically, Deutsche Post figures exclude revenue and full-time employees associated with the Financial Services division. Source: Company Reports, Document Command, Morgan Stanley Research

76

Graphically, the five look like this:

Exhibit: Selected Per Employee Metrics: Deutsche Post, TNT, USPS, UPS, FedEx $160,000

$18,000

$140,000

$16,000

$14,000

$12,000 $100,000 $10,000 $80,000 $8,000 $60,000 $6,000 $40,000 $4,000

$20,000

$2,000

$0

$0 2000

2001

2002

2003

2004

2005

2006

Revenue per Employee

Deutsche Post

TNT

USPS

UPS

FedEx

EBIT per Employee

Deutsche Post

TNT

USPS

UPS

FedEx

Source: Company Reports, Document Command

No matter how one slices it, USPS is far less effective at capital deployment, productivity, and profitability. The depth of the USPS’s inefficiency compared to its private competitors is noticeable, even if the USPS today resembles many of the posts pre-privatization. While these privatized post offices have had their share of turmoil, they have been successful cases of privatization. Their success as publicly traded companies is reflected in their stocks.

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EBIT per Employee

Revenue per Employee

$120,000

Exhibit: Performance of Post Offices as Publicly Held Companies

Source: Bloomberg

As we illustrate above, TNT and Deutsche Post stocks have performed in line with that of their U.S. counterparts (UPS and FedEx). The publicly traded posts boast stronger-than-ever balance sheets. Focused on revenue growth and profitability, these posts are now capable of moving more nimbly and generally have unfettered freedom to make acquisitions and to introduce new products and services. Most importantly, their financial health is tied to the public markets. There is accountability and responsibility to shareholders. As with all public companies, with this responsibility comes reward, as these posts can now fund their operations easily and grow quickly. We pause here to note that with becoming a publicly traded company, these posts have been able to reward executives more handsomely. While senior managers at the USPS may make somewhere in the range of $100,000 to $200,000 per year in total compensation, executives at publicly traded posts, Deutsche Post and TNT, make multiples of this.

78

Exhibit: Executive Compensation at Deutsche Post and TNT in 2005 Deutsche Post Management Dr. Klaus Zumwinkel Dr. Frank Appel John Mullen Prof. Dr. Edgar Ernst Dr. Peter Druse Dr. Hans-Dieter Petram Walter Scheurle Prof. Dr. Wulf von Schimmelmann TNT Management Peter Bakker Jan Haars Harry Koorstra Dave Kulik Marie-Christine Lombard

Base Bonus Subtotal € 1,360,144 € 1,337,021 € 2,697,165 71,500 702,845 774,345 860,000 845,380 1,705,380 863,583 848,902 1,712,485 860,000 845,380 1,705,380 906,763 891,348 1,798,111 715,000 702,845 1,417,845 860,000 853,120 1,713,120 Base 900,000 500,000 600,000 600,000 600,000

Bonus 543,997 302,751 409,561 399,312 430,078

Subtotal 1,443,997 802,751 1,009,561 999,312 1,030,078

USD $3,357,401 963,896 2,122,838 2,131,682 2,122,838 2,238,269 1,764,918 2,132,473 USD $1,797,472 999,256 1,256,690 1,243,933 1,282,230 Source: Company Reports

These subtotals do not include stock options and various incentives not captured by salary and end-of-year bonus. Because these companies are publicly held, their executives are compensated for performance, to generate shareholder value, as shareholders are ultimately setting (by approving) management compensation. For private national posts at the cutting edge of liberalization without publicly traded stocks, we need other metrics. For example, New Zealand is a model of a privately held post that has pushed forward with deregulation. The New Zealand post was so successful at managing costs after casting the yoke of political influence that it was able to lower postage rates in consecutive years, an unheard-of feat. USPS The USPS is one of the largest employers in the world. If it were a private company, the USPS would be in the top 20 of the Fortune 500.

Exhibit: USPS: Income Statement 2000

2001

2002

2003

2004

2005

2006

$ 64,476

$ 65,767 2.0%

$ 66,463 1.1%

$ 68,529 3.1%

$ 68,996 0.7%

$ 69,907 1.3%

$ 72,650 3.9%

49,532 4,709 8,751 _______

51,351 5,056 9,233 _______

51,557 5,132 8,545 _______

50,428 4,989 9,363 _______

52,134 4,969 8,748 _______

53,932 5,437 8,914 _______

56,281 6,045 9,358 _______

Total Operating Expenses

62,992

65,640

65,234

63,902

65,851

68,283

71,684

Operating Income Operating Margin %

$ 1,484 2.3%

$ 127 0.2%

$ 1,229 1.8%

$ 4,627 6.8%

$ 3,145 4.6%

$ 1,624 2.3%

$ 966 1.3%

Interest and investment income Interest expense on def'd retireme Other interest expense

41 (1,568) (220)

35 (1,603) (306)

86 (263) (2)

167 (231) (2)

_______ ($1,747)

58 (116) (694) (7) _______

33 (103) (10)

_______ ($263)

46 (1,601) (340) (10) _______ ($676)

$ 3,868

_______ $ 3,065

_______ $ 1,445

_______ $ 900

Income Statement Revenue Growth % Yr-Yr Operating Expenses Compensation and benefits Transportation Other

Net Income

Source: USPS, Document Command

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While its revenue size is striking, the USPS’s operating income has been historically constrained by the Postal Rate Commission’s determination of what ratepayers should pay for postage and services. In recent years, the USPS’s financial performance has deteriorated by public-company standards. Specifically, the USPS does not generate significant returns on its investment as captured by operating income. A look at the different mail types provides some of the explanation as to why operating profit has been shrinking even in the face of growing revenue.

Exhibit: USPS - Mail Volume and Revenue by Type Mail Volume by Type (in mln) First-Class Standard Priority Express International Periodicals Package Services Other * Total Mail Volume

2001 103,656 89,938 1,118 69 1,083 10,077

2002 102,379 87,231 998 61 904 9,690

2003 99,059 90,359 860 56 939 9,320

1,522 _______ 207,463

1,560 _______ 202,822

1,593 _______ 202,185

2004 97,926 95,564 849 54 844 9,135 1,132 602 _______

2005 98,071 100,942 887 55 852 9,070 1,166 700 _______

2006 97,617 102,460 924 56 793 9,023 1,175 1,090 _______

206,106

211,743

213,138

* Postal Service volume, free matter for the blind and Mailgrams included in "Other" Growth % Yr-Yr, Mail Volume by Type 0.1% First-Class (0.1%) Standard (8.6%) Priority Express (1.5%) International (2.8%) Periodicals Package Services 214.4% Other * _______

(16.5%) (3.8%)

(3.2%) 3.6% (13.9%) (8.8%) 3.9% (3.8%)

(1.1%) 5.8% (1.2%) (3.2%) (10.1%) (2.0%)

(0.2%)

2.5% _______ (2.2%)

2.1% _______ (0.3%)

Revenue by Type (in mln) First-Class Standard Priority Express International Periodicals Package Services Other *

$ 35,876 15,705 4,916 996 1,732 2,205 1,994 2,343 _______

$ 36,483 15,819 4,723 911 1,580 2,165 2,655 2,129 _______

Total Mail Volume

$ 65,767

Total Mail Volume

Growth % Yr-Yr, Revenue by Type 1.0% First-Class 3.4% Standard 1.6% Priority 0.0% Express 4.5% International 1.6% Periodicals 4.3% Package Services 6.8% Other * _______ Total Mail Volume

2.0%

(1.2%) (3.0%) (10.7%)

(62.2%) _______ 1.9%

0.1% 5.6% 4.5% 1.9% 0.9% (0.7%) 3.0% 16.3% _______ 2.7%

(0.5%) 1.5% 4.2% 1.8% (6.9%) (0.5%) 0.8% 55.7% _______ 0.7%

$ 37,048 17,203 4,494 888 1,615 2,235 2,798 2,248 _______

$ 36,377 18,123 4,421 853 1,696 2,192 2,207 3,160 _______

$ 36,062 18,953 4,634 872 1,765 2,161 2,201 3,345 _______

$ 37,039 19,877 5,042 918 1,794 2,215 2,259 3,673 _______

$ 66,463

$ 68,529

$ 69,029

$ 69,993

$ 72,817

1.7% 0.7% (3.9%) (8.6%) (8.8%) (1.8%) 33.1% (9.1%) _______ 1.1%

1.5% 8.8% (4.8%) (2.5%) 2.2% 3.2% 5.4% 5.6% _______ 3.1%

(1.8%) 5.3% (1.6%) (4.0%) 5.0% (1.9%) (21.1%) 40.6% _______ 0.7%

(0.9%) 4.6% 4.8% 2.2% 4.1% (1.4%) (0.3%) 5.9% _______ 1.4%

2.7% 4.9% 8.8% 5.3% 1.6% 2.5% 2.6% 9.8% _______ 4.0%

Source: USPS, Document Command

80

The most profitable classes of mail (First Class, Priority, Express, and International) have been slow growers. The lower-margin Standard Mail has been the most consistent grower of revenue. This mix of revenue shows no sign of changing direction. USPS’s profitability derives from the price of First-Class Mail. Per piece, First-Class Mail is twice as expensive as Standard Mail. Historically, there was justification for this price difference. First-Class Mail includes features such as return-to-sender, encoding of handwritten envelopes, and immediate delivery that Standard does not. While the USPS may not be able to lower return-to-sender costs significantly, given the post’s current architecture in which mail is delivered to an address (some six billion pieces per year, with another six billion pieces shredded as undeliverable) – rather than delivering to a person as, say, DHL does – submitting the encoding-cost argument to explain part of the higher First-Class rate is debatable. As they have been doing with Standard Mail for thirty years, presorters are now handling a larger portion of advertising mail in First-Class. As we have noted, advertisers know that FirstClass has a significantly higher open rate than Standard. Having recognized this, some large advertisers – in particular, credit card companies – have progressively channeled a growing percentage of their advertising volume through First-Class. Some advertisers use First-Class so heavily that they have been able to negotiate newly authorized National Service Agreements (NSA) with the USPS (e.g. Capital One mails over a billion offers a year by First Class under its new NSA). The NSA has brought the definition of Standard Mail to the surface. As the NSA has highlighted, Standard (and its lower rate) is merely a class of mail discounted for volume and automation. As a result, under an NSA, an advertiser consumes First-Class Mail yet pays a discounted rate still higher than the Standard Mail rate, but sufficiently lower than the usual First Class rates to allow them to justify increasing their mailing volumes by hundreds of millions of pieces. In time, as NSAs help marketers direct a larger percentage of advertising to First-Class Mail, we expect the average per-piece rate of First-Class Mail – the segment that generates the majority of operating profits – will fall from its current 38¢. This should concern the USPS. Given these trends, there is a risk that the Postal Service will be unable to keep volumes growing while also generating positive cash flows to fund working capital requirements and deferred liabilities. As old as the USPS is, it should come as no surprise that its deferred liabilities are enormous.

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Exhibit: USPS Balance Sheet 2005

2006

Assets Cash and Equivalents Accounts Receivables Supplies, Advances & Prepayments

725 1,008 200 _____

997 839 205 _____

Total Current Assets

1,933

2,041

0 376

2,958 394

PP&E, at cost Buildings Equipment Land Leasehold improvements Allowances for D&A Construction in progress

22,689 20,480 18,664 2,878 1,172 22,400 1,895 _____

23,095 21,083 19,729 2,887 1,232 23,951 2,115 _____

Total Assets

24,998

28,488

Liabilities and Equity Compensation and Benefits Accounts Payable and Accrued Expenses Customer Deposit Accounts Deferred Revenue (prepaid postage) Outstanding Postal Money Orders Prepaid Box Rent and Other Deferred Revenue Debt

2,852 2,127 1,720 1,200 830 477 0 _____

3,224 2,159 1,647 1,187 885 454 2,100 _____

Total Current Liabilities

9,206

11,656

Workers' Compensation Costs Employees' Accumulated Leave Deferred Appropriations Revenue Long-Term Portion of Capital Lease Other

6,695 2,016 692 644 369 _____

6,869 2,116 631 637 303 _____

Total Liabilities

19,622

22,212

3,034 2,342 _____ 5,376

3,034 3,242 _____ 6,276

Restricted Cash Appropriations Receivable - Revenue Forgone

Equity Capital Contributions of US Gov't Retained Earnings since Reorg Total Equity

Source: Company Reports, Document Command

We note that the USPS FY06 Annual Report has not been updated for Congressional reform at the end of calendar 2006 in which the federal government lifted an estimated $27 billion32 in military retiree obligations from the USPS’s off-balance sheet. The off-balance sheet liability was removed only with the U.S. government’s intervention. Without this deus ex machina rescue, the USPS’s financial insolvency would not be in doubt; it would be a certainty. That is, another postal rate increase would have been unavoidable. In the future, the USPS will be called upon to fund itself. As other posts become more self-sufficient, it is going to become more difficult to argue that U.S. taxpayers or postal ratepayers should bail out the USPS again. Looking at the USPS’s balance sheet of deferred liabilities, the volatility in annual cash flow generation may test the organization’s financial stability. In particular, the accumulated longterm liabilities beg for a stronger cashflow generation.

32

The Wall Street Journal, December 26, 2006.

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Exhibit: USPS Cash Flow Cash flows from operating activities Net income Adjustments to reconcile net income Depreciation and Amortization (Gain) loss on disposal of property and equipment (Increase) decrease in approp's receiv. revenue foregone Increase in workers' compensation liability Increase in employees accumulated leave Increase in non-current deferred appropriations revenue (Decrease) in other non-current liabilities Changes in current assets and liabilities Net cash provided by operating activities

2004 3,065

2005 1,445

2006 900

2,145 71 4 343 74 288 (76) (85) 5,829

2,089 5 (15) (58) 10 (99) (12) 365 3,730

2,149 -40 (18) 342 100 (61) (66) 462 3,768

(1,685) 26 (1,659)

(2,317) 31 (2,286)

(2,958) (2,630) 114 (5,474)

4,144

1,413

1,138

Cash flows from financing activities Issuance of debt Payments on debt Payments for capital lease obligations US government appropriations Net cash provided by financial activities

(5,473) (48) (92) (5,613)

(1,800) 16 458 (1,326)

Net increase (decrease) in cash and equivalents

(1,443)

118

272

2,050 607

607 725

725 997

Cash flows from investing activities Increase in restricted cash Purchase of property and equipment Proceeds from sale of property and equipment Net cash used in investing activities Free Cash Flow (Oper CF less CapEx)

Cash and equivalents at beginning of year Cash and equivalents at end of year

2,100 (37) (85) 1,978

Source: Company Reports, Document Command

While operating cashflow may appear reasonable (although declining recently), the USPS’s free cashflow (operating cashflow less capital expenditures) – the true measure of value creation and sustainability – is most unimpressive (as intended by the Postal Rate Commission). The volatility in free cashflow is related to rate increases, as the first year of a rate increase boosts revenue and cashflow meaningfully. However, with the new regulation capping rate increases at the rate of inflation, we will get a clearer sense of how cash generative the USPS is on a more normalized rate-change basis. The USPS must outline a clear strategy for growth and margin expansion, and invest in the future to stay competitive. Over the next decade, competition for parcels will only intensify. It is very possible for the volume of every class of mail to shrink, as most classes have over the past five years. It is also very possible for operating margins to stagnate, as they have over the past five years. These trajectories – of revenue stagnating and operating margins falling – are unsustainable. The USPS will have to change its operational DNA or face significant financial risk. Given the lifting of the military retiree obligation, the USPS now faces the challenge of financially sustaining itself for the long-term. This will demand operational discipline and

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vigilance in the face of declining mail volume and competitive threats from nimbler private competitors. Will We Be Telling Our Grandchildren That There Once Was a Thing Called USPS? Like all corporations, the USPS will have to find ways to grow revenue and expand margins. These twin goals are at the core of every publicly held company. In an industry exhibiting potentially shrinking mail volumes and rising cost of operations, how can the USPS grow faster and expand margins? Look to the private sector. If UPS and FedEx have taught us anything, it is, as Ken Lynn points out, that consumers pay attention to brands and will pay more for better and quicker service. The cost of sending an overnight FedEx package is 30x the rate of a standard mail stamp. And consumers willingly pay this because speed and reliability are worth it. The problem with the USPS merely mimicking the private sector and the rest of the privatizing post offices is that while privatization may be necessary to guarantee consistent revenue growth and margin expansion, it may not be sufficient. To grow revenue, the USPS can enter new businesses, such as freight, logistics, and digital solutions. All of these are fine avenues of growth, and the USPS has only to look to the EU to see that acquisitions and investments in these sectors can yield positive returns. However, we believe the USPS should look first toward digitization. Advertising Spend Shift: When Paradigms Collide As we noted earlier in this chapter, Direct Mail accounts for the majority of the USPS mail volume, and this class of mail generates meaningful revenue for the USPS. This is one class of mail that has grown consistently over the past decade. However, we live in an era that expects data and measurement, and the Internet is quickly becoming a preferred medium for advertisers. The incredible growth of Internet advertising revenue should worry other mediums. Newspapers have been feeling the pinch for some time now, as have telephone directories and other classifieds.

Exhibit: Advertising Channels Direct Mail Newspapers Broadcast/Syndicated TV Cable TV (+ Spot) Radio Magazines Yellow Pages Internet

2000 45 49 45 15 19 12 13 8

2001 45 44 39 16 18 11 14 7

2002 46 44 42 16 19 11 14 6

2003 48 45 42 19 19 11 14 7

2004 52 47 46 21 20 12 14 10

2005 57 50 47 23 21 13 14 13

0.3% -9.1% -0.8% -9.8% -13.2% 1.8% -7.4% -10.3% 2.8% -11.8%

3.0% -11.0% 0.8% -0.5% 8.2% 3.6% 5.7% -0.9% 1.4% -15.8%

5.0% 0.7% 5.2% 1.8% -0.3% 15.4% 1.2% 4.0% 0.9% 20.9%

8.0% 2.2% 6.4% 4.7% 9.7% 12.0% 3.6% 6.0% 1.0% 32.5%

9.5% 3.9% 5.0% 5.7% 1.4% 7.1% 6.1% 7.3% 3.3% 30.3%

Source: Universal McCann, IAB

Growth % Yr-Yr Direct Mail Business Papers Out of Home Newspapers Broadcast/Syndicated TV Cable TV (+ Spot) Radio Magazines Yellow Pages Internet

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The advertising mediums best positioned to gain share are those in which effectiveness can be measured. Digital is on its way in, and analog is exiting left. Here, digital mediums will surpass Direct Mail in their ability to measure marketing campaigns in real-time. In time, Direct Mail may become the whipping boy of the advertising industry. The trends are clearly pointing that way. While Direct Mail may continue to grow year-over-year in the single digits, the Internet is expected to grow in the 15%-20% range for years to come. The Internet likely represents the single largest threat to Direct Mail. Unless the USPS addresses this new paradigm, the fastest growing class of mail for the USPS will be at risk. This will bring to relief how vulnerable the USPS is to Mail and how undiversified its revenue streams are. The rest of the advertising mediums are able to locate and target their campaigns (every digital device has an Internet Protocol (IP) address). With Tivo, for example, marketers can tell who’s watching what, when, for how long, and who’s fast-forwarding commercials or watching them. The spheres of influence are overlapping in the digital world, with telecommunications (and its vision of unifying telephone, TV, and Internet access), Internet, and television beginning to interconnect seamlessly via digital ID’s. In this world, an enterprise dependent on physical assets can be at a real disadvantage. If it doesn’t have a browser or a login and password, it will have one hand tied behind its back. Today the USPS and virtually every post office in the world are swimming against what will likely turn out to be a losing battle against the digital tidal wave. While one may find comfort in believing that direct mail can co-exist symbiotically with digital mediums, the reality is probably harsher. Direct Mail may look good for now, but digital is clearly the future. Its brethren – newspapers, periodicals, classifieds and yellow pages – have witnessed significant erosion in their advertising revenue market shares. Initially, many believed their online presence would bolster their offline presence. What they realized, however, was that in the physical distribution world, the erosion of even small portions of the customer base can make a physical point-of-presence unprofitable and unfit to operate. Likewise, even if only small percentage points of marketing dollars shift to digital mediums, the negative impact on physical mediums may be dramatic. This is the flipside of the economies-of-scale coin. These “what-if” scenarios are upon us, and the secular trend toward digitization is intensifying globally. The USPS and other post offices have had no workable options to address this trend, until now. Enter Remote Control Mail The liberalizing posts in the EU are liberalizing in part because they have to. The EU is forcing the national posts to complete their transition to liberalization/privatization over the next couple of years. In such a disruptive regulatory environment, some posts can argue that disruption is opportunity, and furthermore that with flexibility, foresight, and the proper balance sheet they could capitalize on this disruption to become investment-worthy. Add to this the clear decline in mail volume, and the path of the posts to the public markets is quickly paved. The USPS does not have this regulatory backdrop. There is no EU-like governing body pitting one US state post against another state post (say, Alabama State Post against Louisiana State Post). However, the USPS faces ongoing competitive forces from the private sector, and with the EU posts coming down the private pipeline, competition in the U.S. will only intensify. Against this backdrop, how does the USPS push forward with liberalization? If capital formation and deployment are the hallmarks of private enterprise, how will the USPS ever manage to make itself attractive to the public as an investment? Given the less aggressive regulatory push at home, the USPS will have to accomplish one of two things: Either the USPS has to layer high-margin revenue on top of the cost of universal

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service obligation under the monopoly (for classes of letters – even in the EU, Deutsche Post has a monopoly in letters up to a certain price and weight), or the US Government and the PRC will have to redefine the universal service obligation to lower the USPS’ cost of operations. These are preludes to loosening the grip on the USPS’s private express statutes monopoly. The problem is the distributed nature of the address network in the United States. First, it was dispersed. Then it was cities and municipalities. Then it was government box systems. The ideal scenario from the USPS’ point of view would be for the USPS to provide a P.O. Box to every addressee in the network and require the addressee to pick up the mail, passing off the delivery costs to consumers, at which point the USPS would be a tollkeeper. This is unlikely to happen. We pause here to consider P.O. Boxes. The 20 million P.O. Boxes in the USPS network is not an insignificant number. Recall, there are only 146 million delivery points in the entire USPS network. So 14% of delivery points are P.O. Boxes. What if 20% or 25% could be “boxes”? The financial impact of reducing delivery costs and carrier costs by even 10% with no deleterious impact on revenue would be tremendous. Remote Control Mail extends the P.O. Box concept of the USPS. It extends the P.O. Box business by creating virtual pools of boxes – one delivery point for potentially thousands (if not hundreds of thousands) of addresses. The Remote Control Mail network would in effect be a variant of the worksharing programs that flourished in the 1970s and which today serve to lower the cost of USPS operations meaningfully. Remote Control Mail in effect serves as a different worksharing network. By post-sorting mail by recipient, and triaging a significant part of the mailstream before handing off mail that is requested to be delivered to the physical address (home or office), Remote Control Mail reduces the volume of mail to such a degree that carrier and transportation costs would plummet, with no adverse impact on revenue. In all likelihood, the USPS would be able to generate incremental revenue through Remote Control Mail. There are many benefits for a national post adopting Remote Control Mail and MegaSorter infrastructure. Below are some of the more salient ones: Cost Reduction. By replacing the existing physical delivery infrastructure with more efficient MegaSorters™ (see Michael Miles’ chapter), the USPS will be able to provision mail services at significantly reduced costs. MegaSorters™ obviate the need for many laborers, notably the 300,000 USPS sortation operators. These employees would acquire new skills (e.g., document scanning, system optimization). It would create an entirely new ecosystem around mail. The organization would have “air traffic control” tracking of every mail piece, as the private carriers already do, and be able to do this far cheaper because of its scale and its technology. This means both the post office as well as the recipient would be able to trace the location of every single mail piece through the Internet. If a post office were to implement MegaSorters™, it would be able to deliver a dramatically higher percentage of its First Class mail overnight, by circumventing choke-points in the delivery network. Once customers experienced routinely-reliable, online-traceable overnight First Class mail, the new system would be exceedingly disruptive to express couriers like UPS, FDX and DHL. New Revenue Streams. Imagine a scenario where the USPS generated incremental revenue simultaneously while lowering costs. With Remote Control Mail, the USPS can automate and digitize a significant part of the mailstream. As with all digital goods, the options available to consumers are unlimited with digital asset management. Specifically, confidential mail imaging, retention, storage, and destruction are a few of the services that Remote Control Mail enables posts to offer. This is possible with very little new overhead, because the mailstream is captured at the beginning of the lifecycle (when the USPS receives the mail). Digital asset management coupled with physical asset management give rise to entirely new classes of services the USPS has been trying to create (digital ID, email verification, tracking, 86

etc.). As posts such as LaPoste and TNT have realized, there is more money inside the envelope. The USPS is in a unique position to establish a digital registry of its customers. Universal Service Obligation. The USPS can maintain its USO with Remote Control Mail. Ubiquity: Remote Control Mail can serve every address in the union. Uniformity: Remote Control Mail does not alter postal rates. Uniformity of service quality: Just as the USPS offers P.O. Boxes to consumers who wish to purchase the service where the consumer opts-in to another mail delivery-retrieval scheme (the consumer comes to the post office and picks up the mail versus a USPS employee delivering the mail to the consumer’s home or work address), Remote Control Mail could begin as an opt-in program. Many consumers and businesses will prefer Remote Control Mail to the traditional USPS delivery. Witness RCM’s growing customer base and millions who use private services such as MailBoxes Etc. and mail forwarding services. In time, many RCM users will prefer this over the traditional delivery method. Labor. The biggest concern about liberalization to the USPS workforce is fear of major layoffs that may accompany the adoption of technologies. Remote Control Mail will automate significant parts of the mailstream. And the tasks that many at the USPS do today will become unnecessary and many positions will become obsolete. However, Remote Control Mail will help create a new and, more importantly, a sustainable ecosystem that requires skilled laborers to provision these new services. With training, the USPS workforce will metamorphose from principally a manual labor force specializing in delivery to one focused on digital asset creation and management. There is little doubt the USPS workforce is becoming leaner. This will continue in the coming years. With Remote Control Mail, the workforce will at last have a framework for modernization. Conclusion The mail industry is going through changes. Digital communications and private service providers continue to invent services and define higher levels of service quality. The impact of these changes is visible in USPS’s financial statements. While many traditional, hard-line mediums are growing at GDP rates, digital mediums (particularly the Internet) are taking market share rapidly. As the Internet continues to take a larger share of the advertising market, physical mediums such as newspapers and direct mail will necessarily lose out. Advertisers are increasingly demanding a measurable return on their investment, and Direct Mail will be left behind. The USPS is witnessing two vectors crossing on the page: Mail volume growth is anemic and should be retarded by a growing Internet-savvy consumer base and the marketers who are growing more comfortable with the Internet, and with the backdrop of inflation-level rate increases, there is a growing cost infrastructure levered to transportation and delivery. Add to this the intensifying competition from domestic private service providers and growth-hungry European posts liberalizing today, and it becomes clear the USPS has to look at itself in the mirror and ask: What will become of us if we allow inertia to be the stronger force? Fifty years from now, will we look back on the USPS and say that it failed to do adapt to the digital world? At its current trajectory, the USPS will be unable to generate enough cash to fund its future liabilities or to invest in technologies to hold off the marching armies of private service providers who are more nimble and better armed. The question is no longer if the USPS should or will reform to become more competitive, but when the USPS will bite the bullet and concede that competitive market forces may be intensifying and could bring the issue of the organization’s financial solvency to the fore.

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The USPS enjoys Government monopoly status which both staves off competition and restricts the organization from freely offering new services, entering new industries, and acquiring companies. And it certainly blinds it to the possibility of technological obsolescence. If the USPS wants to be free, it will have to relinquish its monopoly and follow many of its peers down the path toward liberalization. While this course is not without challenges, there is now potentially significant reward to justify taking the risk. By leveraging its trusted brand and universal access to postal customers, at last the USPS, through Remote Control Mail, has a path toward growth and increasing profitability, and most importantly a story that can excite investors whom the USPS will need in order to cast off the yoke of hardened history and build the next great communications network.

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A Blueprint for the 21st Century Post Office By Ron Wiener

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The Big Picture: Marrying Remote Control Mail and MegaSorters to enable the Post of the Future In the previous chapters you’ve now read all about Earth Class Mail – an evolution unfolding before our eyes in how consumer and enterprise users are vastly preferring to save time, money and the planet, by receiving their postal mail in electronic form. You’ve also read about Mike Miles’ revolutionary MegaSorter – the next generation of mail sorting and bundling automation equipment following four decades of sameness – that will dramatically improve the performance of mail delivery while reducing labor costs and saving billions of BTUs of energy consumption. When these two concepts are married at the national post level, some amazing things happen:

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Remote Control Mail can be provided to every citizen and every enterprise mail recipient as an almost-free by-product of the MegaSorter implementation.

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Rather than begin at the exit-point of the mailstream as RCM does today, when a postal operator implements Remote Control Mail, the remote control capabilities begin at the entry-point of the mailstream.

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Billions of BTUs of energy and millions of tons of greenhouse gases, millions of hours of labor, and millions of tons of paper and chemicals can be saved, because users will be given the choice to have their mail-borne documents scanned, checks deposited, and unwanted mail disposed of, at the point of origin rather than after all the expense of cross-country delivery, final mile delivery, and eventual refuse hauling.

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Vast new “inside the envelope” revenue opportunities are created for the postal operator – such as confidential document imaging, archival, confidential destruction, check remittance, forward-shipping, etc. – which also creates much more interesting and remunerative work for the employees displaced by more efficient automation.

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Postal operators will be able to service customers wherever they are around the globe at any time, not just when they are in their home, office, or standing at the branch retail counter.

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The paradigm for mail sortation inside the post will fundamentally shift from the present “address-level delivery” to “recipient or department-level delivery.” Imagine corporations receiving all their mail from the post office already sorted into mail-stop order.

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Postal customers will be able to view the progress of their mail online (just like they see express packages today), and re-direct it at any time to be scanned, shipped elsewhere, destroyed, transferred electronically, or archived. They will begin to view their postal mail as something just as versatile and convenient as their e-mail and cell phone.

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What is currently a real estate-constrained PO Box business can be extended to many more households and enterprises.

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For already-liberalized posts that own document management companies of various sorts, this new infrastructure will allow them to tightly integrate these assets with their postal divisions for greater competitive advantage and lower overall cost structure. Earth Class Mail integration is the “killer app” for these posts.

For certain posts, Earth Class Mail is the “cure for cancer” Posts today almost categorically fall into two types: those that have a robust advertising mail operation and are growing their volumes, and those that do not have the infrastructure to support an advertising-mail industry in their countries and whose volumes are declining. Developing countries and those whose posts are in the latter category can ill-afford to wait for inevitable crushing hand of declining First Class mail volumes. As volumes decrease and fixed costs increase, they will either have to increase postage and pass the pain to ratepayers (for whom there is a limit before they choose not to absorb such increases), or get government subsidies to make up the operating capital shortfall. Earth Class Mail infrastructure – Remote Control Mail coupled with the modular MegaSorter system – costs far less to operate than conventional “bubble sort” automation equipment and will allow these countries to leapfrog directly into the lower cost structure and higher revenue potential of this next-generation platform.

For more mature posts, Earth Class Mail will give them the ability to effectively compete for advertising dollars with Google, e-mail and other Internet marketing methods When “mature” posts – those currently enjoying a robust bulk advertising mail business and whose volumes are continuing to grow – look to the USPS for trends, they can see that they are probably heading for a future where the bulk of the mail they handle will fall into the classification of advertising. You’ve read Chris Kwak’s analysis that shows the annual growth rate of Internet-based advertising is many times greater than the growth rate of Direct Mail (DM), even in the U.S. where we get more mail per household than anywhere else in the world. With companies like Google ($10B revenue) and Yahoo! ($6B revenue) grabbing large chunks of the advertising dollar pie, posts MUST think strategically about how they can participate in electronic advertising revenues. Today most posts continue to remain startlingly optimistic about the future of print-mail advertising. But they are standing on a shifting sand bar – not to varnish the brutal truth of it, some have their heads firmly planted in that sand – hoping that the trend lines deviate from their inevitable paths. This is wishful thinking. The greatest asset that any post has is its good will, its brand of trust. No new Internet high-flyer can yet match the public perception of the Universal Service Provider in their country. Except for the next generation and their children’s generation who are at risk of growing up believing that Google is a safer and better brand than their postal operator because they’ve had far less interaction with the post in their online world. These teenagers who rarely buy a postage

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stamp will eventually graduate from college and control the advertising budgets of their future employers. Do we really think they will turn to DM before they turn to search engine keywords, web affiliate programs, and pay-per-click campaigns, among other Internet-based advertising? The smart money says they’re not likely to. As you’ve read in Natalee Roan’s chapter, the means for posts to grab an unprecedented piece of the electronic advertising pie will be instantly at their disposal if they implement the Earth Class Mail vision. I’ve just received an email this morning from the Economist magazine which offered me the opportunity to read some premium content on their website – for FREE – but only if I agree to watch an advertisement first. This is the future of advertising mail: it is online, it offers something of value to the recipient in exchange for their attention to the message, and it is invited into their mailbox through a trusted channel. It is also far less expensive than print-mail advertising, instant to launch, collects its revenue potential in days, not weeks or months, and is becoming more scalable every day. When a post moves its customers’ activities online, it also dramatically reduces the cost of Undeliverable As Addressed (UAA) mail and of mail forwarding, which ding the USPS for several billion dollars per year. Since the customer who receives their postal mail online also perfectly maintains their current address with the post AND with the mailers who send them things, it’s as easy as a mouse click when using Remote Control Mail. The proponents of socalled “Intelligent Mail” and mailing list hygiene will quickly recognize the value of assigning each customer a unique account number (what our customers know as an “RCM#” o r“Remote Control Mail Number”) that they print on their business cards as part of their address. Many of us already have accounts on usps.com, for example, for buying postage online. If mailers added a field into their databases for our permanent account numbers, the billions spent on “video encoding” (human interaction required to read the destination address on a piece of mail that failed OCR) will be dramatically reduced. Most importantly, the opportunity for posts is the chance to be the single most-used and most-trusted portal for both advertising and non-advertising messages to their customer base. And while transforming itself to a model for sustainability and growth well into the future, a post can also significantly reduce its footprint on the environment, which in this age of consciousness about global warming, shortage of clean water, and other cataclysmic consequences of our modern excesses, is more top-of-mind for consumers and politicians with each passing day. Posts do not want to be left behind as consumers and businesses shift their advertising dollars, and their non-advertising messaging, to online channels that are more friendly to the planet and cost less. With Earth Class Mail posts can enjoy all the benefits of higher efficiency and profitability, new revenue streams, and even stronger relevance to their customers, while simultaneously reducing their impact on the environment in ways even the automotive industry would view with envy.

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In Conclusion Earth Class Mail was devised with every major postal community constituency in mind, and we believe that all stakeholders in this community have much to gain from its implementation:

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Posts now have a model for sustainable growth and relevance in an increasingly online-oriented society.

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5.5 million Postal workers can have a future that is more financially certain, and jobs that add more value and are more interesting than simply “pushing the envelope.”

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Mailers can enjoy better tracking and delivery time of their materials, at lower costs – and will soon have many new options for boosting the profitability of their mail campaigns. Not to mention the new electronic advertising options best delivered through their trusted postal operator.

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Wall Street and government regulators now have a much better roadmap for privatizing posts in order to secure a more stable and healthy future for one of the most critical infrastructure pieces to any economy – the national post.

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The paper and printing industries, list-rental industry and other stakeholders who wish to see mail volumes rise can take comfort in that smart marketers who use “UnMailMe” suppression files to boost their campaigns’ response rates will be able to plow higher profits into even greater volumes in the future. Marketers who don’t do this will eventually be forced to reduce their volumes or go out of business, as postal rates continue to rise and response rates continue to decline. Long-term, however, these companies, like the posts themselves, must expand their business vision to capture the customers who are migrating online.

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Consumers and businesses are already telling us they want more control over what they invite into their mailboxes, and they want someone else to convert their documents to more convenient electronic form without forcing paper into their households and offices, and into their trash, recycling bins and shredders.

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Ecologists are realizing that posts and the entire postal ecosystem is one of the biggest targets for ecological impact reduction, and that there are smart ways to address the issue without hurting mailers, mail recipients, or the industry that moves the mail between them.

We hope that you have enjoyed reading this white paper and have learned something worth taking back to your workplace and discuss with your colleagues. Please check in frequently with our www.earthclassmail.com website (registration is free, and it’s the best way to stay on top of new information). In the future we will be adding more authors and content to this industrycollaborative work, including a blog, a regular newsletter, and possible conferences for postal technology executives. We look forward to your feedback and participation!

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