Businessweek Fires the Postal Service

Last week, Businessweek told many of its Washington DC customers that the Postal Service will no longer deliver the magazine.  Instead, the weekly magazine will use the Washington Post's delivery service to deliver the magazine early on Friday morning at the same time that it delivers newspapers.

In an interview, Bernie Schraml stated that Washington DC is the fourth market that Businessweek has turned to alternative delivery.  It started the shift in Philadelphia in December, 2010; followed by San Francisco in February, 2011 and Boston, MA in June, 2011.

Combined, alternative delivery now represents 10% of Businessweek's 850,000 subscribers. This shifts 4.42 million magazines from the mailstream annually.

Currently, Businessweek is negotiating with delivery firms in four additional markets which it hopes to bring on-line by the end of the year.   Mr. Schraml indicated that Businessweek is looking for distribution partners in other cities to expand the use of alternative delivery beyond the eight markets already in operation or under negotiation.  

Mr. Schraml indicated that the delivery company in two of the markets is The Washington Post and the Philadelphia Inquirer.  Businessweek is delivered by the newspaper delivery network early on Friday morning at the same time that the Friday paper is delivered.  The magazine arrives at the recipient's address in the same manner as the daily newspaper.

While alternative delivery has shifted subscriptions from the mailstream in four markets, not all subscribers in these markets receive their Businessweek via alternative delivery.   The contracts with delivery firms specify the 5-digit zip codes that the delivery firm delivers to, and in some cases the portion the portion of the 5-digit zip code that it serves.   All other recipients continue to receive their magazine by mail.   Even with the cherry-picking of delivery points, the alternative delivery firms have made a major shift in volume.  Mr. Schraml expects that contracts in other cities will be similar with the delivery firm delivering magazines to a significant portion of Businessweek's subscribers and the Postal Service delivering to only those subscribers that alternative delivery firms cannot reach.

Mr. Schraml indicated that the primary driver in shifting to alternative delivery is service.  In order for Businessweek to compete with the Wall Street Journal's Saturday edition, Barron's, and the Sunday New York Times as well as its own and competitor's web-based content, it needed to arrive on the same day or before these competitors arrived.  Therefore, Businessweek requires delivery on Friday or Saturday with as late a drop-off time as possible.  In cities where Businessweek has begun alternative delivery, Mr. Schraml stated that delivery quality was better than both Postal Service standards and his experience with Postal Service delivery.   The newspaper delivery networks have delivered 100% of its issues on Friday morning.  With the Postal Service, only 30-35% arrived on Friday and no more than 69% were delivered by Saturday.

The alternative delivery networks also offered Businessweek greater flexibility as their critical entry times were no earlier than late afternoon Thursday, and in one city, Friday delivery could be made with entry as late as just before midnight the night before.  Critical entry times for the Postal Service are currently earlier than that of alternative delivery, and starting July 1, they will become even earlier putting the Postal Service at even a larger service disadvantage.   (See Dead Tree Edition)  The potential loss of Saturday delivery creates further problem as that could push the share of magazines with entry into the mailstream on Thursday and delivered before the weekend below 50%.  (For Businessweek and other publications that need late critical entry times due to competitive concerns, earlier critical entry times and the loss of Saturday delivery could make their print product noncompetitive.)

Businessweek's focus on service as the primary motivator for alternative delivery is different from the driver of alternative delivery over two decades ago.  The larger periodical publishers created a nationwide alternative delivery network in 1990 called Publishers Express with a goal of delivering periodicals at a lower cost than the Postal Service. (Pittsburgh Press, Pittsburgh, Pennsylvania) October 29, 1990, pages B5, B7)  Publishers Express acted as a middleman between the publishers and printers and the local delivery firms in both large and small metropolitan areas. This alternative delivery network went out of business in 1996 (Lawrence Journal World, Lawrence, Kansas, February 28, 1996, p. 4D) as it met neither the profitability nor the service requirements that its publishers/owners demanded as well as efforts of the Postal Service to counter the competitive threat.

When asked about price, Mr. Schraml indicated that the total cost of alternative delivery was competitive or less but he did not provide specific cost information.  

He did indicate that alternative delivery had lower preparation costs for Businessweek as addresses were not printed on the magazine, magazines did not have to be combined in bundles to reflect presort requirements and magazines could be loaded on full pallets for alternative delivery as opposed to partial pallets for the Postal Service.  The difference in pallet size reflect the presort requirements of the Postal Service.   The difference in mail preparation and palletization lowers Businessweek's printing and transportation costs.  

Mr. Schraml indicated that he is interested in talking to other publishers about his experience and potential delivery firms about delivering Businessweek in other markets.  Given the speed that he has moved so far to shift subscribers to alternative delivery,  he should be able to shift well over half of his subscribers to alternative delivery within a year.  

Impact on the Postal Service

For a commentary on the impact on the Postal Service see:

The Death Spiral Could It Be Driven By Service As Well As Costs

Leaving the Mailstream - Consumer Periodicals

The iPad, and other devices coming to market in the next 12 months are about to revolutionize how consumer magazines are designed, printed, and sold.

The Associated Press has reported that "the Audit Bureau of Circulations said Tuesday that it has changed its definition of a digital magazine to accommodate the new class of tablet-style devices. The new rules allow publishers to count paid digital subscriptions as part of a magazine's overall circulation as long as all the same editorial and advertising material is included.  That means publishers can custom design their articles and photo spreads for Apple Inc.'s iPad, which goes on sale April 3. Without the rule change, they could only count digital editions that appear exactly the way they do in print."

Initially, publications sold to tech-savvy consumers like Conde Nast's Wired magazine will become available.  Conde Nast will follow the June launch of Wired with launches of its titles directed toward a more general set of readers including GQ, The New Yorker, Vanity Fair and Glamour. 

The action of Conde Nast and other magazine publishers to fully develop tablet versions of their titles in the consumer market reflect an understanding that the new technology may attract both newsstand and subscription buyers at prices that generate real revenue and more importantly auditable circulation.

If Conde Nast is successful, it will be able to retain much of its business model.  This compares to business-to business or trade publications that are rapidly shifting to an all digital model as declining print advertising made publishing a mailed journal unprofitable.   Now trade publications look mostly like a collection of blogs posts with advertising. (Direct, dmNews, Trailer/Body Builders) The alternative is what Document has done and provides a glimpse of what consumers may see on digital versions of consumer publications.  (I hope the consumer magazines do not have the annoying page turning sound.)

 Now the question is when will the new technology have market impact?  It could not come too soon for publishers who are seeing print sales dropping at double digit rates.  For the Postal Service the new technology could increase the already rapid decline in Periodical mail so that it is possible that by 2020 Periodicals could be as common in the mail stream as parcels are today.

Re-regulating the Postal Service?

Yesterday the Postal Regulatory Commission established Docket No. ACR2009, "to consider matters raised by the Postal Service's FY 2009 Annual Compliance Report."    The specific request of the PRC, and in particular its reference to those sections of the U.S. Code relating to ratemaking requirements and objectives that remained virtually unchanged with the passage of the PAEA, suggests that its review of the Annual Compliance Report could become the equivalent of a "rate case light."

The PRC asked the Postal Service and others parties to comment on whether the Annual Compliance Report shows that postal rates and fees comply with the pricing requirements and objectives.   While the PRC cannot force the Postal Service to change its rates to be in compliance, it could use this proceeding to determine that certain rates are not.   If the PRC draws the conclusion that certain rates are not in compliance, it will base it on nearly 40 years of ratemaking precedence and the pricing framework developed in what Congress saw as a failed ratemaking process in its decision to pass the PAEA.

A PRC decision that the Postal Service's rates are not in compliance with the ratemaking requirements and objectives of 39 U.S.C. could have consequences beyond a public embarrasment of the Postal Service.  Private parties could take the PRC's ruling to court to deal with the conflict between the price cap design and the ratemaking requirements and objectives.   It may be possible that a court could force the Postal Service to raise rates in order to comply with its ratemaking requirements and objectives.

The PRC's notice highlights the rates that could cause it to issue a determination of non-compliance.

Rates for market dominant products that are below the product's measured attributable costs  

• Periodical Mail lost $642 million in FY 2009, "earning revenues that were only 76 percent of attributable costs;"  
• "Regular flats, Standard Regular parcels and NFM's together lost $830 million.  Flat [revenue] was roughly 82 percent of attributable costs and revenues for parcels and NFM's were roughly 75 percent of attributable costs.
• Among package services products, only Bound Printed Matter flats and Inbound Surface Parcel Post covered their attributable costs.
• Four Special Services failed to recover their attributable costs—Registered Mail, Stamped Cards, International Ancillary Services, and Confirm.
• International Inbound Single-Piece First-Class Mail failed to cover its costs, earning revenues that were approximately 60 percent of attributable costs.

 Worksharing discounts granted to products that are larger than avoidable costs. 

• The Postal Service provides a discussion of the competing policy considerations that impact workshare discounts and the reasons a substantial number of workshare discounts may have exceeded avoided costs in FY 2009.

Rates for competitive products that are priced below attributable costs 

• These products are Inbound International Expedited Services 1 and 2; Inbound Surface Parcel Post at Non-UPU Rates; International Money Transfer Service; Competitive Registered Mail; Competitive Insurance; Competitive Return Receipt; and Competitive International Business Reply Service negotiated service agreement contracts.

Stakeholders that are concerned that the PRC could issue a statement of non-compliance should take this proceeding very seriously.    In particular, stakeholders should consider the following costing, pricing and policy issues that the Commission's request raises.

• What is the role of the ratemaking objectives and requirements when the Postal Service has the option of using price caps to adjust rates?
• What is the role of the ratemaking objectives and requirements when the Postal Service is trying to lower costs in order to become profitable under a price cap regime?
• What implications for postal policy and Postal Service self sufficiency does the requirement that worksharing discounts be limited to differences in costs have? 
  
• How does the collection of revenue, volume, and cost data using sampling systems affect the reliability of cost estimates and determination of cost coverage for low volume products?   Cost estimates of low volume products have a large variance around the estimate of costs refleccting the interaction of variances associated with estimates generated by all of the Postal Service's sample based costing , volume and revenue measurement systems.
  
• What impact do preferential rates for products such as periodicals and non-profit mail have on the issue of compliance with ratemaking objectives and requirements?   
• Is the potential non-compliance of the identified Standard rate categories related to the proportion of non-profit mail in those categories?
  
• If preferential rates cause the non-compliance, should the Postal Service provide an estimate of the lost revenue due to preferential rates and seek payment from Congress for the legislated preferences?
• How should the process of moving periodicals 2010 be changed to reduce costs? See Dead Tree Edition for some suggestions.
• Are there problems in cost models for periodicals that cause an overestimation of their costs?   See "Periodicals, The Postal Service’s Math Doesn’t Add Up."
• Is there value in handling Periodicals at cost or below cost to improve the value of advertising mail? 
  
• How relevant are FY 2009 costs for 2010 rates for flats given that they are based on costs determined in production processes and a processing network that is being replaced by a network designed around automated flat sorting machines?
• How relevant are any FY2009 costs for estimating compliance given expected changes in operating, delivery, and transportation networks as the Postal Service consolidates facilities, and continually optimizes delivery routes?
  
• Do piggyback factors based on the use of labor to process mail distort the distribution of facility related costs given that the costing theory used to create these piggyback factors date back to the time that mail was sorted manually?   
• How do the legal requirements for workshare discounts distort the prices of workshared and non-workshared products?
• How does the continued linkage between single piece First Class and bulk first class rates affect non-First Class rates and in particular the rates of single piece parcel products?  Are Parcel Post rates, and in particular Parcel Post rates under 2 pounds constrained by the level of First Class rates which are themselves constrained by workshare discount requirements and precedent relating to ratemaking objectives?
  
• Would market-based rates for mail produce rates significantly different than what Commission precedent would generate?   In particular, what rates would the Postal Service charge if its rates were "rational?"  (In this context, rational is used in the way that investment analysts describe transportation prices that allow firms in the industry to earn competitive rate of return.   Generally, firms with pricing freedom, price irrationally when they are willing to charge prices below cost just to hold onto the business.   This often occurs when a market has significant overcapacity.   Currently, analysts are describing the recent pricing decisions of FedEx and UPS as rational as capacity has been cut sufficiently to match current demand levels.   Analysts are still concerned about irrational pricing in the less-than-truckload and truckload markets where significant overcapacity still exists.)