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Postal Service looks to e-commerce for answers

From...

by Elizabeth Wasserman

(IDG) -- It seemed like just one more e-commerce pitchman trying to sell an idea to a group of venture capitalists. John Kelley, VP of Imagitas, a marketing firm, stood before a half-dozen potential investors in a Washington office building last November. His plan was intriguing: Provide Web-based change-of-address services to the 41 million Americans who move each year. With a few clicks customers could update their postal addresses and notify their credit card companies, utilities and magazines of their new location. The payoff could be enormous: National advertisers would pay handsomely to post ads on the site, link to their services and market coupons in the hopes of selling everything from hardware to moving and phone service to the new residents.

The would-be investors listened with interest, but they were hardly your typical VCs. In fact, they're not known for taking big risks with e-commerce plays. They're vice presidents at the U.S. Postal Service.

GOING POSTAL

From Horsepower to Computer Power

1860 The Pony Express crisscrosses the country carrying mail.

1901 Horses return to the pasture as autos are called into service.

1911 Thanks to the Wright brothers, mail is airborne for the first time.

1992 Optical character readers scan handwritten addresses and produce bar codes on envelopes for faster delivery.

1994 Postal Service launches www.usps.gov, but later adopts .com instead of .gov.

2000 Online offerings include bill-paying, shipping, secure e-mail, greeting cards and stamps.

But the leader of the group, Deputy Postmaster General John Nolan, gave the project the green light. "This sounds smart," he later said in his typical measured voice. "We already do it in hard copy. It makes sense to do it on the Net." The change-of-address project, to launch in April as MoversGuide.com, is one of more than a dozen revenue-generating online projects under way at the once stodgy Postal Service. Nolan, who has even set up an in-house venture capital wing and a business incubator, is trying to reinvent an agency that Benjamin Franklin first presided over some 225 years ago. The task is urgent: If the Titanic of government bureaucracies doesn't capitalize on the Internet soon, it could sink into oblivion.

America's growing reliance on e-mail, online bill-paying and other electronic communications is undercutting projected growth in Postal Service revenue. Last year, the agency lost money for the first time since 1994. Even bigger losses, up to $3 billion, are expected this year. But perhaps the worst news for the Postal Service is the growing number of private-sector competitors that are aiming to shut down its online plans.

These companies are howling to Congress that the Postal Service, armed with its government-sanctioned monopoly on mail delivery, has an unfair advantage over rivals in the online arena. United Parcel Service (UPS) has been vocal in its opposition, as have trade associations, whose members include new Postal Service rivals such as Yahoo (YHOO) , Intuit (INTU) and online banks. "This effort to try and reinvent themselves as a dot-com company does not have a very bright future," says Tad Segal, public affairs director with UPS, the Postal Service's arch nemesis on Capitol Hill. "E-commerce is such a robust and multifaceted area serviced by the private sector that it's hard to see a real justification for government involvement."

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It's not only the Postal Service that's getting excited about using technology to make a few bucks for Uncle Sam. The heated debate over that agency's online plans offers a preview of the future of e-government as other state, local and federal agencies consider launching tech- driven businesses. The Internal Revenue Service is hinting at the sale of tax preparation software on the Web, and the General Services Administration is considering online auctions of government surplus goods. Though many of these initiatives are just getting off the ground, it's clear that the Web is already blurring the line between the public and private sectors.

It's not far-fetched to imagine how the Internet could write the epitaph for the venerable Postal Service. A large part of its core business -- a monopoly on the delivery of first-class (letters) and third-class (junk) mail -- is sagging under the weight of online competition. A recent report by the Government Accounting Office found that 68 percent of the 880 million Social Security checks, tax refunds and other government payments were sent electronically last year, resulting in a $180 million revenue loss for the Postal Service. The report also found mailings from banks to customers dropped 18 percent between 1996 and 1999. The decline in mail service has plunged the Postal Service back into the red, which is bad news for everyone. Even though the ink is barely dry on the newly printed 34-cent stamp, the Postal Service is already preparing to ask for another rate hike.

Enter Nolan, the No. 2 man at the Postal Service and the main guy behind the idea that e-commerce can save the agency. Another booster is his boss, Postmaster General William Henderson, who recently announced he is leaving the agency by May. Nolan, who's under consideration for the top job, looks like the postmaster from central casting. With his thinned hair, spectacles and metered tones, all he's missing is a short-sleeved shirt and visor. But looks can fool you. Execs such as Imagitas' Kelley speak of Nolan as part of a "new guard" that's "willing to take risks."

Nolan, 52, first joined the Postal Service in 1970 as a 22-year-old management trainee. He worked his way up from a mail room supervisor to postmaster and general manager of the New York City Post Office, the world's largest. He left in 1989 to direct operations at Merrill Lynch (MER) 's printing and mail division, turning that into a profitable business for the brokerage house. He returned to the Postal Service last year.

It was Nolan who came up with the idea for an "internal VC group" -- formally called the eBusiness Opportunity Board -- along with Pete Jacobson, the Postal Service's CTO and a veteran of Unisys (UIS) and Lockheed Martin (LMT) . In creating the eBOB, which funds and incubates e-commerce projects, they talked to large companies that were grappling with great technological change driven by the Internet: AT&T (T) , Cisco (CSCO) , General Electric (GE) and IBM (IBM) . These discussions inspired Nolan and Jacobson to adopt Web-based supply purchases and to undertake a business-to-business exchange to coordinate intercity trucking and lease space on postal trucks that aren't full. Those ideas were implemented without much controversy. But the same cannot be said for the Postal Service's online consumer projects.

The Postal Service signaled its intention to become an online variety store when it chose the domain .com instead of .gov for its Web site. There, customers can buy online greeting cards and stamps, pay bills and arrange returns of goods bought from such-and-such.com. It's a strategy that pits the Postal Service against a range of industries, from online banking to greeting cards manufacturers, and many companies are crying foul.

Critics argue that the Postal Service has an unfair competitive advantage and should stay out of private enterprise. The agency's mail-delivery monopoly gives it access to more than 130 million households and businesses, a potentially huge market to tap for its online services. Beyond that, the Postal Service pays no income or property taxes. Even its trucks, when illegally parked, don't get ticketed. And forget about its rating from Moody's (MCO); the Postal Service can draw a line of credit direct from the U.S. Treasury. "As a general rule, unless it's an enhancement to their core business, which is delivering the mail, I don't know that they should be involved," says Ed Gleiman, former chairman of the Postal Rate Commission, which sets postage rates and serves as the private sector's watchdog over the agency.

Under Nolan's direction the Postal Service's online projects have ventured far from traditional postal functions. Last April, the service launched the electronic postmark for people who want a higher level of security for their e-mail. This business competes with companies that provide other means of secure electronic messages, such as VeriSign (VRSN), the largest issuer of digital signatures. In May, the agency launched PosteCS, a secure, private online-document delivery system, and UPS promptly filed an antitrust complaint alleging its rival product is disadvantaged because the Postal Service is using monopoly revenues to enter and conquer this new market. The case is pending before the Postal Service Rate Commission in Washington.

For more in this article, see related links below. Or for the unabridged version of this story click here.