Nose of the Camel?: USPS Sneaks in a Rate Hike

Flats Ejection System: "Flyouts" plague FSS.

June 16, 2016 update: At 5 p.m. today, 19 hours after the article below was published, the U.S. Postal Service issued an Industry Alert entitled "Inadvertent Addition of New FSS Zones" as follows:

There were 27 new FSS zones inadvertently added to the July 1, 2016 effective L006 Labeling List as referenced in the Labeling List Changes section of the June 9, 2016 Postal Bulletin (22443). To resolve this action, the newly added zones will be removed from the L006 Labeling List effective August 1, 2016. In addition, mailers may take advantage of the 30-day grace period and opt to continue to use the June 2016 L006 list. Alternately, where the July list has already been implemented, software providers and mail service providers may remove the 27 zones from the list where applicable. The 27 zones to be removed are as follows: 02360, 02738-39, 02769-70, 02878, 02921, 07021, 07027, 07054, 07059, 07069, 07076, 07410, 07435, 07438, 07460, 07480, 23120, 23691, 64050-54, 64056, and 64058. 

Magazine publishers, newspapers, catalogers, and other senders of flat mail are slated to be hit with a backdoor postal rate increase next month.

Implemented without hearings, or regulatory approval, the rate hike will be tiny – a small fraction of 1% for most mailers. But the U.S. Postal Service has given mailers good reason to believe this is just the proverbial nose of the camel in the tent.

So don’t be surprised if there’s a legal challenge to block this precedent, as explained in Good Money After Bad? Mailers Try to Block FSS Expansion.

Officially, what the USPS posted last week in its Postal Bulletin was not a rate hike but rather a “Labeling List Change” – to have its Flats Sequencing System (FSS) machines process mail for an additional 29 ZIP codes. But the shift will mean higher costs for mailers because the postage on Standard, Periodicals, and Package Services flats are typically several cents per piece higher than what is paid for traditionally packaged mail.

No warm and fuzzy
More than 70% of non-FSS mail is presorted into carrier-route bundles, and“FSS is more costly [for the USPS] to process than Carrier Route prepared mail,” postal guru Joe Schick of Quad/Graphics wrote recently in FSS – A Four Letter Word.

“Despite all the discussions around FSS between the mailing industry and the USPS, we have never seen anything that would give us a warm fuzzy feeling about the ability of FSS to be the low-cost process it was intended to be,” Schick wrote.

Was the change "inadvertent"? Vote here.

No one has been able to squeeze a coherent explanation out of the USPS as to why it wants to shift more mail to a less efficient process. But we all know the reason.

It’s the same reason postal officials claim they haven’t bothered to measure the return on the $1.4 billion investment in the giant FSS machines: They don’t want to admit they made a mistake -- moving ahead with the FSS purchase despite the prototype failing two acceptance tests and despite knowing that the entire plan was based on inflated mail-volume projections.

When it comes to the FSS, postal officials are more concerned with CYA than ROI.


Other chapters in the FSS saga include: 

• Flats Litigation System: USPS and Vendor Battling It Out Over Huge FSS Machines
• USPS Needs a Plan B for Flat Mail, Coalition Says 
• Tasers on Stun: 9 New Business Ideas for the U.S. Postal Service 

Postage Rates Decreasing? April Fools!

As noted in my previous article about Trumpazines, I like to celebrate April Fools Day with Onion-esque fake news stories that touch the funny bone and hit close to home. I half-expect the following article to be true because the reality of reduced postal rates is stranger than fiction: 

USPS wants to hang on to the cash

That imminent decrease in the price of Forever Stamps and other postage? Fuhgeddaboutit. It was just a joke.

“You really thought we were going to reduce the cost of mailing? April Fools,” laughed Ben Dover, the U.S. Postal Service’s Vice President of Pricing and Pencil Pushing, at a meeting of clearly not amused mailing industry representatives today.

Previous USPS announcements said the cuts would take effect on April 10, when the Postal Service’s “exigent” surcharge expires. ("See Hell Will Freeze Over on April 10.")

“Get it? April 10. That’s April One Zero: April One is of course April Fools Day, and Zero is the chance we’ll ever reduce postage rates unless someone holds a gun to our heads,” Dover told the Mailers' Tactical Air Command (MTAC).

They're such jokers!
“We should have known not to believe them,” grumbled Gino Del Potato, president of the Amalgamated Association of Stamp Lickers and Junk Mailers. “After all, the people who announced the price changes are the same ones who told us the FSS machines would save the Postal Service big bucks. Even when they’re trying to be serious, half of what they say is a joke."

Dover’s announcement came just in time for Phil LaTelly of Bugtussle, Oklahoma, who was about to file for personal bankruptcy when he heard the news. LaTelly, who invested his substantial life savings in the Forever Stamp futures market three years ago, would have been wiped out by the rate decrease.

“Whew, that news came just in the lick of time,” a relieved LaTelly told reporters on the courthouse steps.

Postal officials have been arguing for years that the surcharge should be made permanent because, gee, who knew that Del Potato's predictions about email and all that Internet stuff reducing mail volumes would actually come true? Their cause seemed hopeless after they lost a court battle, then the appeal, then an attempt to get the Postal Regulatory Commission to reinterpret the appeals court decision, then an appeal of the PRC decision not to reinterpret the court, and finally an appeal to the PRC of the appeals court’s decision.

But despite the courts’ rulings, the three-person Not-So-Temporary Emergency Junta that has governed the Postal Service for more than a year recently concluded that only the full USPS Board of Governors has the authority to decrease rates. There won’t be a full Board until Congress gets around to filling eight vacancies on the 11-person body. Which basically means the exigent surcharge is permanent.

Besides, the two USPS employees on the junta can’t vote for a price decrease without violating the sacred vow taken by all postal executives, “Neither snow nor rain nor heat nor gloom of night shall stay us from raising postage rates as much as we can.”

USPS Raising Rates, Imposing New FSS Rules, and Perhaps Inviting a Legal Challenge

Just in the nick of time, the U.S. Postal Service filed price increases averaging nearly 2% late Thursday on most mail except Forever Stamps.

The Postal Regulatory Commission marked receipt of the filing as 4:07 p.m., less than an hour before closing. If USPS had waited until Friday morning, the December 2014 Consumer Price Index would have been factored into the calculation of the inflation-based cap on postage increases -- perhaps lowering the cap because of plummeting gasoline prices that are leading to deflation.

No change for the Caped Crusader

The rate increases on the "market-dominant" mail classes, slated to take effect April 26, range from 1.886% for Standard to 1.965% for the Postal Service's favorite whipping boy, Periodicals. Take those numbers with a grain of salt.

Those are average increases, but I've never met an average mailer. Different types of mail in the same class may experience rate hikes that deviate significantly from the average -- especially for First-Class Mail.

To achieve the average First-Class rate hike of 1.949% without changing the 49-cent charge for a Forever Stamp, other types of First-Class mail will get larger increases, such as 2.417% for presorted letters and postcards and 10.18% for parcels. Within the Standard Class, carrier-route and letter mail will get relatively low increases, but Every Door Direct Mail will rise nearly 5% and parcels nearly 10%.

Mailers of catalogs, magazines and other flat mail in the Standard and Periodicals classes will also face new rules and incentives for preparing Flats Sequencing System (FSS) mail. The impact is likely to vary significantly from customer to customer.

Flats mailers will face "required FSS preparation for all flat-shaped mail pieces destinating in FSS zones" but also "pricing incentives to reward mailers that prepare and enter flats that are most advantageous to the Postal Service."

Generally speaking, CPI-based rate increases take effect as long as the PRC determines that the Postal Service stayed within the rate cap and followed certain other rules. But there could be a different twist this time around.

A Flats Sequencing System machine

Only the Postal Service's Board of Governors can file for a rate change, but Congress has failed to fill so many positions on the board that it no longer has a quorum. Until more governors are approved, a Temporary Emergency Committee of the remaining governors is acting in place of the board.

A legal challenge to the emergency committee's authority to raise rates might delay implementation, if not block them altogether.

It would be a sweet irony if the inaction of Congress -- where a majority of members seem OK with jacking up the postage paid by business mailers -- blocked USPS from rate increases that would fall disproportionately on business and institutional mailers.

Market-dominant rates are slated to decline by 4.3% this summer when the exigent surcharge expires, but that could be altered by an appeals court or an act of Congress. Postal officials seem especially concerned with the consumer confusion that would result if the price of Forever Stamps were increased and then decreased during the same year, which is probably why they left the price alone.

When (or, rather, if) the surcharge expires, it's not clear whether other First-Class rates could again be rejiggered in a way that again enabled the price of Forever Stamps to remain at 49 cents.

For further reading:

• Postal Rates in 2015 Could Rise or Fall -- or Do Both 
• The Postal Service Giveth, and the Paper Market Taketh Away 
• Rate Cut Has Shippers Switching To USPS

 

Legal Trick Means No Postage Increase -- For Now

With some parliamentary maneuvering, the U.S. Postal Service Board of Governors has apparently avoided the need to raise postage rates sooner than it wanted.

A key deadline for the rumored hurry-up rate hikes passed today when the Consumer Price Index numbers for November were announced.

As the board drew close to losing its quorum last week (because of -- what else? -- Congressional inaction) there was talk the governors were preparing rate hikes that would be announced this week and implemented in the spring. (See USPS May Seek a Rate Hike After All.) That appeared to be the last chance for the governors to raise rates until Congress got around to approving new governors.

But a Federal Register filing published yesterday revealed that the governors came up with another plan: While they still had a quorum, they passed a resolution naming the remaining members to a Temporary Emergency Committee that will "will exercise those reserved Board powers necessary for operational continuity until such time as sufficient members are available to enable a quorum of the Board to convene."

Assuming the resolution withstands any legal challenges, it means Congressional deadlock won't prevent USPS from increasing rates when it chooses. That appears likely to be in a few months, after an appeals court rules whether the 4.3% "exigency" surcharge on most postage should be increased or extended.

A rate hike approved before the board lost its quorum would have to have been filed prior to today's CPI release, which caused a recalculation of the inflation-based cap on rate increases.

The Postal Regulatory Commission now calculates that an increase based on the change in CPI during the past 12 months would be capped at 1.685%. But the Alliance of Nonprofit Mailers puts the true cap at 1.965%, because there hasn't been a CPI-based increase for 15 months. And it projects that, despite plummeting gasoline prices, the inflation-based cap is likely to keep inching up for the next few months.

USPS May Seek a Rate Hike After All

Please see the update to this article, Legal Trick Means No Postage Increase -- For Now.

Barely two months after deciding to skip the usual January price increases, the U.S. Postal Service appears close to announcing that prices will rise in the spring. As usual, the do-nothing Congress is to blame.

The Association for Postal Commerce (aka PostCom), a multi-industry trade group for business mailers, reports that USPS is readying itself for the next postal price change to be effective April 26, 2015." PostCom's "heard it through the grapevine" reports on Postal Service doings are usually right on the mark.

Rates could rise nearly 1.7% for the "market-dominant" mail classes, such as First-Class, Standard, and Periodicals. That could mean a one-cent increase in the price of Forever Stamps, to an even 50 cents.

What's driving the agency's change of plans, according to PostCom, is that Congress has failed to act on five nominations to USPS's Board of Governors, which oversees the Postal Service and must approve any rate changes. If Congress doesn't approve some of the nominations before its holiday recess, scheduled to start later this week, the board will lack a quorum until next month -- and maybe much longer if Congress deadlocks or is too busy naming post offices to act on the nominations.

With no quorum, no rate increases could be enacted. It's not completely clear whether the governors, while still having a quorum, could approve a rate increase but leave it to management's discretion when, or even whether, to file the new rates with the Postal Regulatory Commission.

The Board of Governors announced Oct. 1 that it would forgo the usual inflation-based January rate increase "in part because of the uncertainty regarding the exigent price increase." (See The Postal Service Giveth, and the Paper Market Taketh Away.)

The exigent surcharge of 4.3%, intended to compensate USPS for its losses during the Great Recession, is scheduled to expire next summer, but the agency has gone to court to increase and extend the surcharge.And some politicians have talked of making it permanent.

Also prompting the Postal Service's change of plans may be declining oil prices, which could lead to decreases in the Consumer Price Index. Normal increases in market-dominant rates are limited to changes in the CPI.

The current CPI-based ceiling of 1.678% may be the largest USPS will see for at least a few months if petroleum prices keep dropping. Unless USPS files for an increase, the ceiling will be recalculated Dec. 17 (not Dec. 15, as I originally mis-stated) when the Labor Department reveals the CPI for November.

The Postal Service Giveth, and the Paper Market Taketh Away

October began with both good news and bad news on the cost front for publishers of magazines and catalogs.

Because of announcements made on Wednesday, publishers can scratch the usual January postage rate increase from their 2015 budgets but should probably count on price increases for coated paper.

The U.S. Postal Service Board of Governors announced it would not raises prices on "market-dominant" mail classes early next year, contrary to its usual practice of implementing inflation-based price hikes in January. They have the authority to raise rates 1.58%, which could have led to a 1-cent increase for Forever Stamps as well as higher postage for direct mail, catalogs, newspapers, and retail flyers.

"The governors decided not to seek a change for mailing and shipping products and services in January in part because of the uncertainty regarding the exigent price increase.The Postal Service will continue to evaluate pricing strategies and will communicate about any potential price change filings in early 2015, including advance notice to customers of any price changes."

As noted in Postal Rates in 2015 Could Rise or Fall -- or Do Both, USPS is currently slated to reduce market-dominant rates by 4.3% in the second half of next year when the exigent surcharge expires. But postal officials have gone to court in hopes of increasing or extending the surcharge. And they hope to avoid a price cut when the surcharge expires by implementing an inflation-based price hike at the same time.

The bad news came from Verso Paper, which is closing its Bucksport, Maine coated paper mill. That, coupled with the recent closure of the FutureMark mill in Illinois, could mean an end to rock-bottom prices for magazine-quality paper in 2015.

Verso revealed that Bucksport has been unprofitable for years. Paper industry insiders say the same is true of FutureMark. As the old saying goes, the best way to make a small fortune in the paper business is to start with a large fortune.

Verso, teetering on the edge of bankruptcy, says the Bucksport closure will not affect its proposed merger with NewPage, which is under extended antitrust review by the U.S. Department of Justice. By the time Justice gets done, there may not be anything left of Verso to merge.

Related articles:

• The Monopoly That Haunts the U.S. Paper Market: USPS 
• Forever Stamps: Not a Sexy Investment
• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts

Forever Stamps: Not a Sexy Investment

Sales of Forever Stamps spiked shortly before the 3-cent price increase in January, dropped slightly for a few months, and have now returned almost to normal.

Some people stocked up to beat the price increase but not many bought more than a few extra months' worth of stamps, numbers released Friday by the U.S. Postal Service suggest.

Thanks to the temporary "exigent" surcharge, January's increase to 49 cents was the largest since Forever Stamps went on sale in 2007. That led to speculation about people hoarding or even investing in Forever Stamps.
 
First Class Forever Stamp revenues were up 10% in December 2013 and 35% in January 2014 over the previous year, temporarily netting USPS more than $300 million in additional cash. Then came the drought: The number of stamps sold was down 18% in February, 17% in March, and 12% in April.

By comparison, the 1-cent increase in January 2013 caused hardly a blip -- a 5% increase that month and then a 9% decrease the next.

In the past three months, revenue from Forever Stamp sales has been essentially flat versus the previous year. With the price increase, that means fewer stamps were sold.

But the decrease wasn't much more than would be expected  from the long-term trend of declining First Class letter mail.

If the surcharge expires next summer, as currently scheduled, the price of Forever Stamps will probably decrease for the first time, most likely by a penny or two. But those who own 49-cent stamps will not receive rebates.

Despite email and online billing, people are still mailing plenty of letters: In the 12-month period from September 2013 to August 2014, the Postal Service sold more than 13 billion Forever Stamps, worth more than $6 billion.

Related articles:

• Forever Stamp-ede: Consumers May Hoard Stamps This Week But Stop Buying Next Year 
• Postal Rates in 2015 Could Rise or Fall -- or Do Both
• Could Forever Stamps Become Worthless? What Bankruptcy Might Mean for USPS

Postal Rates in 2015 Could Rise or Fall -- or Do Both

The outlook for changes in postal rates for the next 12 months is murkier than it's been in years.

A rate hike, a decrease, an extension of the temporary “exigent” increase, and even an increase and decrease a few months apart are all plausible 2015 scenarios for First Class, Standard, and Periodicals mailers. That uncertainty is a far cry from the past few years, when "market-dominant" postal rates inched up each January based on the rate of inflation.

The 4.3% exigent increase that was implemented in January is the source of the unusual uncertainty. That surcharge is supposed to disappear after it yields the U.S. Postal Service an additional $3.2 billion, presumably in mid-2015.

The three-judge panel considering an appeal of the exigency case seems unlikely either to eliminate the rate hike or to make it permanent, according to Stephen Kearney, executive director of the Alliance for Nonprofit Mailers. But based on the judges’ comments and questions during recent oral arguments, his reading of the tea leaves foresees a decent chance the judges will remand the case to the Postal Regulatory Commission with orders to revise it.

Big risk to mailers

“The big risk to mailers in the remand outcome would be a possible determination by the PRC that the exigent rates would need to raise more than the $3.2 billion in their original order,” Kearney wrote in a summary of the oral arguments. That could result in hiking the surcharge or in extending it.

The main issue in the case is how much revenue USPS lost as a result of the recent recession, as opposed to revenue it would have lost anyway from increased usage of email, online billing, and other digital media.

“The judges seemed to agree that the PRC was right to accept the recession as an extraordinary event under the statute as well as the need for a special rate increase to cover the recession-caused losses,” Kearney said.

However, the judges indicated that the PRC’s decision was unclear regarding how the Postal Service’s recession-related losses were calculated, Kearney wrote. And they questioned whether the PRC’s methodology fell short of counting all the losses.

Two choices
"The judges likely will decide between two choices: to defer to the expert regulating agency and let the PRC order stand, or to remand the case back to the PRC and tell them to do a better job determining and implementing methods to quantify the revenue that the USPS lost as a result of the 2007-2009 recession.”

With the judges taking one to three months to issue their order and the PRC possibly needing additional time to reconsider the case, it could be well into next year before we know the outcome. And even an order upholding the PRC decision would not completely clear up what will happen to postal rates next year.

Mailers and postal officials are still arguing over how to decide when the $3.2 billion target has been reached. One issue, for example, is whether to count the surcharge on all Forever Stamps sold during the exigency period or only on those that are actually used.

USPS officials could implement the usual inflation-based price increase – probably in the 1%-2% range -- in January. But that could mean a 4.3% decrease a few months later if the exigent surcharge expires as currently planned.

Postal officials have indicated they might postpone a January rate increase in hopes of building up enough rate-increase authority to keep rates level when the surcharge expires. However, if the PRC order is upheld and inflation continues at a tortoise’s pace, USPS's rate authority would probably fall a couple of percentage points short, leading to price decreases.

But remember that, in Washington, “temporary” measures to increase government revenue have a way of becoming permanent. For mailers, there’s a danger that Congress will let the Postal Service keep the extra surcharge in place to keep the agency solvent, to preserve Saturday delivery, to stop some postal facilities from closing, or to finance new delivery vehicles.

Or just because.

Related articles:

• USPS May Delay Next Price Increase
• Why the Exigent Postal Rate Increase Will Backfire  
• Forever Stamp-ede: Consumers May Hoard Stamps This Week But Stop Buying Next Year

The Monopoly That Haunts the U.S. Paper Market: USPS

When it comes to protecting buyers of coated paper from price-gouging, monopolistic suppliers, the federal government has its eye on the wrong targets, an industry analyst says.

The U.S. Department of Justice seems likely to force NewPage and/or Verso Paper to divest at least one paper mill, Verle Sutton wrote this week in his subscription newsletter The Reel Time Report. DOJ is concerned that combining North America’s two largest makers of coated paper would give the new company the power to drive up prices.

History says otherwise, Sutton wrote: “Publication paper prices have been nearly flat (cyclically) for more than thirty years,” he wrote.

“On the other hand, out-of-control postage costs have been an almost insurmountable problem for print advertising customers and, in fact, have led to many bankruptcies, catalog/magazine closures, and paper demand losses to electronic competition,” Sutton added.

Antitrust irony
“Postage costs have escalated sharply for decades, but particularly in the last decade. It is ironic that one government agency (the DOJ) is chartered to make sure there is no possibility of 'unilateral reductions' or 'coordinated effects' in the coated paper business, when the vastly more serious cost problem for print customers is an incredibly inefficient government-sponsored monopoly.”

The bulk of coated paper purchased in the U.S. ends up in the U.S. Postal System in the form of catalogs, magazines, direct-mail pieces, etc. But Sutton is only half right: Yes, rising postage rates are suppressing demand for such items.

But what really hurts is that customers are making strategic decisions knowing that USPS’s future is in the hands of a deadlocked Congress for which "postal-reform legislation" means trying to repeal the laws of supply and demand.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts 
• UPS Praises Postal Service’s Improvements, But Not Its Rate Hike 
• Affordable Postage A Key To Printing Industry’s Future, Quadracci Says

USPS May Delay Next Price Increase

The U.S. Postal Service is thinking about forgoing its usual January price increase next year.

It’s not that postal officials have suddenly been afflicted with a case of generosity after jacking up most postal rates by more than 5% earlier this year. They’re merely preparing for what happens when (or, rather, if) the temporary 4.3% “exigent” portion of the recent rate increase expires.

USPS has gone to court in hopes of making the exigent increase permanent. But if that effort fails, the surcharge will expire after bringing additional postal revenue of $3.2 billion, which will take an estimated 18 months. Postal officials apparently want to avoid across-the-board rate cuts when the exigent increase expires.

“The Postal Service could delay the next rate adjustment so as to coincide with the rescission of the exigent surcharge,” USPS noted in a filing yesterday with the Postal Regulatory Commission.

“If the available percentage of rate authority attributable to inflation were 4.3 percent or greater, then the surcharge could simply be absorbed as part of the scheduled rate change." In other words, USPS could remove the exigent rate increase without actually changing the rates, by simultaneously imposing a normal (inflation-capped) rate increase.

At current inflation rates, the Postal Service’s authority to implement a normal rate increase would be capped not much above 2% when the exigent increase is slated to expire in mid-2015.

“Even if inflation were less than 4.3 percent, the Postal Service could . . . fold in the exigent surcharge into the basic rate structure of some products, while adjusting the prices of other products so as to come out at the cap.” In other words, some products could see no change in rates while others would get a decrease.

USPS’s Board of Governors could pursue other scenarios as well, the filing noted.

“The Governors of the Postal Service could decide to proceed with a January price adjustment for one class of mail — say, Periodicals — while delaying it for other classes.” USPS has been eager to impose additional price increases on magazines and newspapers because it claims to be losing money on the Periodicals class. Apparently, the recent unprecedented quarterly decrease of 8% in Periodicals volume wasn’t big enough for postal officials.

Related articles:

• Why the Exigent Postal Rate Increase Will Backfire
• How USPS Is Like an Airline, and Why That Matters
• Are Printed Magazines Growing or Shrinking? Yes
• Postal Service Dragging Its Feet on Fixing Periodicals 

Are Printed Magazines Growing or Shrinking? Yes

Magazine advertising gains market share in the U.S., but the actual number of magazine copies is declining faster than ever: What in this crazy multimedia world is going on?

Two statistics released this week underscore a counter-intuitive trend: U.S. publishers seem to be prospering despite printing fewer copies of actual magazines.

In fact, many “magazine media” companies are doing well precisely because they can get away with printing fewer copies without suffering the consequences that used to accompany reduced circulation. But first the data, and then the interpretation:

• The volume of Periodicals class mail decreased a stunning 12-plus percent last month versus February 2013, according to preliminary numbers the U.S. Postal Service released Monday. Periodicals mail – which covers distribution of most U.S. magazines, as well as some newspapers – has been gradually declining at a 4%-5% pace the past few years but dropped 7.3% in January and then 12.7% in February. 
• U.S. ad revenue for printed magazines rose an estimated 1.8% in 2013, Kantar Media reported Tuesday. Magazines actually gained a bit of market share from TV, radio, and newspapers. And many magazine publishers no doubt benefited from the 15.7% rise in Internet display advertising.  
• With the high-profile web-to-print launches of such titles as Newsweek, AllRecipes, and The Pitchfork Review, print magazines have become so hip that the recent SxSW conference even devoted a session to their resurgence. Anecdotal information suggests that fewer established titles are abandoning print than in previous years and that more new magazines are surviving the critical first two years. 
• So if magazines are booming but fewer copies are being mailed, other distribution methods must be growing, right? Nope. The newsstand system, which is the second largest distribution channel, had 7.5% fewer copies on sale last year, according to MagNet. And an eyeballing of preliminary Alliance for Audited Media data confirms that the number of printed copies declined for most magazine titles last year. 

A decade or two ago, magazine publishers were in fact magazine publishers and not much else. But when the web started grabbing consumers’ attention and marketers’ dollars, relying on a single product line with declining revenues and rising postage costs became an unsustainable business model for many publishers.

Magazine companies survived by cutting – staff, titles, and circulation -- and by creating new lines of business with web sites, apps, e-newsletters, events, etc. Every week, it seems, we hear about another publisher (or, rather, “magazine media” company) that’s now getting most of its revenue from non-magazine ventures.

Meanwhile, search engines and real people have learned to avoid content farms and keyword stuffers and instead to seek out sources of reliable information. Both seem to be concluding that having a “real” – that is, print – publication correlates with well written, reliable, and objective information. (See How Google Is Becoming the Magazine Industry's New Best Friend for more on this topic.)

No mass
Print is still in the mix, but it serves a different purpose. Advertisers are no longer looking to printed magazines for mass; they have more efficient methods of getting eyeballs. Print ads are now about engagement, about targeting a particular psychographic and mindset, and about demonstrating credibility and stability.

So despite the death-of-print predictions of a couple of years ago, for the foreseeable future the path to publishing profitability seems to include print. But not too much of it. Bloated circulation numbers are less relevant to advertisers. And they’re less sustainable for publishers, especially after the big January hike in postage rates (which may have affected the Periodical numbers in February) proved once again that we have to become less reliant on the Postal Service.

Consider the example of Politico, which a few months ago was a (fairly obscure) web site but can now call itself a "magazine" because it gives away a few thousand printed copies per issue. Its web traffic is up 57% over last year, according to Compete.com’s February unique-visitors statistics.

Or consider Newsweek, which recently was running away so fast from its past and from print that its Internet presence was buried under a mediocre web site. Its recent print-relaunch issue generated massive buzz that helped boost web traffic by 25% last month, all with a print run of only 70,000 copies. At that rate, Newsweek won't even print as many copies in the next 12 months as it did just a few years ago for a single issue.

But that doesn’t matter. For publishers, the important thing is having a presence in print, almost regardless of how many copies they actually print.

Related articles:

•  8 Media Trends You May Have Missed in 2013
•  A Renaissance for Print, Or Is Flat Just the New "Up"?
•  The Magazine Industry's Identity Crisis
•  Why Has Magazine Circulation Declined? Blame Advertising

 

 

FSS Postage Rates Will Raise Issues for Cataloguers, Publications, Printers, and USPS

Because of a provision in the recently announced postal rates, mailers and printers have four months to overhaul the way they prepare catalogs, magazines, and other flat mail.

The coming changes raise a variety of uncertainties for flats mailers, printers, and the U.S. Postal Service itself. And they will make it difficult for many mailers to project how much the new rates will cost them.

The higher rates slated to take effect January 26 will require something that until now has been optional -- and little used: Flat mail going to ZIP codes served by the Flats Sequencing System will undergo FSS preparation. That means the way the mail is sequenced, bundled, and placed on pallets will be completely different from the current methods, which will still be used for non-FSS areas – as explained in FSS Postage Pricing Will Affect Magazines, Catalogs, and Printers.

“FSS machines are a critical element in the Postal Service’s strategic operations plan,” USPS’s recent rate filing says. Currently, however, the efficiency gains that FSS machines produce are limited by the fact that most flats destinating within the ZIP Codes served by FSS machines have not been prepared to maximize FSS efficiency.”

The end of this article has an excerpt from the filing that provides an overview of why USPS is requiring FSS preparation, how the preparation of flat mail will change, and how postage rates for flats mail are being restructured. But first, here are seven questions that I have about these changes. I welcome your feedback on these, either by commenting on this blog or via email at dead.tree.edition@gmail.com.

1. How does a mailer calculate how much its postage will increase? If the exigent portion of the increase is not overturned, the increase will average 5.9% but actually be higher for some mailers and lower for others. The usual method is to take a typical mailing, plug in the new rates, and see how much that changes the bottom line. But mailers now face a whole new rate structure for a portion of their mail, with most having no clue regarding such things as how many mail pieces they will have on DFSS Scheme Pallets.
2. What is the Postal Service’s Plan B? Feeding traditional carrier-route and 5-digit bundles into an FSS machine is not ideal, but it works. The reverse, however, is not true: Mail that has undergone FSS preparation cannot easily be sorted if something goes wrong with an FSS operation, such as machine down time or too much volume.
3. How will co-mail incentives be affected? Postal officials have said they don’t want FSS rates to reduce the incentives to co-mail, which creates a win-win by lowering mailers’ postage while preparing mail in a more efficient manner for the Postal Service. But it will take analyses of many different mailing across multiple classes to determine whether that goal has been achieved. And even if it has, the characteristics of optimal co-mail pools (such as the number of mail pieces) may turn out to be quite different with FSS preparation.
4. Will some co-mail deals between printers and mailers need to be reinterpreted or renegotiated? Co-mail deals often involve a comparison of actual postage costs to baseline postage (the theoretical postage if there were no co-mail or dropshipping), with some sort of guaranteed savings or sharing of savings. But I’m already getting inquiries from some mailers indicating it’s not clear how their current contract language should be interpreted in light of the FSS rates.
5. Will FSS preparation enable printing plants to run more efficiently? Creating fewer, larger bundles will reduce the amount of packaging materials needed and in theory should enable bindery lines to run faster. But are there hidden costs as well?
6. To what extent will FSS preparation reduce mailers’ bindery costs? The way printers charge for creating mail bundles varies from printer to printer and customer to customer. In some cases, customers are charged per bundle – which should mean their bundling costs will decline significantly. In many, if not most, cases, bundling is charged on a per-thousand-copies basis, but will mailers with such deals push for per-bundle charges in the future?
7. Will all printers be able to create mailings with two very different sets of rules, one for FSS zones and one for non-FSS zones? The change should be little trouble for printing plants that specialize in publications, but will it present problems for more general commercial-printing plants that only occasionally handle flats mailings?

Here's what the Postal Service has to say about the new rate structures:

FSS machines are a critical element in the Postal Service’s strategic operations plan. FSS machines reduce the end-to-end processing costs of flat-sized mailpieces by automating their sequencing into delivery order and avoiding labor-intensive manual sortation by carriers. The Postal Service has installed FSS machines in mail processing plants that process high volumes of flat-sized mailpieces.

Currently, however, the efficiency gains that FSS machines produce are limited by the fact that most flats destinating within the ZIP Codes served by FSS machines have not been prepared to maximize FSS efficiency. For example, for mail destinating in FSS zones, carrier route preparation is of no value because it yields excessive bundles that increase bundle handling costs. In contrast, the containerization of FSS mail on FSS scheme pallets enables such mail to completely bypass bundle sortation operations and be fed directly into the FSS operations. The preparation of FSS Facility pallets also improves service by allowing the Postal Service to quickly identify FSS mail so that it can undergo necessary bundle sortation and be made available for FSS processing without delay.

Accordingly, the Postal Service is taking three steps. First, we plan to require the previously optional FSS preparation for all flat-shaped mail pieces destinating in FSS zones. Second, in this filing we are proposing FSS pricing for presorted flat-shaped pieces in Standard Mail, Outside County Periodicals, and Bound Printed Matter Flats that destinate in FSS zones. The proposed FSS prices are designed to minimize changes in postage for flats mailers. Third, in this filing we are also proposing to introduce discounts for mail on FSS scheme pallets that is entered at the location of the destinating FSS machine (DFSS).

Related articles:

• Why the Exigent Postal Rate Increase Will Backfire 
• USPS Admits FSS Is Losing Money  
• So Far, FSS Is A Step Backward, USPS Data Indicate 
• FSS Machines Running Far Slower Than Planned

FSS Postage Pricing Will Affect Magazines, Catalogs, and Printers

The U.S. Postal Service’s growing confidence in the troubled Flats Sequencing System may lead to an overhaul of postal rates and significant changes at printing plants in January.

Postal officials have said recently that they plan to implement new postage rates for the Standard and Periodicals classes (and perhaps First-Class Mail) early next year that include “an FSS pricing structure.” Details have not been released, but discussions indicate the plan will include significant incentives for mailers to create FSS-optimized bundles for ZIP codes served by the giant machines while continuing to make traditional carrier-route and 5-digit bundles for non-FSS areas.

A Flats Sequencing System machine

The move would take aim at a major reason the $1 billion-plus FSS investment so far has increased USPS’s mail-handling costs more than it has reduced delivery expenses: The vast majority of flat mail is still prepared in the traditional manner, which creates extra preparation work at FSS facilities.

Most Standard and Periodicals class flat mail is currently placed in carrier-route bundles, with each bundle containing pieces destined for the same carrier route. A Periodicals carrier-route bundle may have as few as six magazines or newspapers and be only a fraction of an inch thick.

An FSS-optimized bundle, by contrast, is at least four inches thick and contains pieces from multiple carrier routes and often from multiple ZIP codes. That will mean far less handling prior to loading mail into the FSS, but also introduces a new risk: FSS machines have no “Plan B”.

Working traditional bundles on an FSS machine is somewhat inefficient but still works. The converse is not true, however. If the machines break down or are otherwise over capacity, there is no easy way to shift FSS-optimized bundles and pallets to traditional processing.

In recent meetings, such the Mailers Technical Advisory Committee (MTAC), postal officials have described the extensive work they have put in to making the FSS machines more reliable and predictable – such as studying and standardizing best operating practices, tweaking the equipment, and implementing more aggressive preventive maintenance.

Making larger bundles should increase bindery and co-mail efficiency for printers. But now they will also have to follow two very different sets of rules for bundling and containerizing flat mail – a new rule set for FSS ZIP codes and the current rules for non-FSS zones.

The FSS rules and pricing may end up being optional next year, but the incentives are likely to be high enough that commercial printers will not be competitive for producing catalogs, magazines, and circulars unless they can follow the FSS rules.

Related articles:

• USPS Admits FSS Is Losing Money  
• So Far, FSS Is A Step Backward, USPS Data Indicate  
• Flats Litigation System: USPS and Vendor Battling It Out Over Huge FSS Machines

USPS Backs Off From Price-Hike Gambit

The U.S. Postal Service is apparently backing away from an attempt to use one-time payments to mailers as justification for permanent price increases.

As Dead Tree Edition reported last month, USPS proposed to offer large mailers a one-time “Technology Credit” and then to have those credits considered a price decrease for purposes of calculating its inflation-based rate cap. That would result in permanent price increases that would eventually cost mailers far more than the maximum $5,000 credit per mailer.

USPS clarified – or changed – its position this week in response to questions from PRC Chairman Ruth Goldway:

“Revenue forgone from the Technology Credit Promotion for each class of mail will be subtracted from revenue in calculating price cap authority in the upcoming annual price change, and then the same amount will be added back to revenue in calculating price cap authority in the subsequent annual price change,” USPS wrote. In other words, any price increases resulting from the Technology Credits would be temporary.

I’m told that postal officials have claimed during a meeting with mailers that the Dead Tree Edition article misinterpreted the price-cap issue. But several private-sector postal experts have told me they agreed with my interpretation of the Postal Service’s original request, which said nothing about reversing the price increase. And Goldway apparently agreed as well.

“The Postal Service appears to propose the creation of permanent price cap authority,” Goldway wrote to USPS last week. “However, the Technology Credit Promotion is proposed as a temporary, one-time offer. How does the Postal Service intend to reflect the expiration of the Technology Credit Promotion in subsequent . . . rate adjustments?”

The PRC’s Public Representative staff had a similar interpretation, warning the commission about “the danger of creating permanent price cap authority from temporary price reductions” because that could lead to “price cap avoidance tactics.”

USPS estimates it will pay out $61.6 million (down from the original $66 million estimate) in Technology Credits to major mailers that use the Full-Service barcodes during the 12 months that begin June 1. Both Goldway and the Public Representative noted that USPS’s original filing did not show how the payouts were calculated.

In fact, the Public Representative indicated that USPS tried to game the system by presenting “bare bones initial filings without the data necessary to evaluate its request,” making it difficult for anyone to challenge the proposal before the PRC must decide the case.

The Postal Service has already admitted to significant math errors in that initial filing. It now estimates the potential price increase for Standard mail will be 0.231% instead of 0.158% and for Periodicals will be 0.165% instead of 0.244%. It also tweaked the estimated increases for First-Class Mail (0.084%) and Package Services (0.015%).

Because the PRC is requesting so much additional information from USPS on the proposal, it has extended the deadline for commenting until May 17.

Obama Proposes Postage Increase, End to Saturday Delivery

President Obama proposed today a special increase in postage rates and an end to Saturday delivery as part of a plan to right the U.S. Postal Service’s finances.

The Obama Administration’s Fiscal Year 2013 budget plan would also end the “pre-payments” for retiree health insurance and return the overpayments into a retirement fund, which have been the major sources of its recent budget deficits.

“USPS faces long-term, structural operating challenges that have been exacerbated by the precipitous drop in mail volume in the last few years due to the economic crisis and the continuing shift toward electronic communication,” the plan says. “Bold action is needed to ensure that USPS can continue to operate in the short-run and achieve viability in the long-run.”

One part of USPS’s short-run relief would be allowing it “to seek the balance of the modest one-time increase in postage rates it proposed in 2010.” Obama released a deficit-reduction plan in September that contained similar language.

Postal Study Is Bad News For Publishers

Pressure to jack up postal rates for magazines and newspapers was heightened today with the release of a long-awaited study of Periodicals class costs.

Publishers have been hoping for years that the joint Postal Regulatory Commission-U.S. Postal Service study would disprove USPS's claim that postage is covering barely three-fourths of the Periodicals-related costs. No such luck.

"After review of Postal Service responses to data quality recommendations from prior reviews, the Postal Service and the Commission agree that the cost data are reasonably accurate for ratemaking purposes," the report says.

The publishing industry has frequently criticized USPS's methods of allocating costs among classes, noting the rapid increase in costs attributed to Periodicals despite greater automation and better mailing practices.

"Over the past decade, the unit cost of Periodicals has increased faster than the cost of inflation," the report acknowledges, partly because of "the Postal Service’s inability to capture efficiencies in flat mail processing similar to those it has captured for letter mail."

"Substantial opportunities for increasing the efficiency of flat mail processing and transportation exist. Over the past decades the Postal Service has introduced many programs designed to capture some of these efficiencies. However, it is unclear how successful these programs have been."

Still, the PRC believes that "most, but not all, of the Periodicals deficit can be resolved through operational efficiencies." Some of that would entail handling Periodicals mail more like Standard flat mail (such as catalogs).

USPS, however, "believes that substantial differences exist between the characteristics of Periodicals and Standard Mail flats, and that these differences reflect mailer and reader preferences that need to be respected." Upholding those differences limits the potential efficiency savings for Periodicals.

The report spells out ways that the inflation-based cap on postage increases could be pierced to bring Periodicals revenue more in line with costs:

"A legislative change which relaxes strict inflation-based price caps by class and allows for flexible pricing reflecting market dynamics might enable the Postal Service to further remedy the Periodicals cost coverage issue. Absent this legislative change, regulatory action could fix the Periodicals cost coverage problem if the Postal Regulatory Commission intervened as part of its Annual Compliance Determination (ACD) process to raise Periodicals prices to achieve 100 percent cost coverage."

Another option is to get rid of Periodicals pricing altogether, the report says. Periodicals could be charged First Class rates for relatively fast service or Standard rates for slower service and then receive a special discount that recognizes periodicals' unique role in educating and informing the public.

Other articles about Periodicals cost coverage include:

• Special Mail Processing of 'Hot' Publications To End Friday
• USPS Is Wasting Money on Unwanted Services, Publishing Executive Says
• Don’t Blame ‘Overpaid Postal Workers' for Rising Periodicals Costs 
• Do Postal Execs Want To Lose Money on Periodicals? Tough Question #4 For USPS

Obama Supports Postage Increase: Is He Dissing the Print Industry?

The Obama Administration proposed above-inflation increases in postage rates Monday, just a week after the Postal Service indicated it had backed off of just such a rate hike for fear of hurting the printing industry.

The President released a deficit-reduction plan that would "permit USPS to seek the modest one-time increase in postage rates it proposed a year ago."

A week earlier, Deputy Postmaster General Ron Stroman explained in an interview why the Postal Service had decided not to pursue such an "exigent" rate increase: "One of the things we have seen in ongoing discussions with the print industry is that the industry itself is functioning with very close profit margins. We have been very concerned that we not raise prices too high because you just drive people out of the business."

The USPS proposal a year ago, which was rejected by the Postal Regulatory Commission, had average rate hikes of 5.8% for the market-dominant classes of mail. But for Periodicals mailers the increases would have been in the 8% to 9% range.

The president's plan would also "give USPS the ability to better align the costs of postage with the costs of mail delivery while still operating within the current price cap." That may refer to postal executives' desire to impose the highest rate hikes on products on which USPS allegedly loses money, such as Standard flats (catalogs) and Periodicals mail.

The president's plan would also "reduce USPS operating costs by giving USPS authority, which it has said it will exercise, to reduce mail delivery from six days to five days." That's an about face on Saturday delivery: Just seven months earlier, Obama released a budget proposal that included the usual language about requiring six days of delivery and banning the closing of small post offices.

Related articles:

• So Much For Encouraging Publishers To Mail Efficiently . . .
• USPS Seeks Special January Rate Increases 
• USPS Will Not Seek Exigent Rate Increase

How Quickly Can the Postal Service Implement a Rate Increase?

I need to clarify my statement from yesterday (See USPS's Action Delays Announcement of New Postal Rates) about how quickly the U.S. Postal Service can implement rate increases that comply with the inflation-based price cap.

The key language in the PRC's ratemaking rules states, "no rate shall take effect until 45 days after the Postal Service files a notice of rate adjustment specifying that rate." The period could be longer if someone challenges the proposed rates as being out of compliance with the price cap.

Some have also contacted me questioning how quickly the Postal Service's information systems could be updated with the new rates, given the recurring problems with PostalOne and other USPS systems. Good question.

USPS Seeks Guidance On Its Rate Cap

The U.S. Postal Service is asking for a ruling on something that was supposed to be clear -- how much it can increase rates without getting special permission.

A Postal Service lawyer asked the Postal Regulatory Commission today for guidance regarding how to interpret the price cap on most mail products (including First-Class, Standard, and Periodicals), which is based on changes in the Consumer Price Index (CPI-U).

When the PRC announced its decision last week in the exigent rate case, "some uncertainty was expressed regarding the exact amount of authority that is currently available to the Postal Service to adjust rates under the CPI-U price cap," wrote R. Andrew German, managing counsel for USPS Pricing & Product Development in a letter to the PRC.

The PRC's Web site has a chart suggesting that the current price cap is 1.477%, which is based on the average CPI for the most recent 12 months versus the previous 12 months (that is, September 2009 to August 2010 versus September 2008 to August 2009).

But German noted that "it has been more than 12 months since the Postal Service adjusted rates pursuant to the price cap," which seems to mean that a different calculation method should be used.

German referred to a section of the PRC's regulations regarding rate increases that are more than 12 months apart. My interpretation of that section is that the current rate cap would be based on comparing the average CPI for the most recent 12 months to the average CPI for calendar year 2008, yielding a cap of only 0.864%. But I'm no lawyer, and the wording is far from clear in this case.

"For purposes of developing its own financial plans, the Postal Service needs an interpretation of that rule (or any other applicable  rules) upon which the Postal Service can rely if it were to begin preparation of the requisite documentation for CPI-U rate adjustment," German wrote.

The postal-reform law and the PRCs regulations interpreting that law are clear when things go as envisioned, with the USPS seeking rate increases once a year based on increases in the CPI-U. But no one seemed to anticipate the Consumer Price Index decreasing, which is what it did in 2009 primarily as a result of rapidly declining fuel prices. There was no provision in the law requiring the Postal Service to decrease rates as a result of that deflation and no guidance regarding the baseline period for future rate-cap calculations.

Don’t Blame ‘Overpaid Postal Workers' for Rising Periodicals Costs

The U.S. Postal Service’s cost to deliver a magazine or newspaper has been rising twice as fast as inflation for more than two decades, but don’t blame employee pay levels. The real culprit is declining productivity, the Postal Service’s own numbers indicate.

“The tendency of Periodicals costs to increase much faster than inflation . . . has continued with few interruptions since FY1986,” postal expert Halstein Stralberg wrote recently. As a result, the Postal Service has repeatedly hit the Periodicals class with rate increases that exceed both inflation and those for most other classes, as it is trying to do again in the exigent rate case being considered by the Postal Regulatory Commission.

Stralberg blames “the ingrained Postal Service culture” for the Periodicals mess. “The machines they use have become more powerful and sophisticated over time; but the way that operational decisions are made, and the lack of awareness of cost attribution issues among those who make the decisions, has changed very little,” Stralberg’s wrote in his testimony on behalf of Time Inc. for the exigent rate case.

Using the Postal Service’s own data, Stralberg’s showed that USPS’s cost of delivering a periodical increased by 200% from 1986 to 2009 even though inflation was a bit less than 100%. (See Stralberg's chart above.) The Postal Service’s wage rate – calculated as total USPS wages and benefits divided by total hours worked – increased 140%.

For most of the period studied, in fact, changes in the USPS wage rate closely tracked the Consumer Price Index. After all, the Postal Service’s labor contracts generally peg cost-of-living increases to CPI (which is a good reason to limit price increases to changes in CPI as well). Only in the past decade, presumably because of benefits costs (including, perhaps, pension and retiree-benefits overpayments) did the wage rate start to diverge from CPI.

Although some mailers have blamed employee compensation levels for rapid cost increases, Stralberg’s analysis shows that the larger problem is productivity: The Postal Service requires more work hours today to deliver a certain number of periodicals than it did in 1986.

The Postal Service, Stralberg wrote, has never really addressed these “unexplained and anomalous Periodicals cost increases” that occurred during a period in which it “deployed several generations of new technology that were supposed to automate and sharply reduce the costs of flats mail and Periodicals in particular.”

The USPS can’t blame publishers, who during that time have implemented a variety of measures that were supposed to reduce Postal Service costs, such as dropshipping, shifting mail from sacks to pallets, and putting a larger proportion of copies into efficient carrier-route bundles.

Here are excerpts from Stralberg’s explanation of the Postal Service’s skyrocketing Periodicals costs:

For more than a decade, various studies have shown that “as processing of other mail classes was automated, Periodicals continued to be processed in a more manual fashion. Employees freed up by the automation of other mailstreams were kept busy handling Periodicals, whose costs therefore skyrocketed. Additionally, portions of indirect costs that previously had been borne by other mail classes were shifted to Periodicals by the Postal Service’s cost attribution system.”

“In recent years, the Postal Service has acquired enough automated flats sorting capacity, particularly with the recent loss of volume, to sort practically all flats to carrier route on high speed automated equipment. However, many facilities, unable or unwilling to change their traditional ways, or perhaps simply to keep employees occupied, have continued to process Periodicals manually.”

“There evidently are postal clerks … whose costs must be attributed to something, and as long as postal managers continue to send them Periodicals flats to be sorted, their costs will be attributed to Periodicals flats.”

For further reading:

• Postal Service Inefficiency Drives Up Periodicals Costs: Stralberg published a report earlier this year showing that USPS has “a great surplus” of flats-sorting machines but still insists on using more expensive manual sortation.
• Do Postal Execs Want To Lose Money on Periodicals? Tough Question #4 For USPS: Another reason the Postal Service's Periodicals costs may be so high: Postal executives may be playing a political game by ensuring the Periodicals class always looks unprofitable.
• A Decade of Postal Mismanagement Is Costing Publishers and Catalogs