At this point, Amazon might as well just buy the Postal Service

November 11, 2013

The news out this morning that Amazon.com had essentially hired the U.S. Postal Service to deliver on Sundays was both surprising and completely sensible.

The partnership of a floundering, old-world institution and perhaps the nation's most future-oriented tech company — Amazon's strategy is to take losses today in the service of profits down the road — would at first seem incongruous. As my colleague Brian Fung outlined, though, teaming up for Sunday delivery gives both of them an edge over the competition that could force the rest of the industry to adapt.

And why stop there? Amazon and the USPS have lots more to gain from each other — so much so that an outright merger might maximize the best qualities of both.

Let's start with the situation of the USPS.

The Postal Service has known for a while now that the economics of the shipping industry were changing such that it would have to make dramatic changes to stay afloat. A Boston Consulting Group study in 2009 mapped declining mail volumes out through the year 2020, when it calculated that the USPS would lose $15 billion in a single year — especially since revenue per delivery point would fall by 30 percent, as profitable first class-items disappear.

On the way down. (Boston Consulting Group)
On the way down. (Boston Consulting Group)

And yet, the Postal Service has been bettering itself. Even as overall revenue falls, it's been serving more delivery points and increasing income from "negotiated service agreements" with private companies. It's proven itself to be a decent innovator, keeping up with technology to move mail more efficiently. It has shed more than 200,000 employees over the past 10 years and is in a position to lose more, as about half are eligible for retirement. That should make it easier to bring down labor costs, which now make up some 80 percent of the USPS' budget, compared to UPS and FedEx's respective 61 percent and 43 percent.

The biggest problems for the Postal Service today are the overhang of pension and retiree health benefit obligations, which totaled $96 billion at the end of 2012, and endless congressional wrangling over how it should operate. Although it's managed to reduce 21,000 routes and consolidate some mail processing facilities, pleas to close unprofitable post offices and cut Saturday delivery always run into a wall of "no," and substantial changes to the business model — like the ability to offer "non-postal" services — are subject to legislative approval. That's led to a consistent drumbeat of calls for the USPS' privatization, which has been happening gradually for decades anyway, and which most of Europe has already accomplished. The question is just how to pull it off.

Now, let's turn to Amazon. The company has been investing heavily in ways to deliver more products faster, cheaper, and farther than the competition, including dozens of warehouses in the U.S., a fleet of trucks, and even "lockers" for people to pick up their goods at local convenience stores. It's expensive: Fulfillment costs amounted to $1.96 billion, or 11.5 percent of revenue, last quarter alone. Amazon considers it an investment in the future, as part of its strategy to provide anything customers might need as fast as they could possibly get it (as well as a tax strategy, since it knows it'll lose the benefits of lacking a physical presence in states soon anyway). The embodiment of this gambit is AmazonFresh, which doesn't yet make a profit, but is supposed to ease the transition towards delivering more and more goods.

Owning the Postal Service would get Amazon the rest of the way there. It's got 31,000 post offices and 461 mail processing centers, which represent significant excess capacity. The USPS is still the best last-mile mail delivery service provider, and Amazon is perhaps the most aggressive warehousing logistics innovator, which could enable a partnership — similar to one proposed by a group of former postal leaders and partly approved by the National Academy of Public Administration — that would leverage the strengths of both.

Of course, there are important questions to ask about the public role of the USPS in delivering the mail to everyone, wherever they might be, even if doing so costs more than it's able to charge. But there are other examples of former government monopolies that have gone private on the condition that they maintain a degree of universal service, like the phone system (the benefits of the resulting telecom duopoly are debatable, but it's probably better than still having Ma Bell).

Another concern: Wouldn't it be problematic to hand a monopoly to a private company? Well, the new Amazon Postal Service could also be required to offer its services to other companies at competitive rates, as it already does with its rapidly expanding network of data centers. Meanwhile, competition is already shaping up: EBay has partnered with FedEx, and it's not hard to imagine Wal-Mart doing the same with UPS.

Sure, there are still a lot of details to be worked out; the Postal Service isn't Amazon's typical rinky dink acquisition, and the financials could be challenging even for CEO Jeff Bezos's ever-permissive investors. But with no obvious fix in sight, it's worth keeping all options on the table.

Disclosure: Amazon CEO Jeff Bezos owns The Washington Post. 

Lydia DePillis is a reporter focusing on business policy, including lobbying, government contracting, and international trade, with a bit of urban affairs and infrastructure on the side.
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Brian Fung | November 11, 2013