It’s Sunday and the Postman Cometh: Mysteries of the Amazon deal, continued

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The arrangement between the Postal Service and Amazon to deliver packages to members of Amazon Prime on Sundays continues to make news, but details about the deal remain scant.  In a post a few days ago, we speculated about how much the Postal Service might be making, and we took a look at a PRC docket that might have been about the Negotiated Service Agreement (NSA) on the deal.  We were wrong on both counts, but not by much.

It looked like the deal was covered in Docket Number CP2014-3, which was about an NSA that was approved on November 7, just a few days before the Amazon deal was announced.  This NSA involved Priority Mail, which one assumed was how Amazon would be able to ensure that orders made on Friday would be delivered on Sunday.  

As it turns out, however, Amazon will be mailing its parcels using the much less expensive Parcel Select, as we learned from a reader who also pointed us to the correct docket, CP2014-1.  Not that the docket reveals very much.  The language in the filings is very vague, and the USPS-Amazon contract included in the docket is almost entirely blacked out (as you can see at the bottom of this post).  The PRC approved the Amazon NSA on October 29 in Order No. 1863.

Retired postmaster Mark Jamison, who has contributed to a number of PRC dockets and who writes regularly for Save the Post Office, has requested permission to see the non-public materials in CP2014-1.  Amazon and the Postal Service have filed comments opposing his request, and it's not certain what the PRC will do.  Even if he's granted access, Mr. Jamison will not be permitted to share what he learns, so all we can do is continue speculating.

 

Parcel Select gets priority

Parcel Select is a workshare program that provides the Postal Service’s lowest-cost ground shipping option.  It’s the means by which FedEx and UPS use the Postal Service for “last mile” delivery of their packages.  The big mailers, consolidators, and private shippers presort the parcels and deliver them to the Destination Delivery Unit (DDU) or another entry unit from where they are often delivered in a surprisingly speedy way.

Parcel Select generally takes two to nine days, but if the shippers get the parcels to the DDU by a certain time — Early Bird DDU — the Postal Service can often provide same-day delivery.  Regular DDU — dropping off the parcels after the carriers have left — usually means next working day delivery. 

For orders placed on Friday, then, Amazon just has to get the parcel to the DDU on Saturday to be reasonably certain of Sunday delivery.  That’s about as fast as Priority Mail, the service available to average customers who want speedy delivery.  It’s also much less expensive than Priority, since under the workshare system, Amazon can do the presorting in its giant warehouses, where non-union workers are paid far less than USPS employees.  (For more about Amazon’s anti-union policies, low-wage jobs, and the conditions in its warehouses, check out this piece on Huffington Post and this Salon article about Brad Stone's new book on Amazon.)

Apparently Sunday delivery for Parcel Select has been in the testing stage for many months.  In early February 2013, when the Postmaster General was on TV explaining why he wanted to eliminate Saturday delivery, he also revealed that the Postal Service had plans to start delivering parcel on Sundays.  That same month, some communities in Missouri and Kansas got Sunday delivery.  It has also been going on a while in other locations, like Delaware and northern New Jersey, perhaps because they are near Amazon warehouses.

The minutes of a meeting of some focus groups of the Mailers Technical Advisory Council (MTAC), also held back in February 2013, explain some of the details of the program.  They indicate that the Sunday delivery service requires regular postage plus a special fee; it applies to Parcel Select initially, with the hope of expanding to other products later; parcels can be dropped at the DDU on Saturday or Sunday; and an NSA is required.

According to an internal USPS memo dated October 8, the Postal Service is also testing Sunday delivery for Parcel Select in more than 900 ZIP code areas working out of 250 hubs, using low-wage city carrier assistants and rural leave replacements.  It’s not clear from the S.O.P. instructions if the test is limited to Amazon, but for now at least, Sunday delivery is strictly for commercial shippers using Parcel Select.

 

Revising the estimates

A few days after our piece on the Amazon deal, the  Wall Street Journal came out with an article entitled “A Peek at Amazon’s Contract with the Postal Service.”  Someone had apparently told the WSJ where to find the right PRC docket.  As reported by the WSJ, “The contract runs for five years, demonstrating a long-term commitment from Amazon for an initiative that may prove unpopular, logistically difficult or expensive. There is an escape clause, however:  Either side can terminate the contract with a 30-day notice.”

The Postal Service told the WSJ that the arrangement with Amazon represents only “a small percentage of total Parcel Select volume.”  Parcel Select brings in about $1.46 billion, about 2.2 percent of total revenues, so a small percentage of that is not much at all.  But it’s probably much smaller than one might imagine.

Now that it's been revealed that Amazon will be using Parcel Select instead of Priority, it’s time to revise the estimates on the value of the contract.  The projected revenues are probably far less than the $7.5 million we initially estimated.

According to the PRC Annual Compliance Determination, the average Priority parcel brings in about $7.20 in revenue, while the average Parcel Select piece brings in $1.48.  That includes Parcel Select Lightweight, which starts at less than a dollar and is not included in the Amazon contract, so let’s say the average Amazon piece is more like $2.50, plus, say, $1 extra for Sunday delivery. 

There are about 10 million Amazon Prime members in the U.S., and they average 30 orders a year.  (At $2.50 a delivery, that $75 in postage — a Prime membership costs $79.)  If New York and L.A. represent, say, a half million Prime members and they each get a couple of Sunday orders a year, that’s a million Sunday deliveries annually.  At $3.50 each, that’s $3.5 million in revenues.  With a profit margin of about 30 percent, the Amazon deal might net the Postal Service $1 million in its first year, maybe $3 or $4 million when the program is expanded to other cities.

That’s pretty much in line with the estimate offered by Satish Jindel, president of SJ Consulting Group, a logistics advisory firm based in Sewickley, Pennsylvania.  Jindel told Bloomberg that the deal would bring in about $1 million in revenue for the rest of this year.  “Jindal said the number is a guess as it is too small to be worthwhile to calculate.”

A cool million is nothing to sneeze at, but like Jindal says, the profits on the Amazon deal are hardly worth calculating.  Whatever it brings in, the revenues will be just a fraction of a percentage of the Postal Service’s annual budget of $65 billion.  As we originally surmised, Amazon is not going to “save the post office,” despite all the headlines suggesting it might.

 

Amazon & the Postal Service deliver a speedy reply

Upon learning about the Amazon deal, Mark Jamison was sufficiently concerned to seek access to the non-public materials in the PRC docket approving the NSA.  On November 21, he filed a motion requesting permission to view the docket so that he could evaluate for himself whether or not the agreement complied with the Universal Service Obligation and the laws about discriminating against users of the mail.  Along with the motion, Mr. Jamison submitted the required compliance statement promising not to disclose any information in the docket.

The day before Thanksgiving, both the Postal Service and Amazon filed comments with the PRC opposing Mr. Jamison’s request (their briefs are here and here).  The day after Thanksgiving, Mr. Jamison replied to their arguments.  The ball is now in the Commission’s court.

Amazon and the Postal Service argue that the non-public version of the contract contains commercial information “that has extreme competitive sensitivity.”  This includes the prices Amazon is paying for Sunday delivery, volume projections, and the ZIP codes covered by the arrangement. 

Why the ZIP codes would be sensitive information is a bit difficult to understand.  Amazon and the Postal Service have publicly stated that the program will begin in New York and Los Angeles and eventually be expanded to Dallas, Houston, New Orleans, Phoenix and other markets.  The ZIP codes for these cities are hardly a secret.  But perhaps the list of ZIP codes contains other cities as well.  Indeed, the list in the contract goes on for many pages, so maybe the program is going to get a lot bigger than we’ve been led to believe. 

While the specific ZIP codes probably wouldn’t have all that much commercial value, they might reveal something else.  Combined with Census data, they might provide evidence that the Postal Service will be delivering primarily to more affluent areas. There’s no indication in the PRC docket that anyone looked into this question when the Commission and Public Representative reviewed the NSA, but it could be valuable in assessing whether or not the agreement is discriminatory.

As for the pricing, there's no mystery about how much Parcel Select costs in general — the price list is here — so it’s just a question of what kind of discount Amazon gets for large volumes and what premium it’s paying for Sunday delivery.  Industry insiders probably already have a pretty good idea about this, so it’s not likely this information would be of much value to competitors. 

In any case, anyone who is given access to the non-public materials must sign an agreement promising not to reveal the information or take advantage of the information.  Considering that Mr. Jamison is neither a private shipping company nor a retail shipper, there’s little reason to believe he himself will profit from the knowledge he obtains from seeing the docket.  His aim is strictly to review whether or not the agreement complies with laws and falls within the scope of the USO.

 

Adequate justification for disclosure

Amazon's brief argues that Mr. Jamison has not provided “adequate justification for disclosing these materials,” and it says that his “purported rationale is so broad and content-free that, were it approved, any request for access to non-public information could be couched in a way that satisfied the standard.” 

Mr. Jamison’s justification for requesting access to the docket is actually quite simple.  As explained in his motion for access, Mr. Jamison wants to view the materials “for the purpose of conducting an independent evaluation of the contract to determine if it meets the terms and conditions asserted by the Postal Service in its filing and if the rates, fees, and/or services offered in the contract comport with section 3653 and specifically how this contract may relate to the obligations of universal service and service to rural areas under section 39 U.S.C. sections 403 and 404.”  

It was obviously difficult for Mr. Jamison to be more specific about what he wanted to see, considering that he didn’t even know which docket to look at.  None of the dockets on the PRC website mentioned Amazon by name, and the Postal Service’s reply to Mr. Jamison’s motion continues to keep Amazon’s name out of it, even though the deal is all over the news.  The first official acknowledgement that Docket Number CP2014-1 even dealt with the Amazon NSA came from Amazon itself — when it filed comments opposing Mr. Jamison’s request.

As Mr. Jamison’s states in his reply to the Amazon brief, “The very opacity of the initial docket prevents one from making any specific claims as to what may be problematic with the docket.  Until Amazon filed its motion to oppose, there was no way of knowing if Amazon was even a party to the docket.”

It should be noted that in reviewing the NSA the PRC and its Public Representative seem to have concerned themselves primarily with the issue of whether or not the Postal Service would cover its attributable costs with the deal, not with the broader issues of the U.S.O. and Title 39 that were on Mr. Jamison's mind.  Perhaps if they had shown more interest in these matters, it would not have been necessary for others to be concerned about them.

 

A “reasonable” limitation or skimming the cream?

Amazon’s argument against access to the docket is not confined to the commercial sensitivity of the materials.  Amazon also takes the opportunity to argue that “the Postal Service exercises considerable flexibility in determining how it delivers the mail,” so there is nothing amiss in delivering on Sunday for only one company and in only a few markets.  This argument actually takes us into the crux of the issue, so it’s worth considering in some detail.

To demonstrate that the Postal Service is within its rights to deliver just to some areas on Sundays, Amazon cites half a dozen examples showing the Postal Service’s “flexibility” in how it delivers the mail.  All but one involves the actual mode of delivery to a residence — door delivery, curb delivery, cluster boxes, bulk delivery to a dorm, etc.  As Mr. Jamison points out in his reply to Amazon, these examples are not about singling out particular regions for a special service, so they’re not very relevant.

Amazon does cite one example that’s interesting to consider, however.  In 1978, the PRC (then the Postal Rate Commission) considered a complaint, which was part of a general rate case, by the private carrier service Purolator.  At stake was the legality of USPS Express Mail, which was available only in 700 cities that were located near airports that had the necessary handling facilities. 

In its brief, Amazon says that Express Mail was available in 47 cities, but that seems to be a mistake.  Same Day Airport Service was in 47 cities, but Express Mail (which offered Next Day Service) was available in 700 cities, and the plan was to expand it to 23,000 cities.  In mentioning the figure 47, Amazon makes it seem like Express Mail was almost as limited as Sunday delivery to New York, L.A. and a few other big cities.  Express Mail was actually widely available.

Purolator nonetheless argued that because Express Mail was available only in some markets (400 at the time of the case), it was unfairly anticompetitive, discriminatory, and of questionable legality.  To help make this case, Purolator enlisted the services of a relatively young and not-yet-so-famous attorney named Richard A. Posner, who was asked to co-author a report about the “anticompetitive characteristics” of Express Mail. 

That is the same Richard A. Posner who would go on to become one of the most respected federal judges in the country.  Known for his writings on antitrust law and for authoring nearly forty books on the law, Mr. Posner has sometimes been mentioned as a potential nominee to the Supreme Court. 

As Mr. Posner explains in his report for Purolator, when a company provides a service only to communities where it will make the most profit, it’s considered cream skimming, and the practice is generally prohibited by the ICC and state regulatory commissions so that private carriers don’t just deliver to the most profitable markets. 

In the case of Express Mail, however, it wasn’t a private carrier doing the skimming.  As Mr. Posner writes, Express Mail’s “selective entry into certain high-profit markets currently served by for-hire courier companies is a classic instance of ‘cream skimming’ — in this instance practiced by USPS.”  As a consequence, wrote Posner, the Postal Service's competitors were at an unfair disadvantage, and any company that wanted to lower its prices to compete in high-density areas would have to raise prices in low-density routes.  

When it ruled on the Purolator case, the PRC did not say the Postal Service could limit its services to whatever regions it wanted.  Rather, the Commission said, “When evaluating limitations on the availability of services such as Express Mail, we must therefore consider whether the limitation is reasonable.  We must ask, for example, whether it is motivated by genuine requirements of post economies, or is an attempt — as Purolator suggests elsewhere in its brief — to serve profitable routes while neglecting those with less desirable traffic levels.  These are questions of fact to be answered on the basis of an evidentiary record.” 

In the Purolator instance, the Commission clearly did not approve cream skimming or give blanket approval to offering some products only in some markets.  It simply observed that each case needed to be evaluated on its own by looking at the evidence in the record.  But how can anyone make that evaluation about the Amazon NSA if the record is off limits?

Anyway, the point here is not that the Postal Service shouldn’t be expanding delivery to Sundays — that’s just the kind of thing it should be doing to bring in new revenues.  The question is whether it's appropriate to provide this service only for members of Amazon Prime and only in profitable markets, like New York and L.A.  It shouldn’t take one of the country’s leading jurists to see that there might be a problem here.

 

No access for critics?

Amazon’s brief against giving Mr. Jamison access to the docket doesn’t restrict itself to an argument about the sensitivity of the materials and the lack of specificity in Mr. Jamison’s request.  It also has a few choice words to say about Mr. Jamison himself.

Amazon describes Mr. Jamison as a retired postmaster who now writes about his “former employer” on the Save the Post Office postal blog.  In his articles, says Amazon, Mr. Jamison “has commented that the ‘postal rate system has become a morass of embedded privilege,’ business mailers ‘are doing fine,’ and the Postal Service is a ‘wholly owned subsidiary of Mailers Inc.’  He has also opined, among other things, that PMG Donahoe lied in recent testimony to the Senate, and ‘Donahoe and the [Board of Governors] have demonstrated an unrestrained contempt for Congress, the rule of law, and most importantly, the American people.’”

These quotations are presumably intended to horrify the Commission (OMG, did he say the PMG lied?) and to imply that anyone capable of such intemperate remarks cannot be trusted with the sensitive information in the Amazon contract.  That’s unfortunate: Are critics of the Postal Service’s leadership not entitled to access to the docket simply because they are critics?  (By the way, the PMG did give misleading testimony, and later said he "misspoke.")

Amazon returns to the indirect ad hominem tactic in the conclusion to its brief.  Shippers must be assured, says Amazon, that the terms of their deals with the Postal Service will be kept confidential or else the Postal Service’s competitiveness will be greatly reduced.  Shippers should not have to worry that “confidential business information embodied in a contract will be available to any curiosity-seeker who professes an interest in the information for compliance review” (italics added).

As readers of his articles know, Mr. Jamison is hardly a “curiosity-seeker” who simply “professes an interest” in postal matters.  His interest is anything but touristic or superficial, and it is unbecoming of Amazon to suggest otherwise. 

Anyway, it's nice to see that Amazon’s attorneys took some time to read a few of Mr. Jamison’s pieces on Save the Post Office.  They're worth reading.  (They're all archived here.)

Here's the redacted version of the USPS-Amazon contract.  It's worth reading, too.

(Photo credits: Amazon postal truckPostal worker delivering)

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