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Will Net stamps, email hurt postal monopoly?

The U.S. Postal Service expects to announce a record fifth consecutive year of profits on revenues of $62 billion, despite a bleak report released by the General Accounting Office.

Have reports of the U.S. Postal Service's demise been greatly exaggerated?

First-class mail is expected to begin declining by 2003 in the face of email and electronic bill-paying, according to a General Accounting Office (GAO) report delivered to the House Subcommittee on the Postal Service last week. Based on projections provided by the USPS, the document says the Internet could wipe out $17 billion in postal service revenues and threaten the agency's ability to provide universal first-class mail service.

Also last week, however, the USPS announced a new vice president for ePayments, a new online division. The move followed the September launch an online marketing deal with Amazon.com to boost the federal agency's presence as a major player in the burgeoning e-commerce delivery business, and came on the heels of August's debut of a new service, PC Postage, to let consumers print stamps directly from desktop computers.

The GAO's gloomy outlook further contrasts with the fact that the USPS expects to announce a record fifth consecutive year of profits on record revenues of $62 billion.

Few doubt that the Internet is forcing a major transition in the postal service. But while some worry the agency is slipping into irrelevancy, competitors have come forward with complaints that it is unfairly extending its monopoly advantages into new businesses that have little to do with delivering the mail.

"We will revolutionize the way we grow the business, manage the mail, build on our strong Internet presence, and earn our share of the growth in e-commerce business by becoming the carrier of choice for merchandise purchased or returned through the Internet," Postmaster General William Henderson said in a statement last week.

"The GAO report is not saying that the postal service is all that fragile," said James Cameron, a lobbyist in Washington, D.C., representing Federal Express. "It is really saying that the postal service will hit a wall unless the rules of competition are changed."

Bills to strike a balance
The issue has gained the attention of Congress, where at least two bills have been introduced to help keep the USPS viable while ensuring it doesn't squeeze out competition in emerging businesses. H.R. 2535, introduced by Rep. Henry Waxman (D-California), and H.R. 22, by Rep. John McHugh (R-New York), would give the USPS greater flexibility in setting postal rates and set ground rules for the USPS to enter non-postal markets.

H.R. 22 has won support from several influential lobby groups, including FedEx, and for now it appears to be the front-runner. Under the bill, the postal service would be allowed to enter new businesses, such as electronic bill-paying, only by setting up a subsidiary that would compete under the same rules as private companies.

The bill "would position the postal service to allow it to compete and give it greater flexibility to set rates, balanced with provisions requiring it to compete on a more level playing field, " said Dana Johnson, McHugh's press secretary.

H.R. 22, which was approved by the House Subcommittee on the Postal Service, still faces some hurdles. Henry Black, a spokesman for United Parcel Service (UPS), said his company believes the bill doesn't go far enough in addressing competitive concerns.

"The postal service wants to have it both ways," he said. "They wail about how the sky is falling, that they can't survive the Internet and email unless they expand into other lines.

"At the same time, they refuse to acknowledge they're getting special treatment, from paying zero taxes to not paying parking tickets. Congress has to act, but H.R. 22 doesn't produce a level playing field."

Even if online bill payments seem destined to cut into the USPS's future revenue, there are some bright spots.

The junk mail boon
Direct marketers are increasing their reliance on junk mail, for example, which last year accounted for 44 percent of all pieces of mail handled by the post office. In addition, the e-commerce boom is increasingly shipping through the post office.

Leading online retailer Amazon, for example, has said that 65 percent of its customers choose the USPS's Priority Mail option for shipping. Amazon and the USPS teamed up last month for a TV and print advertising campaign to promote the postal service.

In launching PC Postage, meanwhile, the agency joins numerous private-sector companies that hope to stake a profitable niche on the Net.

Online stamp sellers in the private sector don't seem deterred by the GAO report. They are building powerful business alliances and marketing new services that go beyond providing stamps via the Net.

Stamps.com and E-Stamp are the only two private-sector companies approved by the USPS to sell stamps over the Net. Both companies are on Wall Street's radar.

In a deal worth $56 million, America Online took a stake in Stamps.com last week and gave it exclusive placement on its service. Stamps.com announced today that it will acquire iShip.com, a Net-based shipping technology, to build a one-stop mailing center for consumers and businesses. iShip's investors include UPS, Mail Boxes Etc., eBay, Intel, and venture capital firm Draper Fisher Jurvetson.

E-Stamp rose 32 percent on its first day of trading this month. Both Excite@Home and Microsoft have stakes in the company.

A representative for Stamps.com was not immediately available for comment. E-Stamp wasn't available to comment on the GAO report because it's still in its post-IPO quiet period.

But neither Stamps.com nor E-Stamp mentioned the threat of online bill payments cutting into stamp sales as risk factors in filings with the Securities and Exchange Commission.

Another reason online stamp sellers may not suffer from the prediction in the government report is because they are targeting businesses, not the consumers who are migrating to online bill-paying, analysts say.

"It's going to cut into everybody overall, but it will effect the post office more than these guys directly because they are branching out into other businesses," said Stephen Lacey of the IPO Reporter. "Businesses still need the ability to send things out in bulk and do it easily."

News.com's Courtney Macavinta contributed to this report.