Postal Rate Commission
Submitted 12/21/2006 2:05 pm
Filing ID: 55459
Accepted 12/21/2006
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
POSTAL RATE AND FEE CHANGES, 2006 )
Docket No. R2006-1
INITIAL BRIEF
OF
AMAZON.COM, INC.
William J. Olson
John S. Miles
Jeremiah L. Morgan
WILLIAM J. OLSON, P.C.
8180 Greensboro Drive, Suite 1070
McLean, Virginia 22102-3860
(703) 356-5070
Counsel for Amazon.com, Inc.
December 21, 2006
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARGUMENT
I. BPM COST COVERAGE SHOULD BE SET BETWEEN PARCEL
POST AND MEDIA MAIL AS RECOMMENDED BY DR. HALDI
A. Unlike Dr. O’Hara’s Proposed BPM Coverage, Dr. Haldi’s Proposed
BPM Coverage Is Consistent with the Commission’s Treatment of BPM
in Recent Dockets
1. In the Most Recent Litigated Docket, the Commission Placed BPM’s
Cost Coverage between Parcel Post and Media Mail . . . . . . . . . . . . . . . 6
2. BPM Cost Coverage Has Properly Decreased as the Percentage of
Books Has Increased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
B. Dr. Haldi’s Proposed Cost Coverage Is Based on a Proper Application
of the Statutory, Non-cost Rate-Setting Criteria . . . . . . . . . . . . . . . . . . . . 9
1. ECSI (Criterion 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
a. Other Package Services Subclasses and ECSI . . . . . . . . . . . . . . . . . 9
b. Proper Application of ECSI to BPM . . . . . . . . . . . . . . . . . . . . . . 10
2. Value of Service (Criterion 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Effect of Rate Increases (Criterion 4) . . . . . . . . . . . . . . . . . . . . . . . . 11
II. BULK MAILINGS OF BOOKS PUBLISHED IN AN ELECTRONIC
MEDIA FORMAT SHOULD BE ELIGIBLE TO BE SENT AS BPM.. . . . . . . 12
A. Electronic Media Already Qualify To Be Mailed as BPM Under Certain
Circumstances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
B. Dr. Haldi’s Proposal Will Not Change the Nature of BPM . . . . . . . . . . . . 14
ii
1. BPM Books on Electronic Media Will Remain Small Parcels . . . . . . . . 14
2. The Proposal Is Consistent with Prior Changes in BPM Eligibility
and with the Purpose of BPM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
C. This Proposal Will Benefit the Postal Service . . . . . . . . . . . . . . . . . . . . 16
1. This Proposal Will Not Have a Negative Impact on BPM . . . . . . . . . . 17
2. This Proposal Will Not Have a Negative Impact on Media Mail . . . . . . 18
D. This Proposal Is Consistent with the Statutory Standards (39 U.S.C.
§ 3623(c)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
E. Postal Service Criticisms of This Proposal Lack Merit . . . . . . . . . . . . . . . 21
1. Witness Kiefer Seeks to Misrepresent Dr. Haldi’s BPM Classification
Proposal by Totally Ignoring His Alternate Proposal . . . . . . . . . . . . . 22
2. Witness Kiefer’s Concern about Migration from Parcel Post Is a
Straw Man, and Should Be Disregarded . . . . . . . . . . . . . . . . . . . . . . 22
3. Witness Kiefer Acknowledges that Dr. Haldi’s Understanding of
the BPM Content Exemption Is Precisely Correct . . . . . . . . . . . . . . . 23
4. Contrary to Witness Kiefer’s Assertion, the Volume of Media Mail
Likely to Migrate to BPM Does Not Amount to a “Sweeping Change” . . 23
5. Witness Kiefer’s Arguments Concerning Density Are Based on a
Misconception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6. Witness Kiefer’s Argument that CDs and DVDs Should Not Be
Allowed in BPM Because Proposed Rate Differences Do Not
Reflect 100 Percent of Cost Differences Is Fatally Flawed and
Does Not Withstand Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7. Witness Kiefer Asserts that, Ceteris Paribus, BPM and Media Mail
Have the Same Costs, but His Argument Is Fatally Flawed Because
There Is No “Paribus” and No Evidence to Support His Assertion . . . . 29
8. Witness Kiefer’s Assertions Concerning Erosion of Contribution on
Account of Migration from Media Mail to BPM Do Not Hold Up . . . . . 30
iii
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
APPENDICES — I. Proposed DMCS Amendments . . . . . . . . . . . . . . . . . . . . . . . . A-1
II. Alternative Proposed DMCS Amendments . . . . . . . . . . . . . . . . . A-2
iv
TABLE OF AUTHORITIES
Page
Statutes
39 U.S.C. § 3622(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
39 U.S.C. § 3622(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
39 U.S.C. § 3622(b)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
39 U.S.C. § 3622(b)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 8, 9, 29
39 U.S.C. § 3623(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 19, 21
39 U.S.C. § 3683 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Regulations
39 CFR § 3001.20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DMCS § 522 (39 CFR Subpart 1, Appendix A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Postal Rate Commission Opinion and Recommended Decisions
Docket No. R90-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 7, 8, 12, 15, 19
Docket No. R94-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Docket No. R97-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Docket No. R2000-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-12
Docket No. R2001-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Docket No. R2005-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
POSTAL RATE AND FEE CHANGES, 2006
)
Docket No. R2006-1
INITIAL BRIEF
OF
AMAZON.COM, INC.
STATEMENT OF THE CASE
On May 3, 2006, the United States Postal Service filed a request, pursuant to the Postal
Reorganization Act of 1970 (39 U.S.C. §§ 3622 and 3623), for a recommended decision by the
Postal Rate Commission on certain rates and fees, including proposals relating to Standard
Mail rates, as well as certain changes to the Domestic Mail Classification Schedule.
On May 5, 2006, the Commission issued a Notice of Filing of the Postal Service’s
submission (Order No. 1464).
In accordance with Order No. 1464 and Rule 20 of the Commission’s Rules of Practice
and Procedure (39 CFR § 3001.20), Amazon.com, Inc. (“Amazon.com”) filed a notice of
intervention on May 31, 2006.
The Postal Service’s Request
The Postal Service’s Request for a Recommended Decision initiating this proceeding
requested rate and fee changes affecting all classes of mail, and asserted that, without those
changes, the Postal Service would incur a revenue deficiency of $5.874 billion in the requested
2
test year (FY 2008). According to the Postal Service’s initial filing, the requested rates would
generate a revenue deficit of approximately $787,000 in the test year. Request, p. 2.
The Postal Service’s case-in-chief presented a systemwide average rate increase of 8.5
percent, with Bound Printed Matter (“BPM”) rates receiving a substantially above-average
increase of 11.9 percent. USPS-T-31 (revised Aug. 25, 2006), pp. 17, 32.1
Discovery of the Postal Service’s Case-in-Chief
Counsel for Amazon.com conducted written cross-examination of five Postal Service
witnesses with respect to their identified direct testimony, and oral cross-examination of certain
witnesses, which appears in the record at the identified pages:
John P. Kelley
USPS-T-30
Tr. 12/3516-22
Donald J. O’Hara
USPS-T-31
Tr. 17/5128-42
Nina Yeh
USPS-T-38
Tr. 8/1990-2033
Marc D. McCrery
USPS-T-42
Tr. 11/3143-69
Joyce K. Coombs
USPS-T-44
Tr. 13/3734-39
Amazon.com Direct Testimony
Amazon.com sponsored the direct testimony of witness John Haldi (AMZ-T-1) on
Bound Printed Matter, filed on September 6, 2006. A revised version was filed November 9,
2006. During discovery, a total of 18 interrogatories and requests for production of documents
were propounded to Dr. Haldi by the Postal Service (USPS/AMZ-T1-1-18). The responses of
1
Witness Yeh states that the average BPM increase in revenue is 11.7 percent.
USPS-T-38, p. 10.
3
Dr. Haldi to all of these interrogatories were transcribed as written cross-examination (Tr.
27/9374-403).
No oral cross-examination was requested of Dr. Haldi on his direct testimony, and it
was entered into evidence on August 24, 2006.
Amazon.com Discovery of Other Intervenors
Amazon.com submitted a total of six interrogatories and requests for production of
documents to Association for Postal Commerce witness Peter A. Angelides (PostCom-T-5).
All of the responses to the Amazon.com interrogatories were designated as written crossexamination. These responses appear in the record as follows: AMZ/POSTCOM-T5-1-6, Tr.
27/9346-54.
Rebuttal Testimony
The Postal Service sponsored witness James M. Kiefer’s rebuttal testimony
(USPS-RT-11), which attempted to rebut the direct testimony of Dr. Haldi (AMZ-T-1), with
respect to his first proposal for modification of BPM eligibility standards. This rebuttal
testimony is analyzed at Section II, infra. Counsel for Amazon.com cross-examined witness
Kiefer on November 30, 2006 regarding his rebuttal testimony (Tr. 33/11164-98).
4
SUMMARY OF ARGUMENT
The appropriate cost coverage for BPM, after proper application of the non-cost criteria
(with particular emphasis on the educational, cultural, scientific, and informational value of
BPM mail), is between the cost coverage of Parcel Post and that of Media/Library Mail.
Parcel Post receives no “educational, cultural, scientific, and informational” (“ECSI”)
consideration, while all Media/Library Mail receives recognition of ECSI content. 39 U.S.C.
§ 3622(b)(8).
Dr. Haldi’s proposed coverage also would restore the relationship of markups between
the respective Package Services subclasses that the Commission had established in Docket No.
R2000-1 — the most recent fully-litigated omnibus rate case. Therefore, Dr. Haldi proposes
that the Commission recommend BPM rates which retain a coverage of 113 or 114 percent,
which is between the Postal Service’s recommended coverage for Media/Library Mail and
Parcel Post.
As Dr. Haldi has demonstrated, the next logical step in evolution of the BPM subclass
is removal of restrictions against mailing books and related materials in an electronic format.
Books published in an electronic format — among other otherwise ineligible items — currently
may be sent as BPM under certain restrictions. Books (and other related matter) published in
an electronic format — such as CDs and DVDs — should be eligible to be mailed at BPM rates
when such items are part of a bulk shipment of 300 or more pieces that otherwise qualify for
BPM.
When, in Docket No. R90-1, the Commission recommended elimination of the BPM
eligibility requirement that books contain advertising, it noted how the proposal furthered the
5
intent of the Postal Reorganization Act of 1970 (“the Act”) — “to encourage widespread
dissemination of ideas by considering the postage paid by senders of books.” The Commission
also found that the advertising requirement did not make economic sense, and did not “appear
to enhance the value of the mail piece to the recipient or affect the Postal Service’s handling of
it.” Docket No. R90-1, Op. & Rec. Dec., ¶ 6508. These same principles now support
recommendation of Dr. Haldi’s proposal in the present case.
Additionally, it is clear that Dr. Haldi’s proposal will benefit both the Postal Service
and mailers — particularly by helping the Postal Service compete with electronic downloads of
digital content. This proposal will not change the fundamental nature of BPM, and complies
with the relevant statutory standards governing mail classification changes.
6
ARGUMENT
I.
BPM COST COVERAGE SHOULD BE SET BETWEEN PARCEL POST AND
MEDIA MAIL AS RECOMMENDED BY DR. HALDI.
A.
Unlike Dr. O’Hara’s Proposed BPM Coverage, Dr. Haldi’s Proposed BPM
Coverage Is Consistent with the Commission’s Treatment of BPM in Recent
Dockets.
1.
In the Most Recent Litigated Docket, the Commission Placed BPM’s
Cost Coverage between Parcel Post and Media Mail.
As a general rule, the Commission’s last Opinion and Recommended Decision operates
as the baseline from which changes in coverage are considered. The last opportunity the
Commission had to set coverage at the end of a fully-litigated omnibus rate case was in Docket
No. R2000-1. There, the Commission recommended a coverage for BPM of 113.9 percent.
For Media and Library Mail2 and Parcel Post within Package Services, the Commission
recommended coverages of 101.9 and 114.9 percent, respectively. Docket No. R2001-1, Op.
& Rec. Dec., Appendix G, Schedule 1. That nestled the BPM coverage into the position of
being somewhat above Media and Library Mail, and slightly below Parcel Post.
In this docket, Postal Service witness Donald J. O’Hara (USPS-T-31) proposes to
change the relative coverage of these Package Services products radically and to boost the
coverage of BPM well above that of Parcel Post. Dr. O’Hara’s proposed coverages are as
follows: Media and Library Mail, 109 percent; Parcel Post, 115 percent; and BPM, 125
percent. This proposed coverage for BPM is completely unwarranted, not supported by any
2
For purposes of collecting costs and establishing coverage, Media and Library
Mail are combined.
7
intervening change in facts or circumstances since Docket No. R2000-1. AMZ-T-1, p. 27, l. 1
– p. 28, l. 7.
Dr. Haldi proposes continuation of the historic coverage relationship within Package
Services, where the coverage on BPM is slightly less than the coverage on Parcel Post, and
moderately higher than the coverage on Media Mail. This practice is in full accord with the
Commission’s prior recommendation in Docket No. R2000-1. Specifically, Dr. Haldi
proposes that the coverage on BPM should be set between 113 to 114 percent, which is slightly
below the Postal Service’s proposed coverage of 115 percent for Parcel Post, and comfortably
above the 109 percent proposed for Media Mail. AMZ-T-1, p. 28, ll. 8-16.
The Postal Service offered no rebuttal testimony to Dr. Haldi’s direct testimony on the
coverage for BPM. Amazon.com urges adoption of Dr. Haldi’s proposed coverage for BPM.
2.
BPM Cost Coverage Has Properly Decreased as the Percentage of
Books Has Increased.
Since the Commission removed the requirement that books contain advertising in order
to qualify to be mailed as BPM in Docket No. R90-1, and the percentage of books in BPM has
grown dramatically, BPM’s cost coverage has decreased steadily.
In Docket No. R90-1, the Commission set the BPM cost coverage at 144 percent.
Docket No. R90-1, Op. & Rec. Dec., ¶ 6492. The Commission explained that it selected this
coverage as being slightly below average, and similar to the third class bulk regular rate. The
Commission declined to give BPM as much ECSI consideration as that given special rate
fourth (Media Mail), but observed that, if ECSI were the only consideration, BPM’s cost
coverage should be below that of third class bulk regular rate. Id., ¶¶ 6519-20. The Docket
8
No. R90-1 recommendation reflected a reduction in the markup index for BPM from an aboveaverage level of 1.02, to a below-average level of 0.891. Docket No. R94-1, Op. & Rec.
Dec., ¶ 5386; Docket No. R94-1, Op. & Rec. Dec., Appendix G, Schedule 3, p. 2.
In Docket No. R94-1, the Commission reduced BPM cost coverage to 137 percent,
reflecting a reduced markup index of 0.644. Id., ¶ 5389. The Commission observed that the
“below average cost coverage gives due recognition to the nonpreferential nature of the
service.” It added that the “markup index declines from 0.891 to 0.644 which is reasonable in
the unique circumstances of this proceeding.” Id., ¶ 5390.
In Docket No. R97-1, the Commission set the BPM cost coverage at 136 percent,
reflecting a markup index of 0.643. Docket No. R97-1, Op. & Rec. Dec., ¶ 5721. The
Commission noted that “the recommended contribution to institutional costs recognizes that a
portion of the matter mailed as BPM warrants beneficial consideration under § 3622(b)(8).”
Id., ¶ 5725.
In Docket No. R2000-1, the Commission set the BPM cost coverage at 114 percent.
Docket No. R2000-1, Op. & Rec. Dec., ¶ 5878. This reflected a markup index of 0.237. Id.,
Appendix G, p. 35. The Commission discussed how, in rate cases following Docket No. R901, it “reduced both the cost coverage and the markup, noting, in Docket No. R97-1, that the
below average markup reflected consideration of ECSI due to the presence of books in the
subclass.” Id., ¶ 5880. The Commission also observed that “the nonpreferential nature of the
service received by BPM is indicative of a lower value of service and, consistent with
Commission practice, is reflected in a lower cost coverage for BPM.” Id., ¶ 5886.
9
B.
Dr. Haldi’s Proposed Cost Coverage Is Based on a Proper Application of
the Statutory, Non-cost Rate-Setting Criteria.
Dr. Haldi’s proposed coverage, not Dr. O’Hara’s (USPS-T-31) substantially increased
coverage for BPM, is supported by the non-cost criteria contained in 39 U.S.C. § 3622(b).
Certain of those non-cost criteria have been found by the Commission to be particularly
pertinent in setting the coverage for BPM.
1.
ECSI (Criterion 8).
As discussed above, since Docket No. R90-1, the Commission has given the BPM
subclass increased consideration under criterion 8 in § 3622(b), known generally as “ECSI.”
The presence of materials with “educational, cultural, scientific, and informational” value
justifies a reduction in the subclass coverage in comparison with another subclass with identical
features — excepting only ECSI content.
a.
Other Package Services Subclasses and ECSI.
For Media and Library Mail, 100 percent of the mailpieces qualify for ECSI
consideration. The Commission gives ECSI consideration to the entire volume of Media and
Library Mail. On this basis, in Docket No. R2000-1, the Commission recommended a Media
and Library Mail cost coverage of 102 percent. In this docket, the Postal Service’s
recommended coverage for Media and Library Mail is 109 percent — which reflects an
increase from the previous coverage, while allowing the implicit coverage on Library Mail (for
which rates are set 5 percent below Media Mail rates) to cover attributable costs.
By contrast, Parcel Post, the other Packaging Services subclass, receives no ECSI
consideration. The Postal Service’s requested coverage for Parcel Post is 115 percent, nearly
10
identical to the 114.9 percent coverage recommended by the Commission in Docket No.
R2000-1. AMZ-T-1, p. 29, l. 4 – p. 30, l. 11.
b.
Proper Application of ECSI to BPM.
In Docket No. R2000-1, the Postal Service estimated that 52 percent of BPM consisted
of books, meriting ECSI consideration. Apparently, the Postal Service no longer collects
information on the relative share of BPM which consists of books, and no other source is
available to provide the percentage of BPM that contains books.3
Dr. Haldi testified that, in light of the previous trend and the number of years that have
elapsed since 1997, an estimate that books now constitute between 55 and 60 percent of BPM
volume would appear reasonable. AMZ-T-1, p. 31, ll. 5-13. Certainly no evidence suggests
that books constitute any smaller share of BPM today than they did in 1997, or even in 1999.
Id.
On this basis alone, BPM deserves to receive at least as much — and perhaps more —
ESCI consideration today as it received in Docket No. R2000-1.4 Certainly, on the basis of the
ECSI consideration due BPM, the coverage for BPM should be below that of Parcel Post, as
Dr. Haldi has proposed. AMZ-T-1, p. 31, l. 13 – p. 32, l. 2.
3
Response of the Postal Service to question posed at hearings on witness Yeh’s
testimony, filed August 30, 2006. Tr. 17/5131; Tr. 18D/6689.
4
The Commission consistently has held that telephone directories, catalogs, and
any other advertising matter in BPM are not entitled to ESCI consideration. Consequently,
BPM does not receive the same ECSI consideration as Media Mail or Periodicals.
11
2.
Value of Service (Criterion 2).
Another criterion historically used for determining coverage of subclasses in Package
Services is the relatively low value of service, reflecting the nonpreferential processing and
transportation received by all subclasses within Package Services, including BPM. See AMZT-1, p. 32, ll. 3-16. The own-price elasticity of BPM, as computed by Postal Service witness
Thomas E. Thress (USPS-T-7), is -0.491, which is slightly higher than either Media Mail
(-0.334) or non-destination entry Parcel Post (-0.374),5 which indicates a slightly lower value
of service for BPM, and does not justify the proposed increase in coverage. USPS-T-7, p.
191, ll. 11-12.
Again, in setting its cost coverage for BPM in Docket No. R2000-1, the Commission
expressly found that “the nonpreferential nature of the service received by BPM is indicative of
a lower value of service and, consistent with Commission practice, is reflected in a lower cost
coverage for BPM.” Docket No. R2000-1, Op. & Rec. Dec., ¶ 5886.
3.
Effect of Rate Increases (Criterion 4).
Yet another important consideration is criterion 4, the effect of rate increases on the
public, mailers, and competitors (i.e., alternate delivery carriers). The Postal Service’s
proposed 11.9 percent rate increase for BPM is significantly above the systemwide average.
This level of rate increase presents a good reason not to nearly double the markup for BPM
from that established by the Commission in Docket No. R2000-1. The reduction in coverage
5
It is less than the own-price elasticity of destination entry Parcel Post (-1.399), a
significantly different product which witness Thress computes separately. AMZ-T-1, p. 32, n.
35.
12
proposed by Dr. Haldi would help ameliorate the size and impact of the proposed rate
increase, and would be consistent with the approach taken toward BPM by the Commission in
Docket No. R2000-1. Id., ¶ 5887. See AMZ-T-1, p. 33, ll. 1-9.
II.
BULK MAILINGS OF BOOKS PUBLISHED IN AN ELECTRONIC MEDIA
FORMAT SHOULD BE ELIGIBLE TO BE SENT AS BPM.
The Commission has a long history of recommending low-cost mailing options for
mailers where possible, in furtherance of the policies of the Postal Reorganization Act of
1970.6 To accomplish that objective, postal offerings have not been frozen in place, but have
adjusted to new developments. For example, the BPM subclass has been evolving at least
since 1976, when books containing advertising first became eligible to be sent at BPM rates.
Through a series of steps, the Commission has both de-averaged the BPM rate structure and
opened it up to mailers of books, while maintaining reasonable rates for mailers of heavyweight (over 16 ounces) catalogs who presort their mail finely and almost always enter it at
destination facilities. See USPS-T-7, pp. 186-187; AMZ-T-1, pp. 9-11.
As BPM has evolved, book publishing also has undergone important changes —
including publication of books not only in the traditional “Gutenberg” printed-on-paper format,
but also in an electronic format, such as audio tapes, video tapes, CDs, and DVDs.7 Indeed, at
6
See, e.g., “Our effort to make low-cost options available if possible furthers the
policies found in the Act.” Docket No. R90-1, Op. & Rec. Dec., ¶ 6508.
7
Likewise, many books are the basis for movies. When such movies are released
in an electronic format, such as a DVD, a CD containing the book and a DVD containing the
movie are quite similar with respect to their physical dimensions.
13
present, normally ineligible items — including books published in an electronic format — may
be sent as BPM, subject to certain limitations of weight and cost. See AMZ-T-1, pp. 14-16.
Dr. Haldi has proposed the next logical extension of the BPM content standards,
whereby BPM eligibility is expanded to allow books published in an electronic format — such
as CDs and DVDs — to be mailed at BPM rates when such items are part of a bulk shipment
of 300 or more pieces. Dr. Haldi’s proposal would make the focus of the BPM content
requirement the substance of the item (book content), not the format of the item (i.e., printed
paper). Accordingly, Dr. Haldi’s proposal recognizes that formats for storing and retrieving
content have evolved, and would help move BPM content standards into the digital era. See
AMZ-T-1, pp. 7-8, 20-22. Adoption of this proposal is requested by Amazon.com.
A.
Electronic Media Already Qualify To Be Mailed as BPM Under Certain
Circumstances.
CDs and DVDs (among other items) are already eligible, subject to certain limitations,
for mailing as BPM. On June 5, 2001, the Postal Service published in the Federal Register a
final rule change to the Domestic Mail Manual (“DMM”) that modified the standards
governing permissible attachments and enclosures in BPM, allowing non-print enclosures —
which consequently now permits many items ordinarily entered as Media Mail, as well as
various other items, instead to be mailed at BPM rates.8 It seems illogical to allow printed
books, combined with non-print items including electronic books, to be mailed at BPM rates,
8
Non-print attachments/enclosures must constitute no more than 25 percent of the
weight of the BPM in the mailpiece. Also, the individual cost of each non-print attachment
and enclosure must be less than or equal to the cost of a “low cost” item (currently $8.60).
Finally, the combined cost of all non-print attachments, or enclosures, must not exceed two
times the cost of a “low cost” item. AMZ-T-1, pp. 14-15.
14
while a bulk mailing entirely composed of books published in an electronic format is not
eligible for BPM rates. The classification changes which Dr. Haldi has proposed in this docket
would give bulk mailers a lower-cost way to mail books and related material when customers
prefer to purchase such items in an electronic format, rather than in printed format.
B.
Dr. Haldi’s Proposal Will Not Change the Nature of BPM.
Although BPM originally was designed to be a bulk subclass for catalogs, it has not
been an exclusive catalog subclass for some time. It continues to be essentially a bulk
subclass, however. As witness Yeh points out, less than 5 percent of BPM volume consisted
of single piece mail (soon to be called nonpresort BPM) in FY 2005. USPS-T-38, p. 7, ll. 78. Dr. Haldi’s proposed classification changes would only apply to bulk mailings and thereby
preserve the bulk nature of BPM. See AMZ-T-1, pp. 7-8, 19-20; USPS-T-38, p. 6, n. 2.
At the same time, while some migration of bulk mail from Media Mail (mostly from
presort Media Mail) can be expected, the Media Mail (and Library Mail) subclass will continue
to be available to all mailers, most especially those who mail at single-piece rates. AMZ-T-1,
p. 20.
1.
BPM Books on Electronic Media Will Remain Small Parcels.
Packages containing books in electronic format can be expected to be lightweight; on
average, they will weigh less than a book, but with significant density at least comparable to
books. Non-print mailpieces would be required to be part of a bulk mailing, and will be
similar to packages containing lighter-weight books, e.g., paperbacks. Using Amazon.com’s
mail as a representative example, as Dr. Haldi observed, 44 percent of mailpieces containing
CDs/DVDs are a pound or less in weight, while 87 percent of such mailpieces weigh two
15
pounds or less. By contrast, only 67 percent of mailpieces containing books weigh two pounds
or less. Response to USPS/AMZ-T1-7 (Tr. 27/9386).
2.
The Proposal Is Consistent with Prior Changes in BPM Eligibility
and with the Purpose of BPM.
BPM is advertising, promotional, directory, or editorial material weighing up to 15
pounds. Docket No. R2005-1, Op. & Rec. Dec., ¶ 6137; DMCS § 522 (39 CFR Subpart 1,
Appendix A). The Commission has cited examples of BPM as including catalogs, books,
telephone directories, and similar permanently bound volumes. As noted above, the definition
of BPM has been expanded since by the Postal Service to permit attachments or enclosures that
do not meet these standards. Likewise, the requirement that materials mailed as BPM include
advertising has been eliminated. See AMZ-T-1, pp. 18-19.
In Docket No. R90-1, the Commission recommended elimination of the requirement
that books to be sent as BPM contain advertising. The Postal Service proposal had been
presented “to make it less inconvenient for book mailers to use bound printed matter” and “to
provide mailers with the choice between fourth-class special rate [now Media Mail] and bound
printed matter.” Docket No. R90-1, Op. & Rec. Dec., ¶ 6501. These considerations apply
with equal force to Dr. Haldi’s mail classification proposal in this docket.
In adopting the Postal Service proposal in Docket No. R90-1, the Commission observed
that:
!
It did not “make economic sense to require publishers to include advertising in
their books in order to qualify for [BPM] rates.”
!
The requirement that books contain advertising did not “appear to enhance the
value of the mail piece to the recipient or affect the Postal Service's handling of
it.”
16
!
The intent of 39 U.S.C. § 3683 “is to encourage widespread dissemination of
ideas by considering the postage paid by senders of books” — a purpose
promoted by the proposal. [Id., ¶ 6508.]
These arguments apply with equal force to Dr. Haldi’s proposal in this docket. It does not
make economic sense to require publishers to avoid the use of electronic formats to take
advantage of the cost efficiencies of BPM rates. The requirement that books be printed on
paper does not appear to enhance the value of the mailpiece to those recipients who prefer to
listen to books on CDs, nor does it affect handling by the Postal Service. Moreover, adoption
of the proposal will encourage even more widespread dissemination of ideas — in furtherance
of the purpose undergirding 39 U.S.C. § 3683. See AMZ-T-1, pp. 18-19.
C.
This Proposal Will Benefit the Postal Service.
It is a simple truth that most information stored in an electronic format can be delivered
through e-mail and over the Internet. In theory, therefore, virtually anything on a CD or
DVD, including books and movies, can be delivered electronically at very low cost, rather
than sent physically through the mail. Already, a great deal of digital music is downloaded
every day over the Internet, and movies appear to be the next major development ripe for
downloading. AMZ-T-1, pp. 22-23; see USPS-T-7, p. 196, ll. 1-20.
Allowing CDs and DVDs to be mailed at the lower BPM bulk rates achievable through
worksharing may help the Postal Service to retain more of this volume, and lose less of it to
Internet downloads. The Postal Service clearly is faced with intense competition from the
Internet, and any attempt to force items that are stored digitally on electronic media, such as
CDs and DVDs, into higher rate categories is almost sure to be self-defeating eventually.
17
Allowing CDs and DVDs to be shipped via BPM will help the Postal Service retain as much of
this business as possible, for as long as possible. AMZ-T-1, p. 22, l. 13 – p. 23, l. 8.
1.
This Proposal Will Not Have a Negative Impact on BPM.
The BPM rate structure, through a series of steps over many years, has been deaveraged, and reflects costs far more accurately than before. Today, the BPM rate structure
promotes efficient mailing practices — possibly more so than any other subclass.
For instance, BPM rates are zoned. With unzoned rates, it is not possible to reflect
transportation costs accurately. In addition to zoned rates, the BPM rate structure also has
cost-based discounts for destination entry at all points, which promote reduced handling by the
Postal Service. This gives mailers a positive incentive to dropship into destinating facilities.
Furthermore, the BPM rate structure offers discounts for presortation, which also helps to
reduce Postal Service handling. A barcode discount is offered whenever the Postal Service can
use a barcode to process BPM on its mechanized or automation equipment. Finally, BPM has
a shape-based rate differential, which reflects some of the difference in costs incurred when
handling flats instead of parcels. AMZ-T-1, p. 12, l. 8 – p. 13, l. 3.
Development of this highly de-averaged, cost-based rate structure has helped protect
BPM mailers who submit highly-prepared and highly-efficient mail from suffering rate
increases on account of less-efficient and more costly mail being entered as BPM and averaged
into the rate. By promoting efficient mailing practices, this rate structure also has helped to
restrain cost and rate increases in BPM. AMZ-T-1, p. 13, ll. 4-14.
Recommendation of the proposed classification change is not expected to increase the
cost of BPM parcels. Inclusion of books in the BPM subclass did not increase subclass unit
18
costs for other mailers, and neither should the inclusion of books or other materials published
in an electronic format. AMZ-T-1, p. 13, ll. 15 – p. 14, l. 7. Dr. Haldi’s proposed
classification changes would not increase subclass average costs for BPM parcels.
For instance, it is expected, based on content and packaging, that migrating Media Mail
pieces would be parcel-shaped, and hence they would be required to pay the higher rate that is
applicable to parcels in BPM. Similarly, the rate paid by migrating pieces would reflect the
degree of presort, point of entry, and distance traveled (i.e., zone). Under the BPM rate
structure as it now exists, rate-averaging is rather limited, and restricts the opportunity for
migrating pieces entering BPM to take advantage of rate-averaging, as sometimes occurs in
other subclasses where rates have not been de-averaged to the same extent as they have in
BPM. AMZ-T-1, Appendix I, p. 35, l. 14 – p. 36, l. 6.
2.
This Proposal Will Not Have a Negative Impact on Media Mail.
After an extensive analysis of Media Mail and BPM rates, Dr. Haldi concluded that,
for Media Mail to migrate to BPM as a result of the classification changes proposed here,
cherry-picking — or adverse selection — would be de minimis. Consequently, for almost 99
percent of Media Mail volume that migrates, the impact in contribution to Postal Service
overhead ranges from neutral to slightly positive.
D.
This Proposal Is Consistent with the Statutory Standards (39 U.S.C.
§ 3623(c)).
The Commission is directed to “make a recommended decision on establishing or
changing the [mail classification] schedule in accordance with the policies of [Title 39]” and
19
six enumerated criteria set out in 39 U.S.C. § 3623(c). 9 Dr. Haldi’s proposal meets these
criteria.
As discussed at length, supra, allowing books and similar material published in an
electronic format to be mailed in BPM bulk mailings does not alter the basic content standards
of the subclass. Non-print items already can be mailed BPM as an attachment or enclosure.
Also, BPM mail is acknowledged as having an ECSI component, and Dr. Haldi’s proposal thus
clearly will promote further the mailing of materials with an ESCI component. Indeed, as the
Commission acknowledged in Docket No. R90-1, BPM has an important role in the
encouragement of the “widespread dissemination of ideas” (Docket No. R90-1, Op. & Rec.
Dec., ¶ 6508). Thus, the proposed changes are fair and equitable. In fact, the proposal is
probably more equitable than maintaining the existing distinction between printed and
electronic matter, and clearly satisfies criterion 1. AMZ-T-1, p. 19, ll. 2-14 and p. 24, ll. 915.
9
(1)
(2)
(3)
(4)
(5)
(6)
39 U.S.C. § 3623(c):
the establishment and maintenance of a fair and equitable
classification system for all mail;
the relative value to the people of the kinds of mail matter entered
into the postal system and the desirability and justification for
new or special classifications and services of mail;
the importance of providing classifications with extremely high
degrees of reliability and speed of delivery;
the importance of providing classifications which do not require
an extremely high degree of reliability and speed of delivery;
the desirability of special classifications from the point of view of
both the mail user and that of the Postal Service; and
such other factors as the Commission may deem appropriate.
20
Allowing mailers of books and other materials published in electronic format to enter
such items as bulk BPM offers such mailers more options and incentives designed to promote
maximum mailing efficiency. Allowing books and other related materials in electronic formats
to take advantage of the benefits offered by BPM will increase the relative value of the postal
system to mailers and recipients. Thus, Dr. Haldi’s proposal meets criterion 2.
The BPM subclass does not receive extremely high speed of delivery, nor do the items
that might be mailed as BPM under the proposed classification change require extremely high
speed of delivery, hence criterion 3 is not applicable. AMZ-T-1, p. 25, ll. 1-4. Of course,
allowing mailers of works published in electronic format to send their mailpieces as BPM
would provide financial incentives for mailers to dropship (and engage in other worksharing),
which would have the effect of improving the reliability and speed of delivery.
The BPM subclass, as part of the Package Services class, provides mailers with a lowcost means of sending material that does not require an extremely high degree of reliability and
speed of delivery. At the same time, as noted above, by providing discounts for entry at
destination facilities, mailers who take advantage of such discounts can save money for
themselves, reduce Postal Service costs, and reduce the time that their mail spends in the postal
network. Allowing books and similar material in electronic format to be mailed at BPM rates
would satisfy criterion 4. AMZ-T-1, p. 25, ll. 5-12.
BPM is already a specialty subclass from the viewpoints of both existing mail users and
the Postal Service, and satisfied criterion 5 long ago. AMZ-T-1, p. 25, ll. 13-15. The issue
here is whether the proposed classification change conforms to the purposes for which BPM
exists. BPM essentially is a bulk subclass, a characteristic that would not be changed under
21
Dr. Haldi’s proposal. Traditionally, BPM now has had a restriction on content (i.e., books)
that will not be changed,10 while restrictions on format — i.e., printed, bound matter — would
change so as to recognize the expanding use of electronic formats for storing and retrieving
information. Recognizing such widespread changes is obviously desirable from the viewpoint
of end users, and it most certainly should be considered desirable by the Postal Service.
Clearly, Dr. Haldi’s proposal meets criterion 5. AMZ-T-1, p. 25, l. 13 – p. 26, l. 7.
With respect to criterion 6, such other factors as the Commission may deem
appropriate, Dr. Haldi’s proposal has presented the Commission with a number of factors
worthy of its consideration — including, but limited to, the projected enhancement of the BPM
subclass and related benefits to the Postal Service — all of which offer further reasons to
support the classification changes proposed here.
Clearly, therefore, the classification changes proposed by Dr. Haldi satisfy all of the
relevant criteria contained in 39 U.S.C. § 3623(c).
E.
Postal Service Criticisms of This Proposal Lack Merit.
Postal Service witness Kiefer, at pages 27-32 of his rebuttal testimony (USPS-RT-11),
makes sweeping criticisms of the proposed classification change for BPM. His criticisms
generally consist of bald assertions, that are unsupported either by facts or by any actual
analysis in his testimony.
10
As described above, for non-print items sent as attachments and enclosures,
BPM has restrictions on cost and weight.
22
1.
Witness Kiefer Seeks to Misrepresent Dr. Haldi’s BPM Classification
Proposal by Totally Ignoring His Alternate Proposal.
Witness Kiefer first asserts that Dr. Haldi’s proposal is designed to allow all CDs and
DVDs to qualify for BPM. Tr. 33/11137(a), n. 15. On cross-examination, however, witness
Kiefer admitted he had totally ignored the alternate proposal that Dr. Haldi submitted in his
response to USPS/AMZ-T1-18 (Tr. 27/9402), saying of the original proposal “that’s what I
wanted to rebut in my testimony.” Tr. 33/11167, l. 15. After reading Dr. Haldi’s alternative
proposal, witness Kiefer then acknowledged “that it would give the Postal Service the ability to
promulgate rules” limiting the types of CDs and DVDs acceptable in the BPM subclass to
exactly what Dr. Haldi originally proposed. Tr. 33/11167, l. 22 – 11168, l. 2. Consequently,
his criticism on this score is completely inapposite, and deserves no weight whatsoever.
2.
Witness Kiefer’s Concern about Migration from Parcel Post Is a
Straw Man, and Should Be Disregarded.
Witness Kiefer then asserts that “[t]his proposal would likely lead to a migration of
parcels from Media Mail, and possibly, Parcel Post, to BPM and increase the average unit
costs for BPM.” Tr. 33/11137(a), ll. 9-11. On cross-examination, witness Kiefer admitted
that he could not think of one single example of mail that is now using Parcel Post (instead of
Media Mail) that would qualify for and likely migrate to bulk BPM if Dr. Haldi’s proposal is
adopted. Tr. 33/11170, ll. 3-4. His charge that BPM might see migration from Parcel Post
thus represents total speculation. As such, it is unfounded and should be disregarded
completely.
23
3.
Witness Kiefer Acknowledges that Dr. Haldi’s Understanding of the
BPM Content Exemption Is Precisely Correct.
Witness Kiefer also alleges that Dr. Haldi’s testimony is flawed because it exhibits “a
serious misunderstanding” of certain content exemptions that have been permitted in BPM
since 2001. USPS-RT-11, p. 27, Tr. 33/11137(a), ll. 14-16. On cross-examination, however,
witness Kiefer acknowledged that the BPM content exemptions are based on two factors: cost
and weight. Tr. 33/11172, ll. 14-16; Tr. 11173, ll. 14-15. When pressed, he admitted that “I
don’t think Dr. Haldi misunderstood the cost limitation or the weight limitation.” Tr.
33/11174, ll. 16-17. He appeared to agree that the existing regulation, as written, allows any
item (including CDs, DVDs, and other electronic and digital formats) that conforms to the cost
and weight restrictions to be included in BPM mailings. Tr. 33/11173, ll. 4-5. Thus, the
flaws regarding this subject are seen to be in witness Kiefer’s rebuttal testimony, not in the
testimony of Dr. Haldi.
4.
Contrary to Witness Kiefer’s Assertion, the Volume of Media Mail
Likely to Migrate to BPM Does Not Amount to a “Sweeping
Change.”
Witness Kiefer’s rebuttal testimony alleges that allowing CDs and DVDs to be mailed
as BPM would amount to “a sweeping change in the definition of an important parcel
subclass.” USPS-RT-11, p. 27; Tr. 33/11137(a), l. 18. The asserted basis for his “sweeping
change” assertion is twofold: (i) the total volume of CDs and DVDs likely to migrate from
Media Mail, and (ii) the density of parcels containing CDs and DVDs relative to the density of
parcels containing books. Tr. 33/11175, ll. 17-23. (Witness Kiefer was operating from a
misperception about density, and that topic is dealt with in the next section, infra.)
24
With respect to the volume likely to migrate from Media Mail, on cross-examination
witness Kiefer acknowledged that migration to the bulk rate categories of BPM would come
almost entirely from the presort categories of Media Mail. Tr. 33/11176, l. 15 – 11177, l. 1.
Witness Kiefer further agreed that, if all 36 million pieces of presorted Media Mail were to
migrate to BPM, the result would be a 6.5 percent increase in the 555 million pieces currently
mailed as BPM. Tr. 33/11177, ll. 6-11. By no stretch of the imagination does a 6.5 percent
increase in volume constitute a “sweeping change.” Furthermore, a potential 6.5 percent
increase is the extreme case, because not all of the 36 million pieces of presort Media Mail
likely would qualify for BPM, especially under Dr. Haldi’s alternate proposal.
5.
Witness Kiefer’s Arguments Concerning Density Are Based on a
Misconception.
In his rebuttal testimony, witness Kiefer states that “the BPM rate design is not ‘costbased’ in one important aspect: it does not recognize the impacts of cubic volume (or ‘cube’)
on costs separately from weight.” USPS-RT-11, p. 31; Tr. 33/11139(a), ll. 6-8. He goes on
to assert that the BPM subclass “consists largely of relatively high-density books and
catalogs.” Id., ll. 17-18. He further claims that “[h]igh-density parcels and flats have
favorable cost characteristics....” USPS-RT-11, p. 32; Tr. 33/11139(b), l. 8. He refers to the
non-printed matter parcels that this proposal would be allowed into BPM as “low-density,” and
reckons that parcels containing CDs and DVDs, solely by virtue of their “low” density, have
unfavorable high-cost characteristics. USPS-RT-11, p. 31; Tr. 33/11139(a), ll. 9-13. As
shown below, witness Kiefer is mistaken. Nevertheless, he uses his misconception about the
density of CDs and DVDs relative to books to attack Dr. Haldi’s proposal; e.g., “risk of
25
making disastrous rate design decisions” (USPS-RT-11, p. 31; Tr. 33/11139(a), ll. 14-15,
emphasis added) and “eventually destroy BPM’s low cost profile” (USPS-RT-11, p. 32; Tr.
33/11139(b), ll. 10-11, emphasis added).
During cross-examination, witness Kiefer reiterated these misconceptions about density.
“I wanted to emphasize the importance of the bound printed matter characterization of the
subclass is that this kind of material [books and catalogs] tends to be fairly dense.” Tr.
33/11171, ll. 14-16. “I think that I address that in my testimony, where I pointed out the fact
that the nature of the bound-printed-matter subclass is that it consists of printed pieces which
... tend to be very dense, and that has very good cost characteristics.” Tr. 33/11175, ll. 1723.
On cross-examination, witness Kiefer admitted that he had not put a book (or books) on
a scale and then compared the weight of the book(s) with the weight of CDs or DVDs that
occupy the same cubic volume. Tr. 33/11189, ll. 23-24. He then was confronted with facts
that are on the record and were readily available to him, and on which he should have relied,
rather than his speculation as to relative density of books on the one hand, and of CDs and
DVDs on the other. Upon reviewing Dr. Haldi’s response to an example promulgated by the
Postal Service in USPS/AMZ-T1-8 (Tr. 27/9402), he acknowledged that the average density of
books as shipped was 12 pounds per cubic foot, and the average density of CDs and DVDs as
shipped was 45 to 90 pounds per cubic foot, exactly the reverse of his speculation. Tr.
33/11191, l. 8 – 11197, l. 6. After being confronted with the facts, he then agreed that “it
certainly is possible to undo what I would call the favorable density characteristics of bound
26
printed matter packaging.” Tr. 33/11196, l. 24 – 11197, l. 1. Of course, witness Kiefer was
referring to books creating a problem, not CDs and DVDs.
Finally, witness Kiefer was asked about Dr. Haldi’s observation that “small packages
containing CDs/DVDs will fit into mail boxes more readily than larger boxes containing
books.” Response of Amazon.com witness Haldi to USPS/AMZ-T1-8, Tr. 27/9388. On
cross-examination, witness Kiefer agreed that
if a package is very large and could not fit in a mailbox, it would
necessitate a dismount, and a smaller piece might...avoid a
dismount, it might avoid the cost.... [Tr. 33/11198, ll. 4-6, 1213.]
Dr. Haldi’s point about the delivery cost advantage of small parcels, such as those containing
CDs and DVDs, also is confirmed by the rebuttal testimony of Postal Service witness Michael
D. Bradley (USPS-RT-4), where he stated: “It is obvious from an operations perspective, that
the time caused by delivering a large parcel, that typically requires an approach to the
customer’s door, will be much larger than the time caused by delivery of a small parcel that
can be placed directly into the customer’s mail receptacle.” USPS-RT-4, p. 20, ll. 4-8.
With respect to the issue of density and cost, the record in this docket contains no
evidence that CDs and DVDs have density or cost characteristics that are any less favorable
than those of books, and such evidence as does exist indicates that the cost characteristics of
parcels containing CDs and DVDs may be even more favorable than those of parcels
containing books, most especially the cost of delivery. Witness Kiefer’s unsupported
speculations about unfavorable cost characteristics of CDs and DVDs have no support on the
record and should be rejected in their entirety.
27
6.
Witness Kiefer’s Argument that CDs and DVDs Should Not Be
Allowed in BPM Because Proposed Rate Differences Do Not Reflect
100 Percent of Cost Differences Is Fatally Flawed and Does Not
Withstand Scrutiny.
Witness Kiefer cites the testimony of Postal Service witness Marc A. Smith (USPS-T13, Attachment 14), which projects that, in test year, BPM flats will have a unit cost of 23.71
cents, BPM parcels will have a unit cost of 62.28 cents, and the indicated cost differential is
38.57 cents. Tr. 33/11138(a), n. 17. He also complains about the fact that the discount
applicable to flats, 15.6 cents, as proposed by witness Yeh (USPS-T-38), does not reflect 100
percent of the cost difference. Tr. 33/11138(b), ll. 21-23. On the basis of witness Smith’s
cost data, witness Kiefer asserts that BPM “has a high proportion of flats [46 percent], which
generally are cheaper to process and deliver than parcels [and] [b]ringing more parcels into
BPM would increase average unit costs, eroding the low average cost characteristics of BPM.”
Tr. 33/11138(a), ll. 16-19. This argument fails for several reasons.
First, the effect of witness Kiefer’s argument is that parcels which, at present, contain
only books, are the source of the high unit cost recorded by witness Smith, and that their
elimination would reduce subclass unit costs significantly. The critical question is whether
parcels containing CDs and DVDs would increase the average unit cost of parcels containing
books. Hence, the appropriate comparison is between (i) the cost of parcels containing books
and (ii) the cost of parcels containing CDs and DVDs. As discussed in Section 5, supra,
parcels containing CDs and DVDs have a higher density than parcels containing books, and
they also likely have a lower delivery cost.
28
Second, witness Kiefer implicitly faults witness Yeh for failing to revise her testimony
and give explicit consideration to the best unit cost data available, as contained in witness
Smith’s testimony.11 Tr. 33/11178, ll. 9-13. This argument — that weaknesses in the Postal
Service’s revised case-in-chief precludes the development of the most efficient rates — is a
curious basis for witness Kiefer to rely upon when seeking to convince the Commission to
reject Dr. Haldi’s proposal. Regardless of whether his implied criticism has any validity, it
offers no reason whatsoever to reject Dr. Haldi’s proposed classification change and deny
BPM rates to books published on CDs and DVDs. For reasons discussed below, explicit
recognition of witness Smith’s flat-parcel cost difference would not necessarily result in a 100
percent passthrough. Moreover, even if agreement existed that the passthrough should be 100
percent (although no such argument has been made in this docket), witness Kiefer’s argument
would “make the perfect the enemy of the good.”
Third, in BPM, (i) all catalogs are flats, and virtually all flats are catalogs, and (ii) all
parcels contain books, and most books are mailed as parcels. The failure to recognize 100
percent of the flat-parcel cost difference in rates means that the implicit markup on catalogs is
higher than the implicit markup on books. Of course, this difference in the implicit markup is
entirely appropriate because the Commission long and consistently has held that catalogs are
not entitled to ESCI consideration, whereas books are so entitled, owing to the educational,
cultural, and scientific information found in the content, which is essentially the same content
11
Witness Yeh did not have witness Smith’s data when she prepared her original
testimony, Tr. 8/2104; see her response to POIR No. 3, question 18(b), Tr. 8/1977.
29
that is found on CDs and DVDs based on books.12 In light of this consideration, it may never
be appropriate to recognize 100 percent of the flat-parcel cost difference in rates.
7.
Witness Kiefer Asserts that, Ceteris Paribus, BPM and Media Mail
Have the Same Costs, but His Argument Is Fatally Flawed Because
There Is No “Paribus” and No Evidence to Support His Assertion.
Witness Kiefer claims that “[t]he Postal Service processes and delivers similarly
presorted and entered bulk Media Mail and BPM in the same way, so the cost would be the
same, regardless of the subclass.” Tr. 33/11137(b), l. 20 to 11138(a), l. 1. Of course,
witness Kiefer is neither an operations expert nor a cost witness. His claim is thus somewhat
anecdotal and speculative. On cross-examination, witness Kiefer concedes that the BPM and
Media Mail rate structures differ significantly, with BPM having destination entry discounts,
as well as shape-based rates. Tr. 33/11178, l. 16. Mailers using BPM thus have stronger
incentives to prepare and enter their mail in a more efficient manner than those who use Media
Mail. In consequence thereof, when comparing the unit costs of BPM and Media Mail,
incentives offered mailers are distinctly and most definitely not equal; i.e., ceteris paribus does
not apply, and no basis exists to believe that Media Mail which migrates to BPM would be
entered “in the same way.”
Mailers’ response to the disparate incentives of BPM and Media Mail is demonstrated
dramatically in the unit cost data provided in Attachment 14 of witness Smith’s testimony —
the same attachment that witness Kiefer would invoke to oppose the proposal to allow selected
CDs and DVDs in BPM. USPS-T-13, Attachment 14. Witness Smith’s data in that attachment
12
Notably, the “educational, cultural, scientific, and informational value” is not
dependent on being in a printed and bound format. 39 U.S.C. § 3622(b)(8).
30
indicate that the unit cost of flats in BPM and Media Mail is, respectively, 23.71 cents and
103.45 cents (id.), and witness Kiefer says “I don’t have a reason to question those particular
numbers.” Tr. 33/11184, ll. 9-10. Media Mail flats are thus over 4.3 times costlier to handle
than BPM flats. For parcels/Irregular Piece and Parcels (“IPP”) in BPM and Media Mail, the
unit cost difference, although less striking, is highly significant: 62.28 cents versus 111.67
cents, respectively. Media Mail parcels thus cost almost 50 cents more than BPM parcels —
or 1.8 times as much. Most obviously, the unit costs are quite far from being equal.
The stunning differences in unit costs between BPM and Media Mail flats and parcels
lend no support to witness Kiefer’s claim that “[t]he Postal Service processes and delivers
similarly presorted and entered bulk Media Mail and BPM in the same way so the cost would
be the same, regardless of the subclass.” Tr. 33/11183, ll. 7-10. One logical explanation for
the lower average unit cost of BPM parcels (and flats) is that BPM is more workshared.
Another possible explanation is that presorted parcels in Media Mail have the same low cost as
BPM parcels, but are being overcharged relative to single-piece parcels in Media Mail.
Although witness Kiefer’s testimony raises questions, it provides neither answers nor insight,
and in no event does it provide a reason to deny the proposal to allow books on CDs and
DVDs to be sent at BPM rates.
8.
Witness Kiefer’s Assertions Concerning Erosion of Contribution on
Account of Migration from Media Mail to BPM Do Not Hold Up.
Witness Kiefer insists that “the only way a piece migrating from Media Mail to Bound
Printed Matter would increase contribution would be if that mail piece were to cost less as a
BPM piece than as a Media Mail piece.” Tr. 33/11137(b), ll. 18-20. Given the fact that the
31
coverage on BPM is higher than that of Media Mail, this assertion is, of course, obviously
false. Moreover, as discussed previously, there is no reason to expect that parcels containing
CDs and DVDs mailed as BPM would have any higher cost than BPM parcels containing
books, since such parcels have a lower mail processing cost by virtue of their higher density
and, on average, a lower delivery cost by virtue of their smaller size. Witness Kiefer also
adopts the “argument” that dropshipping “would only improve contribution if the Postal
Service passed through less than 100 percent of its appropriately estimated destination entry
avoided costs” — but then admits that the current passthrough is less than 100 percent.13 Tr.
33/11138(a), n. 17.
Thus, witness Kiefer claims that Dr. Haldi’s testimony — that volume migrating from
Media Mail to BPM will increase contribution to Postal Service institutional costs — is
“demonstrably false.” Tr. 33/11137(b), l. 3. Yet, as shown above, witness Kiefer makes no
such demonstration. He offers no analysis — however cursory — of what postage would be
paid, or what costs would be incurred, by qualifying mail that migrates from Media Mail to
BPM. Again, contrary to witness Kiefer’s position, it is clear that BPM provides for greater
worksharing and cost avoidance by mailers, and BPM also has a higher coverage than Media
Mail.
13
Witness Kiefer hastens to add “[w]hile passthroughs may be lower than 100
percent at present, neither the Postal Service nor the Commission has expressed the view that
they should remain so indefinitely.” Tr. 33/11138(a), n. 17.
32
CONCLUSION
For the reasons set forth above, Amazon.com urges the Commission to recommend
BPM rates which reflect a cost coverage proposed by Dr. Haldi, consistent with prior
Commission consideration, which is less than Parcel Post and more than Media/Library Mail,
in keeping with the application of the statutory non-cost criteria. Further, Amazon.com urges
the Commission to recommend either the original change to the Domestic Mail Classification
Schedule proposed by Dr. Haldi (Appendix I hereto), which would allow book content on CDs
and DVDs to be entered as BPM, or that proposal as slightly amended as suggested in his
response to USPS/AMZ-T1-16. Tr. 27/9403 (Appendix II hereto).
_______________________
William J. Olson
John S. Miles
Jeremiah L. Morgan
WILLIAM J. OLSON, P.C.
8180 Greensboro Drive, Suite 1070
McLean, Virginia 22102-3860
(703) 356-5070
Counsel for Amazon.com, Inc.
December 21, 2006
A-1
APPENDIX I
Proposed DMCS Amendments
(from AMZ-T-1, Appendix II)
522
Bound Printed Matter BPM Subclass
522.1
Definition. The Bound Printed Matter BPM subclass consists of Package
Services mail weighing not more than 15 pounds and not having the nature of
personal correspondence, which either:
a. i. Consists of advertising, promotional, directory, or editorial material, or
any combination thereof;
b. ii. Is securely bound by permanent fastenings including, but not limited to,
staples, spiral bindings, glue, and stitching; loose leaf binders and
similar fastenings are not considered permanent;
c. iii. Consists of sheets of which at least 90 percent are imprinted with letters,
characters, figures or images or any combination of these, by any
process other than handwriting or typewriting;
d. Does not have the nature of personal correspondence;
e. iv. Is not stationery, such as pads of blank printed forms., or
b. Consists of sound recordings or video recordings, including incidental
announcements of recordings and guides or scripts prepared solely for use
with such recordings, if they are mailed at Basic Presort Rate or Carrier
Route Presort Rate.
A-2
APPENDIX II
Alternative Proposed DMCS Amendments
(from response to USPS/AMZ-T1-18, Tr. 27/9403)
522
Bound Printed Matter BPM Subclass
522.1 Definition. The Bound Printed Matter BPM subclass consists of Package Services mail
weighing not more than 15 pounds and not having the nature of personal
correspondence, which either:
a. i.
Consists of advertising, promotional, directory, or editorial material, or any
combination thereof;
b. ii. Is securely bound by permanent fastenings including, but not limited to, staples,
spiral bindings, glue, and stitching; loose leaf binders and similar fastenings are
not considered permanent;
c. iii. Consists of sheets of which at least 90 percent are imprinted with letters,
characters, figures or images or any combination of these, by any process other
than handwriting or typewriting;
d. Does not have the nature of personal correspondence;
e. iv. Is not stationery, such as pads of blank printed forms., or
b.
Consists of sound recordings or video recordings, as specified by the Postal
Service, including incidental announcements of recordings and guides or scripts
prepared solely for use with such recordings, if they are mailed at Basic Presort
Rate or Carrier Route Presort Rate.