BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D. C.
POSTAL RATE AND FEE CHANGES,
2000
:
I’ I; ~.,
i ,,: ”
Docket No. R2000-1
REBUTTAL TESTIMONY OF
VINCENT GIULIANO
ON BEHALF OF THE
SATURATION
Communications
MAIL COALITION
with respect to this document
should be sent to:
John M. Burzio
Thomas W. McLaughlin
BURZIO & MCLAUGHLIN
1054-31st Street, N.W.
Washington, DC 20007-4403
Counsel for the
Saturation Mail Coalition
August
14,200O
TABLE OF CONTENTS
PzQ2
AUTOBIOGRAPHICAL
SKETCH ..... ...... ............. ............ ....... .......... ...... ..... ...... .... ...... ... ... 1
PURPOSE AND SUMMARY OF TESTIMONY ,.,.,,..,,...,,.,..,.......,...,.......,......................... 1
WHO ARE THE COMPETITORS
II.
THE MYTH OF “HARM TO COMPETITORS” ....................................................... 6
Ill.
Iv
Perspective..
IN THE MARKETPLACE?
............................ 4
I.
............................................................................. .7
A
Historical
B.
Tye’s Claim Of Diversion From Newspapers To The
Mail Is Unfounded .......................................................................................
9
WHITE MISCHARACTERIZES
THE COMPETITIVE
TRADEOFFS BETWEEN MAIL AND PRIVATE DELIVERY ............................... 10
A
The Oklahoma City Market.. ...................................................................... IO
B.
The Advantages
C.
Advo’s Private Delivery Experience ..........................................................
of Private Delivery ......................................................... 12
13
1.
The Lower Cost Of Private Delivery. ............................................ 14
2.
Advo’s Private Delivery Initiatives. ................................................ 15
“MONOPOLY CUSTOMERS” WILL BE HARMED, NOT
“PROTECTED” BY FURTHER INCREASING THE RATES
FOR COMPETITIVE ECR MAIL.. ........................................................................... 17
AUTOBIOGRAPHICAL
1
My name is Vincent Giuliano.
SKETCH
I am Senior Vice President of Government
2
Relations for ADVO, Inc., reporting directly to the Chairman and Chief Executive Officer.
3
In this position,
4
matters concerning
5
I deal with all governmental
postal regulations,
services, and rates.
Since starting with Advo in 1971, I have worked in a variety of areas in the
6
company’s
7
activities, focusing
8
President from 1978 to 1983.
9
List Sales, and was Sales Manager/Senior
operations.
I have been responsible
on postal-related
10
marketing
11
with Advo’s operations
12
activities that might affect Advo, especially
for Advo’s government
matters since 1983.
I served as Assistant
and its marketing
Account Supervisor
responsible
and
for
I am familiar
of mail services to customers.
in Advo’s rate case preparation
testimony
to the
Before that I served as Director of List Maintenance
Advo’s solo mail services to some of its largest customers.
I have participated
relations
13
R80-1 and presented
14
3. I have long been active in mailing industry associations
15
Currently,
16
Postal Policy, Public Affairs, and Postal Operations
17
Direct Marketing
18
Saturation
19
of Commerce
20
Economics
in every case since Docket
on behalf of Advo in Dockets R87-1, C87-2, and C89and organizations.
I am a director and Secretary of Post Corn and a member of its Executive,
Association’s
Mail Coalition’s
Government
Affairs Committee,
Steering Committee,
and the Small Business Council.
from St. Michael’s
Committees,
a member of the
a member of the
and a member of the U.S. Chamber
I received a B.A. degree in
College in 1970.
PURPOSE AND SUMMARY OF TESTIMONY
21
Advo has been in the mailing business for more than seven decades.
22
last three decades,
23
the marketplace
newspapers
and our business
have been our primary competitors.
In the
Over that time,
have gone through both evolutionary
and
-2-
1
revolutionary
2
half of our company’s
3
saturation
4
rates and particularly
5
support the Postal Service’s
6
pound rate.
7
changes
-- often related directly to postal rates which constitute
costs.
mailers compete,
Although
In the highly competitive
the level of Enhanced
market in which we and other
Carrier Route saturation
the high pound rate are growing concerns,
proposed
8
half the size of the (also moderate)
9
testimonies
postal
That is why we
rates, which would slightly moderate
the Postal Service’s proposed
ECR pound rate reduction
reduction proposed
about
the
is only about
in Docket R97-I, the
of NAA witness Tye and AAPS witness White portray it as Armageddon
IO
the newspaper
11
address
12
newspapers
13
allegations
14
order to permit the Postal Service to maintain its ability to compete for the distribution
15
of preprints and other advertising
16
this is beneficial
17
and to consumers.
18
and private delivery industries.
their unsubstantiated
contentions
The purpose of my testimony
concerning
and private delivery, and to demonstrate
are unfounded.
for
is to
the alleged impact on
why their highly generalized
In addition I show why the proposed
rates are essential
in
materials that are part of its core services and why
to the Postal Service, its customers,
the retail advertising
community
In Section I, I explain why the dichotomy Tye and White try to draw between
19
“mailers and competitors”
is simplistic
20
use private delivery operations,
21
nonsubscriber
22
newspapers,
23
advertising
publications.
24
particularly
in response
25
more rational pound rate are not just traditional
26
(especially
TMC programs
in particular,
and inaccurate.
Some mailers also own or
and vice versa; some newspapers
while others use private delivery.
make significant
use of saturation
Shifts between delivery alternatives
to postal rate changes.
smaller dailies and weeklies)
Consequently,
use mail for their
Smaller
mail for free papers and
can and do occur,
the beneficiaries
“mailers” but also newspapers
that use ECR mail.
of a
-3-
1
In Section II, I place the proposed
pound rate in its proper marketplace
2
perspective,
3
how the excessive
4
mailers and the Postal Service.
5
diverted substantial
6
and that the swings have been in the other direction.
7
describing
the changes that have occurred in the market since 1970,
pound rate distorts the marketplace,
and why this is detrimental
I also show that Tye’s contention
volumes from newspapers
over the last five years is unfounded,
8
between
mail and private delivery, and his unsupported
9
describe
how in White’s Oklahoma
City market, his daily newspaper/
combination
11
Contrary to his claim that private delivery is “disadvantaged”
12
mail, I describe the significant
13
are related to regulatory
14
rates or regulations
15
substantial
16
costs, and procedures
advantages
constraints
in competing
flexibility that private delivery companies
to fit marketplace
in contrast to the
have to tailor their operations,
needs.
in private delivery demonstrates
19
pound rate, widens as weight increases.
20
will be only modestly
21
will harm private delivery.
22
which have been undertaken
23
effect that the substantially
24
Advo’s mailed and privately delivered
25
volumes due to conversion
mitigated,
with the
that private delivery enjoys -- most of which
that govern their mailing businesses,
Advo’s own experience
the substantially
lower
to mail -- a cost disparity that, because of the high
Even at the proposed
disproving
White’s allegation
I also describe Advo’s expanding
rates, this disparity
that the proposed
rates
private delivery operations
primarily because of the high pound rate. I explain the
lower weight-related
costs of private delivery have had on
volumes, including reductions
in Advo’s mailed
to private delivery.
In Section IV, I address witness Tye’s contention
customers”
private delivery
that leave mailers with little or no control over the
costs of private delivery compared
27
injury.
the market, at least in part because of the high pound rate.
18
26
of competition
claims of competitive
10
17
that mail has
In Section Ill, I address witness White’s mischaracterizations
dominates
to
requires that the cost coverages
that “protecting
monopoly
and rates of the most competitive
and
I
-4.
1
price sensitive
2
mailers and advertisers
3
along with the substantial
4
the obvious detriment
5
postal customers
6
choices.
7
that targeted
ECR mail should be increased
out of the mail, eliminating
contribution
of “monopoly
into competitors.
And small businesses
marketing
even further.
His logic would force
mail as a competitive
alternative
that this mail makes to institutional
customers”
and the Postal Service.
For advertisers,
and consumers
costs, to
It would turn
it would reduce their media
would be deprived
through direct mail advertising
of the benefits
brings to the marketplace.
8
Finally, I explain that Advo continues to prefer mail as its distribution
medium of
9
choice, and hopes to use the mail as a vehicle for a number of market expansion
10
opportunities.
11
delivery, or even whether to continue using the mail -- is ultimately a function of the
12
marketplace
I.
13
However, the choice -- whether to expand through the mail or private
and, most importantly,
WA
The testimonies
of NAA witness Tye and AAPS witness White give the
14
impression
15
distribution:
16
The reality is more complex.
17
postal rates.
that there are two distinct groups of competitors
saturation
Although
mailers versus newspapers
not mentioned
in White’s testimony,
for many “independent”
delivery companies,
19
other private delivery companies
20
Delivery Services
21
there is no competition
22
delivery arm in tandem compete with other private delivery companies
of Oklahoma
Newspapers,
24
newspapers
25
total market coverage
is the local daily newspaper,
that are owned by newspapers
(TMC) products,
For
(like witness White’s
Instead, the newspaper
large and small, also make use of ECR mail.
like the Daily Oklahoman
private
not mail.
which is a division of the daily newspaper
with the newspaper.
advertising
and private delivery companies.
18
23
the biggest competitor
for saturation
publisher),
and its private
and mailers.
While some
use their own private delivery to distribute their
many daily newspapers
use ECR high density
-51
mail for their TMC products.
2
mail not only for TMC distribution,
3
community
newspapers
4
Association
witness
but also use ECR saturation
and advertising
publications.
Max Heath concluded,
5
6
7
8
9
10
11
usage of ECR mail:
12
ADVO/NNA-Tl-1,
13
Many smaller daily and weekly newspapers
As National
free
Newspaper
newspapers’
“NNA-member TMCs are heavily skewed toward full-coverage
(Saturation) on another day of the week than their non-daily
[newspaper] product, contrary to the daily [newspaper] operation
of TMCs as supplementary to a daily issue. Saturation mail is
vev important to NNA members.”
Attachment
at p. 3 (emphasis added); Tr. -.
There is also a mixture of use between
mail and private delivery within the
saturation
15
some use ECR mail for a portion of their distribution.
16
SMC witness
17
publications
18
of distribution
19
Advo’s private delivery operations.
mail industry.
Bradpiece
A majority of shopper publishers
(SMC-RT-2)
use saturation
and private delivery for others.
use private delivery, but
Other shopper
publishers,
like
mail for some of their
Nor is saturation
mail the exclusive
within the “shared mail” segment of the industry, as evidenced
mode
by
Advo, in fact, is a member of AAPS.
Over the years there have been many shifts between these distribution
21
alternatives,
22
moved into and shifted between
23
newspapers
24
TMC and saturation
25
switched
26
mail to distribute
referring to NNA-member
14
20
rely on ECR
mostly motivated
by changes in postal rates:
mail and private delivery TMC distribution;
(which are much more dependent
between
Although
programs;
daily newspapers
have
weekly
on the mail) have shifted into mailed
and shopper publications
and shared mailers have
mail and private delivery.
not mentioned
by witnesses
White or Tye, all the newspapers
27
use ECR mail would benefit from the lower pound rate proposed
28
Service.
29
in my opinion,
Notwithstanding
that
by the POStal
this benefit, the real interest of the major daily newspapers,
is to eliminate
saturation
mail competition.
-6-
1
For the smaller newspapers
mail to distribute
TMC products, and advertising
publications,
free
2
community
3
lower pound rate is obvious and unequivocal.
4
witness
5
greater use of Standard
6
(2) over 90% of their Standard A volumes were mailed at ECR rates; and (3) that of
7
those ECR volumes,
8
office, and 60% weighed
9
Docket R97-I.
10
newspapers,
that use saturation
the benefit of a
In fact, the NNA survey data provided by
Heath in Docket R97-1 showed that (1) these smaller newspapers
A than Periodicals
70% were saturation
made
mail, mostly for nonsubscriber
products;
mail drop shipped to the destination
above the 3.3-ounce
Even among the larger NAA-member
breakpoint,
See Tr. 14778, 14781-82,
daily newspapers,
a number use ECR
11
high density mail for their TMC products.
12
billing determinants,
13
average weight than saturation
14
costs.
15
mailers than to saturation
mailers.
16
advantage
over saturation
mail, allowing them to combine their low, weight-
17
insensitive
newspaper
18
pound rate for nonsubscriber
19
high pound rate for their entire distribution,
20
According
to the Postal Service’s
1999
high density mail is growing more rapidly and has a higher
mail. The lower pound rate will reduce their postage
In fact, the Postal Service’s proposed rates are more favorable to high density
They give the newspapers
insert rates for subscriber
households.
households
Saturation
a substantial
cost
with a reduced
A lower pound rate
21
also benefits
many large and small newspapers,
as well as large and small
22
advertisers.
The real issue is about establishing
reasonable,
23
rates, as opposed
24
competitors.
25
26
to maintaining
ECR
mailers must pay the still-too-
In sum, this issue is not about “mailers v. newspapers.”
II.
post
cost-based
artificial pricing barriers whose purpose
postal
is to protect
THE MYTH OF “HARM TO COMPETITORS”
NAA witness Tye and AAPS witness White assert that the Postal Service’s
proposed
ECR rates, and particularly
the modest reduction
in the high pound rate, are
-7a threat to the newspaper
and misleading.
Noticeably
Those assertions
for preprint advertising
in a stronger
position than at any time since the introduction
early 1980s.
The private delivery industry is likewise strong and growing,
by Advo’s continuing
A
Historical
7
are wrong
absent is any evidence of what has been going on in the
marketplace
evidenced
over the years,
expansion
The newspaper
industry, in fact, is
of shared mail in the
as
of its private delivery operations.
Persoective
Over the three decades that I have been with Advo and involved in postal
8
matters, I have witnessed
9
nature of the competitive
IO
and private delivery industries,
changes -- particularly
11
many changes in the marketplace.
marketplace
To understand
today, it is necessary to recognize
those
as they relate to postal rates.
In the early 197Os, mail was a more dominant choice of advertisers
12
preprint distribution
13
saturation
14
mail was almost knocked out of the rapidly expanding
15
saturation
16
became competitors
of the Postal Service.
17
volumes
by two-thirds,
18
-- at the same time newspaper
19
pieces.
mail.
market, competing
However,
with newspapers
by the mid-1970s
21
1978 and particularly
22
of the market.
23
newspapers
24
services such as TMC programs
25
through
26
private delivery distribution
A number of
private delivery operations
that
preprint volumes soared from 3 billion to 28 billion
of the carrier route presort discount
shared mail concept in 1980, mail regained
in
some
stimulus of shared mail forced complacent
to pay attention to their customers’
a combination
preprint market.
from 2 billion pieces in 1970 to 680 million in 1978
the saturation
The competitive
through the use of solo
Although Advo stayed in the mail,its
In the early 1980s with the introduction
20
in the retail
because of large postal rate increases,
mailers left the mail, some launching
plummeted
the
needs, because new products
allowed advertisers
of newspaper
insert distribution
to nonsubscribers,
to obtain saturation
to subscribers
and
coverage
and mail or
These newly available competitive
-a-
l
price and service choices sparked a large growth in the preprint market.
Preprint
2
volumes, both in the mail and in newspapers,
a
3
substantial
number of the preprints
4
multi-page
preprints
5
that weighed
In the late 1960s
grew rapidly.
Significantly,
carried in shared mail were what I call “traditional”
one or more ounces.
following the large Docket R67-1 rate increase (a 22%
6
increase in the minimum carrier route rate and a larger 26% increase
7
rate), carrier route mail volumes fell. Newspapers
a
TMC programs
9
Private delivery companies
began shifting their nonsubscriber
out of the mail and into less expensive
sprang up and expanded.
10
the other hand, curtailed market expansion.
11
Advo began to explore private delivery alternatives
12
of private delivery operations.
13
The introduction
what might otherwise
alternate delivery programs.
Saturation
mailers like Advo, on
In the aftermath of the R67 increases,
and undertook
discounts
several market tests
in the Docket R90-1 rate case
14
substantially
15
and allowed moderate
16
of newspaper
17
grow.
ia
inhibiting Advo’s ability to remain price competitive
19
Advo’s average preprint weights were declining and have continued
20
the combination
21
decisions
22
preprints.
23
mitigated
of new worksharing
growth in saturation
TMC programs
by other customers
have been devastating
advertising
rate increases,
mail. But spurred by the shift
out of the mail, private delivery operations
By this time, it was becoming
of diversion
in the pound
continued
to
apparent that the high ECR pound rate was
for traditional
of heavier preprints to non-postal
remaining
multi-page
preprints.
to do SO, due to
competitors
and
in the mail to reduce the sizes of their mailed
Over the past decade, the large disparity between the high ECR pound rate and
24
the low cost of private delivery, coupled with the pressures
25
marketplace,
26
launched
of the competitive
have forced Advo to look at the private delivery alternative.
Advo
its first private delivery operation in late 1992 in the Philadelphia
market,
-91
both to reduce its distribution
2
event that future postal rate increases
B.
3
costs and to be positioned
threatened
for further expansion
in the
its ability to compete.
T
7 e’
NAA witness Tye claims that newspapers
have suffered substantial
4
diversion of preprint volumes to mail over the last five years because the pound rate
5
has not been increased.
6
marketplace
7
N/W-Tl-1
at 44-46, Tr. 14734-36.
However, he provided no
data to support his contention.
In fact, because
of the high pound rate, shared mail today is less competitive
a
with newspapers
9
preprints than it was in the mid-1960s.
and private delivery for the distribution
of traditional
multi-page
Until the large Docket R67-1 rate increase,
10
Advo’s shared mail carried a substantial
11
ounce.
12
they were diverted to newspapers
13
reduced the number of pages and weight of their inserts to make it affordable
14
remain in shared mail (but with the tradeoff of carrying less advertising
15
Because
number of preprints weighing
of the pound rate, those heavier preprints are gone.
Advo’s experience
as inserts, although
more than an
In most cases
in some cases the advertisers
since 1994 belies Tye’s claim of diversion
to
information).
of substantial
16
volumes from newspapers.
17
billion pieces.
ia
nearly 7 percent reduction.
19
shift of shared mail into its expanded
20
insert volumes
21
FY 1994 to 1999, our preprint volumes grew only 5 percent, peaking in 1997 and
22
falling since then.
23
24
Advo’s shared mail volumes peaked in FY 1995 at 3.176
In FY 1999, shared mail volume declined to 2.961 billion pieces, a
Half of this reduction, as I explain below, is due to Advo’s
private delivery operations.
likewise reflect no diversion from newspapers.
Mail is less competitive
Advo’s preprint
In the five years from
today than it was in 1994, in large measure due to the
pound rate. As I discuss in the next section, this is a major reason why Advo has
-lO-
1
become involved in private delivery:
2
distribution.
Ill.
3
to make it more competitive
WHITE MISCHARACTERIZES
THE COMPETITIVE
BETWFPN MAIL AND PRIVATE DELIVERY
TRADEOFFS
AAPS witness White tries to portray the private delivery industry as small
4
beleaguered
companies
5
monopolistic
Postal Service that is attempting
6
implies, without substantiation,
7
the proposed
a
Advo’s own experience
9
Postal Service that is at risk of becoming
10
with newspaper
struggling
to compete against the “unfair” advantages
to drive them out of business.
that private delivery companies
non-competitive
He also
would be harmed by
lower pound rate. The facts do not bear out his rhetoric,
in the mail and its growing presence
of a
Based on
in private delivery, it is the
because of the high pound
rate.
A
The Oklahoma
11
Citv Market
Even in his own market, Oklahoma City, where Distribution
(DSO) serves as the private delivery arm for the Dai/y Oklahoman
12
Oklahoma
13
newspaper,
14
held by the OklahomanlDSO,
15
market share and pricing.
16
dominance
17
Services of
witness
White declined to provide information
of combined
and professed to know little about the newspaper’s
In fact, the Oklahoma City market is a good example of the
newspaper-private
delivery distribution.
Advo started a shared mail program in the Oklahoma
competing
about the market share
with the Daily Oklahoman.
City market in the, mid-
18
1980s
19
substantially
20
case. Then in 1991, the Dai/y Oklahoman launched a privately delivered TMC
21
program,
22
nonsubscribers
23
discontinued
24
mail program and has no sales force in the market.
impaired
However, our ability to compete was
by the large 25% postal rate increase in the Docket R87-1 rate
using its newly created sister company,
DSO, to distribute
to achieve saturation total market coverage.
its Oklahoma
City shared mail program.
preprints to
Shortly thereafter,
Advo
Advo no longer offers a shared
Our only involvement
is through a
-ll-
1
small independent
2
nationally-generated
3
companies
4
shopper
advertising
like Blockbuster)
every major multi-page
6
Oklahoman/OS0
7
whereas
the Buyers Guide, which distributes
inserts for Advo (mostly single-sheet
and once a month Advo’s four-page
The Daily Oklahoman/OS0
5
combination
preprint advertiser.
dominates
some
ads from
shared mail wrap.
the market, distributing
the Daily
As witness White acknowledged,
carries a number of preprints that weigh in excess of one ounce,
he knew of none carried by competitors.
Tr. 22/l 0032-33.
Even with respect to lighter weight pieces -- the one market segment where
a
9
publication,
shared mail can still compete -- witness White mischaracterized
the market.
His
10
claim that postal rates have driven private delivery out of the market for light-weight
11
pieces (Tr. 22/9966)
12
includes
13
page inserts weighing
14
a substantial
is disingenuous.
In fact, the Daily Oklahoman’s TMC program
number of inserts weighing
a fraction of an ounce.
under one ounce, including
Tr. 22/10044; AAPS-LR-2.
This alleged inability of private delivery companies
15
pieces is nonsense.
16
multiple-piece
17
newspapers
ia
newspaper
19
inserts.
20
coverage,
21
as part of a TMC program.
22
delivery companies
23
inserts.’
1
Almost all private delivery companies
advertising
single-
to compete for light-weight
compete by carrying
sets, just like shared mailers, shopper
do. Many, if not most, private delivery companies
publications
distribute
and
shoppers
or
TMC products that serve as the vehicle for carrying multiple preprint
In all these cases, the private delivery company offers advertisers
either by itself or in conjunction
with newspaper
In all cases, these saturation
distribution
saturation
to subscribers
vehicles allow private
to compete on equal footing with mail for light-weight
advertising
White’s light-weight claim is based on an apples-to-oranges
comparison.
The
only circumstance where OS0 arguably would be “non-competitive”
with shared mail
would be in the highly unusual case of an advertiser who wanted saturation coverage
entirely in private delivery, choosing not to use the newspaper as the vehicle to reach
subscriber households.
In that case, DSO’s delivery to subscriber households would
- 121
B.
2
The Advantaaes
Although
not mentioned
3
important advantages
4
“Advantages
5
“no label or handling
6
Among other advantages:
7
a
of Private Delivery.
in White’s testimony,
over mail distribution.
private delivery has
DSO’s rate card, for example, touts the
of OS0 Delivery Over Mailing Services and the Post Office,” which include
charges”
and “lower per piece delivery charge.”
Tr. 2219962.
Private delivery does not require address labels, avoiding the costs of
list maintenance and label production.
9
10
11
12
Private delivery involves only minimal preparation and administrative
requirements -- far less cumbersome and costly than the complex mail
preparation requirements, multiple mailing forms, and postage payment
and audit trail documentation required by postal regulations.
13
14
15
16
Private delivery eliminates the expense of transporting drop shipped
mail to postal facilities, as well as the cost of managing a transportation
network and scheduling drop ship appointments,
Carriers pick up the
delivery materials at the plant.
17
ia
19
Private delivery generally avoids the capital investment and expense of
mechanically inserting advertising pieces into shared mail packages, a
function usually performed by the private delivery carriers.
20
21
22
23
By simplifying or eliminating mail preparation steps and eliminating drop
shipment, private delivery can accommodate later deadlines for receipt
of preprints from customers, an important competitive consideration for
time-sensitive
advertisers.
24
25
Private delivery allows total control over service and delivery dates,
assuring the ability to achieve delivery on a specific day.
be on a “solo piece” basis, at a higher cost than the normal newspaperflMC
insert
rate. But in this case of an advertiser wanting “solo” distribution, the appropriate
comparison is the postal rate for solo mail distribution. Yet DSO’s published rate for
solo distribution, ranging from 7.3$ to 10.6c per piece depending on quantity (Tr.
2219962) is lower than the Postal Service’s lowest proposed saturation ECR rate of
12.0$ for mail drop shipped to the destination post office.
-131
2
3
.
4
Another major advantage
Private delivery allows deliveries to be made on Sunday, as Advo does in
the Cincinnati market, which is the primary day for newspaper preprint
distribution.
5
over their distribution
6
procedures,
7
regulations
a
rate they pay for mail distribution,
9
operations.2
10
is that private delivery companies
costs, and greater flexibility to adapt their operations,
and prices in response
are set through
However,
to the market.
regulatory
processes,
significantly
12
the high pound rate.
Because
13
that dictate their mailing
of private delivery, as I discuss below, is its
lower cost in relation to ECR saturation
C.
postal rates and
mailers have no control over the
or the rules and regulations
the biggest advantage
11
have greater control
postal rates, particularly
due to
Advo’s Private Deliven/ Exoerience
From shortly after its founding in the 1920s until the early 1950s Advo
14
was primarily a private delivery company.
15
mails exclusively
16
efficacy of the mail, and would like to expand its mailing operations.
17
a business operating
18
long as postal rates allow it the opportunity
19
is true for all saturation
20
mail compared
2
as its distribution
medium of choice.
in a highly competitive
mailers.
to newspaper
From that time until 1992, Advo used the
Today, Advo still believes in the
Nevertheless,
as
market, Advo can stay in the mail only so
to remain competitive
and profitable.
The high pound rate impairs the competitiveness
and private delivery distribution,
This
of
and is the major
Private delivery does have some potential disadvantages compared to mail, but
in Advo’s experience these are more a matter of perception than reality. Some gated
neighborhoods
and communities restrict access by private carriers, but in those
instances Advo simply uses the mail to reach those addresses. There is also a
perception that private delivery results in lower consumer readership due to lack of
access to the mailbox, but Advo’s internal surveys reveal that in some markets private
delivery has higher readership than mail or newspaper advertising. The primary
determinant is the quality of the delivery service, not the mailbox.
- l41
reason why Advo has entered into -- and is continuing to expand -- its private delivery
2
operations.
1.
The I ower Cost Of Private Deliverv.
At current postal rates, the cost of private delivery is significantly
3
4
lower than mail delivery.
5
sensitive,
6
Moreover,
the cost disparity
because private delivery costs are less weight-
widens as mail piece weight increases,
In our private delivery operations,
the distribution
7
less than 12c per package,
a
cost plus all costs for inserting preprints into the package,
9
supervision.
In contrast,
or $120 per thousand.3
cost for a 4-ounce
destination
11
not including
12
preprints
13
requirements
14
which are avoided in private delivery.
15
This includes the total delivery
at current rates for saturation
10
plastic bags, and carrier
mail drop shipped to the
post office, the postage cost alone is 13.725$ or $137.25
the additional
into the package,
imposed
For an a-ounce
package is
per thousand
costs for (1) address labels, (2) mechanical
--
insertion of
(3) bundle and facing slips, and other documentation
by postal regulations,
package,
and (4) drop ship transportation,
all of
the postal versus private delivery cost differential
16
widens substantially.
17
per thousand.
ia
related costs mentioned
19
doubling
20
(and in many cases substantially
21
of weight results in a 98% increase in postage -- effectively doubling the cost.
22
Moreover, for this a-ounce piece, the postage cost alone is 60% greater than the total
3
In private delivery, the total distribution
The current postage cost alone, excluding
above, is $271.50 per thousand.
cost is less than $170
the other additional
In private delivery, a
of the piece weight results in only about a 40% increase in distribution
less).
mail-
cost
But in the mail at current rates, this doubling
Advo’s actual private delivery costs vary by market, and are confidential.
above figures represent the high end of our private delivery costs.
The
-151
distribution
2
increases.
3
cost in private delivery.
I would emphasize
The disparity widens even further as weight
that even at the Postal Service’s proposed
rates, the
4
modestly
5
delivery and newspaper
distribution.
Under the proposed
6
would become $140.50
per thousand
for a 4-ounce piece, and $253.00 for an 8-
7
ounce piece.
8
_- a cost/weight
9
delivery, but at least moderately
lower pound rate would still leave a significant
A doubling
rates, the postage
of weight would still result in a large 80% postage
to private
cost
increase
ratio that would still be about twice as high as the ratio in private
lower than the irrational 98% ratio under current rates.
10
Moreover,
11
higher than the total private delivery cost,.
12
disparity compared
the postage cost alone for the 8-ounce piece would still be almost 50%
This, of course, explains why the allegations
of harm by witnesses
Tye and
13
White are couched
in generalized
14
rates will “continue
to divert mail” from newspapers,
15
Noticeably
16
above comparisons
17
substantial
18
possibly cause any major shift in the marketplace.
19
reduction
20
erosion and once again compete at the margins for a segment of the market.
21
addition, by marginally
22
they will lessen the necessity for mailers to convert to private delivery and become
23
Postal Service competitors.
assertions
missing are any supporting
(such as Tye’s claim that the proposed
cost data or concrete evidence of harm.
show, even at the proposed
cost premium over the competitive
in the currently
2.
distorted
narrowing
25
the aftermath
26
company
rates, mail distribution
alternatives.
As the
will still pay a
Those rates cannot
Rather, they will allow a moderate
cost relationships,
enable mailers to stem volume
the cost disparity between
In
mail and private delivery,
Advo’s Private Deliverv Initiatives.
Advo’s initial involvement
24
Tr. 14732 and following).
in private delivery came in late 1992 in
of the Docket R87-1 rate increase.
in Philadelphia,
Advo acquired a private delivery
and initially provided both shared mail and private
- 161
distribution
in the same zones, using private delivery to distribute
heavier preprints
2
that Advo could no longer compete for in the mail due to the high pound rate. Advo
3
has since converted
4
private delivery operation,
5
expanded
6
200,000 homes weekly.
7
Cincinnati,
8
that market to private delivery, reaching 650,000 homes weekly.
9
year, Advo launched
its shared mail program in these overlapping
zones into the
which now serves 775,000 homes weekly.
its private delivery operations
In mid-1995
and has since converted
In 1993, Advo
to the Boston market, which currently serves
Advo acquired a private delivery company
a substantial
in
part of its shared mail volume in
In January of this
private delivery in the central New Jersey market, converting
IO
distribution
to 350,000
homes weekly from the mail to private delivery.
11
Advo converted
12
TMC program with the Denver Post newspaper.
13
operations
distribution
currently
In February,
to 300,000 homes in the Denver market from mail to a
In total, Advo’s private delivery
serve 2.3 million homes weekly.
In each of these markets, Advo has shifted shared mail out of the postal
14
15
system and into private delivery.
16
nearly tripled to more than 120 million pieces annually, while our shared mail
17
volumes have declined
18
Privately delivered
19
program
by 120 million pieces -- a 4% reduction
in postal volume.
volumes now constitute about 3.7% of Advo’s total shared mail
distribution.
These conversions
20
Since 1994, Advo’s privately delivered volumes have
to private delivery have had a number of positive effects
No longer constrained
for
21
Advo.
by the high postal pound rate, Advo has been able to
22
compete successfully
23
page preprints that had been priced out of the mail. Our privately delivered volumes
24
average 40% more preprint inserts per package than our mailed volumes,
25
privately delivered
26
fact, the mailed preprints
in those markets for a share of the mid-to-heavier
preprints
weight multi-
and those
have a higher average weight than those in the mail. In
have declined in weight over the last six years, due to the
- 171
high pound rate. Although
2
mail volume, it accounts
3
These markets
private delivery accounts for 3.7% of Advo’s total shared
for a larger 4.7% of our preprint volume.
have become more profitable to Advo as a result of their
4
conversion
5
private delivery and the enhanced
6
volumes.
7
dollars annually in distribution
8
line, substantially
9
to private delivery, due to the combination
of the lower distribution
ability to compete for heavier traditional
Overall, these conversions
preprint
to private delivery have saved Advo millions of
costs, all of which has gone directly to Advo’s bottom
enhancing
our company’s
profitability.
For the Postal Service, the result has been a corresponding
contribution
11
Service is greater than the volumes alone imply, because our private delivery
12
operations
13
these markets.
14
areas with longer distances
15
is precisely what common
16
vulnerable
17
contribution
tend to be concentrated
In higher-cost
to diversion
The impact of this diversion
in the lowest-cost,
“MONOPOLY
on the Postal
easiest-to-deliver
areas of
delivery areas within these markets, such as outlying
between
deliveries, Advo continues
economic
sense suggests:
to use the mail. This
that the volumes
most
are the lowest cost volumes that provide the highest
to Postal Service institutional
FURTHER
18
mail volume.
loss of high-
10
Iv.
saturation
cost of
CUSTOMERS”
INCREASING
costs.
WILL BE HARMED, NOT”PROTECTED”
THE RATES FOR COMPETITIVE
At the current pound rate, private delivery is an increasingly
19
to the mail.
I am not suggesting
20
or that it can be entered into quickly.
21
provide a high quality of reliable delivery, must be well-managed,
22
stringent quality controls.
23
have the demanding
24
the mail system is a universal,
25
only be accomplished
BY
ECR MAIL
attractive alternative
that shifting to private delivery is an easy undertaking,
To be effective, a private delivery operation
One of the advantages
task of managing
through private delivery).
and must have
of mail is that the mailer does not
a delivery network.
six-day-a-week
must
Another advantage
service (although
is that
Sunday service can
Compared to private delivery, a mailer
-181
can more rapidly enter or exit markets, expand or contract its geographic
2
and change or add delivery days.
3
private delivery has been selective and carefully planned.
4
delivery must be done right. But that can be done.
5
These are the reasons why Advo’s expansion
To be successful,
For these reasons Advo is willing to pay some reasonable
6
service.
7
on its traditional
a
delivery business.
9
excessive
of
private
premium for mail
All else being equal, Advo would much prefer to focus its efforts and energies
advertising
marketing
and mailing business,
But the current premium, particularly
and out of balance with the marketplace
rather than entering
-- a fact well known by our
newspaper
11
the artificial postal pricing barrier that insulates them from competition.
12
where postal rates head in the future, private delivery may, unfortunately,
13
business
14
mail industry.
and private delivery competitors,
necessity
Ironically,
the
the high pound rate, is
10
15
coverage,
who want to maintain and even increase
not only for Advo but for significant segments
Depending
on
become a
of the saturation
NAA witness Tye argues that ECR mail should be hit with an even
16
higher cost coverage
17
“increasing
18
claims this will also “arrest the past increases
19
to diversion”
20
sensitive
21
near or at the point where a shift to private delivery becomes feasible, Tye’s “solution”
22
for “protecting
23
will force that mail out of the system -- either by diverting advertisers
24
and private delivery competitors,
or by causing mailers themselves
25
system and become competitors
of the Postal Service.
26
interest of “monopoly
or the Postal Service’s universal delivery system.
27
What the Postal Service needs -- at a time when it is facing inevitable
and higher rates in order to “protect monopoly
the contribution
from competitive
from non-postal
competitors.
and faces substantial
monopoly
competition,
customers”
customers”
customers”
classes such as ECR.”
Tr. 14742.
by
He
in volume of competitive
classes due
Given the fact that saturation
mail is price
and because
saturation
will have the opposite effect.
postal rates are
Even higher rates
to newspapers
to leave the postal
Neither outcome
is in the best
non-price-
- 191
related diversion
2
to generate
3
First Class mail.
4
of core mail volumes due to changing technology
new volumes
of profitable
This also exposes
mail in all of its product categories,
witness White’s claim that all AAPS is seeking
5
playing field.”
6
pound rate to insulate competitors
7
rates that are fair to both mail users and competitors
8
The current high pound rate is not only not cost-based,
9
USPS’s best customers
10
-- is the opportunity
including
is a “level
What NAA and AAPS are really seeking is to maintain an artificially high
from effective competition.
The best way to set
is to make them cost-based.
but has the effect of turning the
into competitors
Advo wants to expand its shared mail operations,
11
so through the mail rather than private delivery.
12
number of potential
13
second weekly programs
14
unmet demand
15
postal rates, and especially
16
the possibilities
market opportunities
and we strongly prefer to do
We are currently considering
to expand existing market coverages,
in existing markets, and enter new markets, because
in the marketplace.
of expanded
The major impediment
to these initiatives
a
add
of an
is
the pound rate. That is why we must continue to explore
private delivery.
CERTIFICATE
OF SFRVICE
I hereby certify that I have on this date served the foregoing
participants of record in this proceeding in accordance with s
Practice.
Laughlin
August 14, 2000
document
upon all