2014-38
Postal Services:
Governments and Firms’Perspective
Fumitoshi Mizutani Shuji Uranishi
Eri Nakamura

Postal Services: Governments and Firms’ Perspective
Fumitoshi Mizutani (Kobe University)
Shuji Uranishi (Osaka City University)
Eri Nakamura (Kobe University)

1 Introduction
Modern postal service began in the UK in 1840 (Royal Mail Group (2014)) with asystem characterized by universal pricing regardless of origin or destination, and by the prepaid
system of postal stamps. This basic arrangement for postal service has since been adopted incountries around the world and has become the international norm.
An important network industry, postal service has traditionally been provided bynational governments in the form of a monopoly. While postal service at first comprised only
the exchange of letters for personal correspondence, service soon expanded to include thedelivery of parcels, newspapers, periodicals, direct mail, and many other items. In somecountries, postal organizations have evolved to encompass even banking and insurance
businesses.
However, postal service now faces an important turning point in its mission todeliver information and goods. Hard copy letters are becoming obsolete as they are rapidly
replaced by electronic messages and quick, easy cellphone calls. Another big challenge in the
postal industry is the introduction of competition among postal service providers, part of thetrend toward deregulation in recent years designed to mitigate the lack of efficiency of
traditionally monopolistic government-run postal services. In other public utility industries, forexample industries providing electricity, gas, water, rail service, and so on, competition policies
have been implemented and privatization carried out either wholly or in part. It is the purpose ofthis paper to examine where postal service stands today and to provide advice relevant to its
future policy and management.
This paper consists of five sections after the introduction. Beginning in the second
section, explanation and discussion focus mainly on the selected countries, chosen as examples
which best show the characteristics of postal service in terms of regulation, liberalization,
governance and strategies: the UK, France, Germany, the US, and Japan. The second section
gives an overview of postal service: (i) size, (ii) organizational form, and (iii) major regulations
regarding such matters as entry, price, and regulatory body.
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The third section concerns the movement toward liberalization of postal services,which has garnered much attention in recent years in many countries. We will give historicalreasons for governments’ decisions to pursue liberalization.
The fourth section discusses the universal service obligation (USO), with a focus on
businesses covered by the USO, postal items to which the USO applies, financial backing for
the USO, and other related issues.

After listing the characteristics of USOs of each country,

we will discuss methods of USO measurement: (i) the deficit approach, (ii) the net avoidable
cost approach, (iii) the entry pricing approach, and (iv) the profitability cost approach.
The fifth section discusses management issues. It is important to note thatliberalization which includes privatization spurs more radical reforms in management thanliberalization without it, and that this topic might have particular relevance to deciding future
policy. This section focuses especially on (i) governance structure, (ii) diversification strategy,and (iii) internationalization strategy.

2

Summary of Postal Service in Selected Countries
In this section we will give an overview of postal services in the selected countries:

the UK, France, Germany, the US, and Japan. We will focus on the following items: 1) size of
postal services, 2) ownership and managerial type, 3) regulations such as those related to entry
and price, and regulatory body.

2.1 Size of Postal Services
Table 1 shows a comparison of the size of postal service organizations in FY2012.
As there are variations among these countries in terms of population and total land area, we use
the unit number per population and land area.
The number of post offices is on average about 30 to 50 per 1000 km2 of land area.
The US, with its huge land area, has a much smaller number than average, and Japan, 70% of
whose land area is comprised of mountains, has a much larger number. It is also worth notingthat the UK’s number is slightly larger because its non-permanent post offices are included in
the total.
Second, the number of employees is similar among these countries, except forGermany, which has between 2 to 4 employees per 1000 population. The number of employees
for Germany includes part-time staff.

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Table 1 Comparison of Size of Postal Service in FY2012

Country
Main provider
Population(thousand)Area(1000 km2)
Number of post offices(a)(Per 1000 km2 area)

UK

FranceGermany

US

Japan

Royal Mail

La Poste

Deutsche
Post DHL

USPSJapan Post

62,79863,45881,991

315,791

126,435

242.9

551.5

357.0

9,629.0

377.9

48.7(b)

30.9

36.4

3.1

64.9

Number of employees(c)2.39(b)
3.57
1.99
3.09
5.17
(Per 1000 population)
Number of delivery items(d)
0.25
0.47
0.17
0.29
0.24(e)（per 1000 population）(f)
Postal service revenues
127.2
293.0
581.2
134.4
105.4
(per population)(Notes):(1) These numbers are obtained from Statistics of Universal Postal Union and from eachcountry’s home page.
(2) In item (a), this number includes both permanent post offices and post offices undercontract.
(3) In item (b), this number is for FY2011.
(4) In item (c), this number is the total number of employees including both permanent
employees and part-time staff.
(5) In item (d), this number is the total number of letter-post items (domestic service) andordinary parcels (domestic service).
(6) In item (e), this number is for FY2011 and includes international service (dispatch), but
excludes unaddressed advertising items.
(7) In item (f), the unit is SDR (Special Drawing Rights). 1SDR = 140.8846 yen in January
2014.

The number of delivery items is also similar among these countries, except for theUS, where the number is inflated by the high letter-post volume, most likely the result of
massive direct mailing advertising activities.
Finally, postal service revenues per population are apparently similar among thesecountries, except for Germany, whose revenues are about 4 to 5 times higher than for othercountries, presumably because Deutsche Post has likely included in its total revenues those of
DHL, a leading global postal service provider with which it has merged. We will discuss thistype of international business strategy in a later section.

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2.2 Organizational Form
Postal service can be organized in several ways. In this section, by considering
ownership, managerial type as organizational structure, and the range of related services in theselected five countries, we will examine the organizational forms which postal service may take.
Table 2 shows the organizational form of postal services.

Table 2

Organizational Form of Postal Service

Country

UK

FranceProviderRoyal Mail

La Poste

1660
1969
2001
2013
Holdingcompanytype
30% public
ownership(a)100%subsidiary ofholdingcompany

1804
1991
2010
Singlecorporation
type
100% public
ownership
Corporation

Establishment year
State owned:
Public Corporation:
Corporatization:
Privatization:
Company type
Ownership

Post

Banking

Otherbusiness

None

Insurance

None

Front
customer
service100%
subsidiary ofholdingcompany100%
subsidiary ofpostcompany
Associatedcompany ofpostcompany
None

Germany
Deutsche
Post DHL

US

Japan

USPS

Japan Post

1876
1995
2000
Singlecorporation
type
21.0% public
ownership(b)

1775
1971
Publiccorporation
type
100% public
ownership

Corporation

PublicCorporation

None

None

None

None

None

None

1871
2003
2007
Holdingcompanytype
100% public
ownership100%
subsidiary ofholdingcompany100%
subsidiary ofholdingcompany100%
subsidiary ofholdingcompany100%
subsidiary ofholdingcompany (c)(Notes):(1) This information has been modified from information obtained from the Ministry ofInternational Affairs and Communications (2013c) and each organization’s homepage.
(2) In item (a), the number is the ratio of public ownership (government and government-related
financial organizations).
(3) In item (b), the number is the ratio of public ownership (government-related organizations)fromtheDeutschePost
accessedon(http://www.dpdhl.com/en/investors/shares/shareholder_structure.html,
September 4, 2014).
(4) In item (c), this company was integrated into the Post company on October 1, 2012.

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Royal Mail is a member of the Royal Mail Group, which has one holding company
and one main postal service company. Royal Mail Group, Ltd., which is owned by Royal Mailplc, has two brands ‘Royal Mail' and 'Parcelforce Worldwide' and three affiliated companies:
Royal Mail Investments Ltd., Royal Mail Estates, Ltd., and Romec Ltd.

In 2013, Royal Mail

was privatized and about 70% of its shares were sold to the private sector.
According to Le Groupe La Poste (2013), France’s La Poste Group has six main
companies subsidiary to the parent company La Poste S.A and many others associated withthese six companies. La Banque Postale, the former postal savings division of La Poste S.A.,
now works as a main financial services provider in the group, and became a subsidiary in 2006.
Although La Poste S.A. became a public limited company in 2010, 73.7% of its shares were still
held by the French government as of 2013.
Germany’s Deutsche Post DHL is an independent company with two internal
divisions, Post-eCommerce-Parcel and DHL, in addition to Corporate Center. According to
Deutsche Post DHL (2013), the Post-eCommerce-Parcel division handles mail, e-post, press
services, export and import, and global eCommerce. The DHL division has three sub-divisions:
Express, Global Forwarding, Freight, and Supply Chain. Corporate Center provides main office
functions for the entire company, including board services, corporate controlling, corporate
finance, and human resource management. Though not shown in the figure, Deutsche Post DHL
has many affiliated companies, associated companies, and joint ventures around the world. The
origin of Deutsche Post DHL was Deutsche Post AG, created during the privatization of
Deutsche Bundespost in 1995. Deutsche Post acquired DHL in 2002 and integrated related
business operations under the DHL brand. Worthy of note is that Deutsche Postbank AG and
Deutsche Telekom AG were separated from Deutsche Bundespost when it was privatized andnow have no capital ties with Deutsche Post DHL.
The USPS falls into the category of public corporation, a quasi-independent
organization operated by the government, with one segment incorporating mailing, shipping,packages, and international services. According to the United States Postal Service (2013), the
USPS began operations in 1971, after the Postal Reorganization Act of 1970 stipulated that the
Post Office be transformed into a self-funding entity.
Japan Post Group, which is a holding company type organization, has three main
service providers—Japan Post, Japan Post Bank, and Japan Post Insurance—in addition to 16
affiliated companies and consolidated subsidiaries.

These three service providers were createdunder Japan Post Holdings, when Japan Post was privatized in 2007. One hundred percent of5

the shares of Japan Post Holdings are still held by the government. Japan Post Insurance andJapan Post Bank also subcontract operations to Japan Post.
From these results, we can summarize as follows.

First, postal services are largely

publicly owned. Among the selected countries—in France, the US and Japan—postal service
organizations have 100% public ownership. In the UK and Germany, however, ownership ismore private sector- or business-oriented.
Second, as for company type, these postal organizations can be divided into threegroups: 1) the single corporation type, which includes Deutsche Post DHL and La Poste; 2) the
holding company type, which includes Royal Mail and Japan Post; and 3) the public corporation
type, which includes the USPS. Deutsche Post DHL, La Poste, Royal Mail, and Japan Post are
all stock companies with several divisions and affiliated companies.
Last, the postal service industries in France and Japan also provide banking andinsurance services. This strategic behavior will be discussed in Section 4.

2.3 Major Regulations and Regulator
This section will provide an overview of the main regulations and regulatory bodies
related to postal services. As Table 3 shows, regulatory situations vary among countries.

First,

as for entry regulations, while both the UK and the US have none, there are limitations on entry(i.e., through licensing or permission systems), in France, Germany and Japan.

There aredifferences in regulation only in services related to personal correspondence, such as letters. For
parcel delivery service, there are no entry regulations at all.
Second, there is much variation in price regulation among countries, especially in
non-competitive service. With no price regulation, the UK is the most liberalized country, while
Germany and the US have stricter regulations: the price of non-competitive service must be
approved by the regulator. Falling somewhere between are France and Japan, where price is not
subject to strict limitations but must simply be reported in advance. For competitive service,
there are no regulatory limitations except in the US, where price regulation is apparently stillrather conservative.
Last, Mizutani (2014) argues that the existence or non-existence of an independent
regulator is an important factor affecting the fairness of judgment regarding incumbents andnew entrants.

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Table 3 Main Regulations and Regulatory Bodies

Entry
Reg.

Price
Reg.

Country

UK

FranceGermany

USJapan

Major Law

PostalServices Act(2011)

PostalServices andElectronic
Communica
tions Code

Postal Law(Postgesetz)

U.S. Code(Title 39)

Postal Law

None

License(a)License(b)NonePermission

None

None
Report inadvance,
Order ofchange andsuspension

None

None

None

Approval(c)Approval(d)Report inadvance

Personal
correspondence
ParcelNoncompetition
service

Competition
service
Independent regulatory
body

Regulator

None

None

None

None

Approval(e)Report after

Yes

Yes

Yes

Yes

No

Office ofCommunica
tions:
Ofcom

Electronic
Communica
tions andPostalRegulation
Authority:
ARCEP

Federal
Network
Agency forElectricity,
Gas,
Telecommu
nications,
Post andRailway: BNetzA

PostalRegulatory
Commission: PRC (f)Ministry ofInternal
Affairs andCommunication(Note):(1) This information was obtained from the Universal Postal Union (2014), the Ministry ofInternational Affairs and Communications (2013a) and other organizations and regulators
in selected countries.
(2) In item (a), a license is not always necessary for domestic-only and non-delivery services.
(3) In item (b), a license is necessary for addressed letters (i.e. personal correspondence) of lessthan 1kg, and direct mail items.
(4) In item (c), prices should be approved for addressed letters (i.e. personal correspondence)of less than 1kg and direct mails. However, bulk mail with more than 50 items per unit is
excluded.
(5) In item (d), the postal service may implement postage rate changes for market-dominant
products, subject to a minimum of 45 days advance review by the Postal Regulatory
Commission (PRC), for consistency with the price cap and certain factors and objectives.
(6) In item (e), for competitive products, the Postal Service may implement competitive pricechanges on 15 days' notice for rates not of general applicability (negotiated service
agreements) and on 30 days' advance notice for rates of general applicability, subject tofiling with, and review by, the Commission.
(7) In item (f), the PRC is the regulator for the USPS only, and private providers are excluded.

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An important feature of postal service in Japan is that regulators and policy makers
are one and the same, a situation quite different from that in many European countries and theUS, where postal service regulators are separate from ministries (departments) involved inpolicy making.

In Japan the government itself both creates and regulates policy, one reason

being that competition in the postal service has not become fully open.

The market itself istightly limited to existing incumbent companies, and the idea of pursuing fair judgment fromdisinterested regulators has not taken hold in Japan.
The regulatory situation is more advanced in European countries such as the UK,
France and Germany, which have independent regulatory bodies, in compliance with Article 22of EU Directive (97/67/EC), stipulating that postal service in each country must maintain an
independent regulatory body separate from the supervisory authority.

3

The Liberalization of Postal Services
This section summarizes the liberalization of postal service.

Details can be found in,for example, Crew et al. (2008) and Eccles (2008).

3.1 A History of the Liberalization of Postal Service
Traditionally provided by national government, postal service began to be reformedin the late 1980s. Two important 1988 reforms stand out: (i) action toward an integrated postal
service market within the European Union, and (ii) efforts to rectify the monopolistic postal
service situation in New Zealand. The first reform aimed to create inside the European Union acommon market with standard rules. The second reform involved introducing competition.
While monopolistic postal service has the advantage of fostering the provision of stable service,monopolies are costly due to the lack of competition, a problem worldwide postal reforms wereintended to address. Major reforms are as follows:
1992

Postal Green Paper by EU toward a future integrated market1

1993

Abolition of monopoly in the Swedish postal service

1997

The first EU Postal Directive (Directive 97/67/EC)

2000

Abolition of a monopoly situation in postal service and construction of aregulatory body in the UK,

1

The Postal Green Paper by the European Commission (1992) examines each country’s current situation,
existing problems and future potential problems, and investigates feasible solutions in order to implement
policy to realize a future integrated market in the EU.

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Privatization of Deutsche Post
2002

The second EU Postal Directive (Directive 2002/39/EC)

2005

Privatization of Japan Post and subdivision of postal services

2008

The third EU Postal Directive (Directive 2008/6/EC)

Among these reforms, we will summarize the essence of the EU Postal Directives.
The first EU Postal Directive has four important points. First, postal service should fulfill aminimum universal service obligation. Second, gradual and controlled liberalization of postal
service must be carried forward. Third, the price of universal service obligation should reflect
its cost. Last, accounting separation must be observed between monopolistic andnon-monopolistic postal services.
postal services be reduced.

The second EU Postal Directive stipulated that monopolistic

The third EU Postal Directive asks member states to liberalize thepostal service market by the end of December 2010, with the exception of some countries which
are given an extended deadline of the end of December 2012. It is worth noting that there has
been much variation in the process of liberalization of the postal service from country tocountry.

3.2 Reasons for Liberalization
The liberalization of postal service was spurred by liberalization in other industries,
notably air transportation, telecommunications, and energy (i.e. electricity and gas utility).
Beginning in the early 1980s in the UK and the US, massive deregulation and privatization
quickly caught on worldwide, common trends being the privatization of state-owned
corporations, the introduction of new regulation schemes such as incentive regulations (i.e.
price-cap, yardstick regulation), the reduction or abolition of entry barriers, and the embracingof free competition to/in the market.
The postal service industry was a latecomer to liberalization, lagging about ten years
behind other public utilities industries, despite the increasingly urgent need for liberalization,
for several reasons. The first reason was the clear necessity of integrating postal service withother telecommunication tools such as the facsimile and the Internet. For example, according to
Post and Parcel (2011), such integrated systems as E-Postbrief by Deutsche Post and Digiposte
by La Poste have been in operation since 2010. Liberalization was necessary also because
competition had severely increased against rivals such as the private mail express services thatwere proliferating in the 1980s. Furthermore, the traditional core business of postal service
industry—personal letters—was being supplanted in the 1990s by e-mail. Third, the decline in9demand and the increase in the cost of postal service worsened the managerial and financial
situations. To solve these problems, national governments exhorted post offices to improve
efficiency, ultimately leading to the liberalization of postal services through reforms in the post
office, price setting, the introduction of competition, and other areas.

4 The Universal Service Obligation
Although there is no concrete definition of “universal service,” there seems to beconsensus about what it means. A report by the OECD (1991) defined universal service as
having four components: universal geographical access, universal affordable access, universal
service quality and universal tariff. Based upon these ideas, the universal service obligation(USO) could be defined as the obligation of a provider to provide good quality service to allusers at uniform and affordable prices (Mizutani, 2012). In this section, we explain thecharacteristics of the USO and methods of calculating it.

4.1 Situation of Universal Service Obligation in Selected Countries
Table 6 shows an international comparison of the USO system for postal service. It
can be seen that selected countries have adopted similar approaches. Postal items to which theuniversal service obligation applies are mainly letters, registered mail, guaranteed mail andparcels. Postal tariff is applied at a flat rate nationwide.
Second, although the USO is maintained in the postal service, the monopoly situation
no longer remains. Competition is applied in almost all fields of postal service, except in the US,
where the USO system appears to be conservative.
Third, although there are variations among countries in the financial means formaintaining the USO, there are four main sources: (i) tax privileges, (ii) funds, (iii) subsidies,and (iv) loans. Obtained by exemption from Value Added Tax, tax privilege refers to a financing
method used in European countries such as the UK, France and Germany. Funds, used in France,
Germany and Japan, are another source for the USO, although there are slight differencesamong the countries as to who should contribute. Subsidies from the national government analso support the USO. In the US, borrowing and the right to issue bonds are also allowed asways to finance the USO, though these methods are used sparingly.

Table 5 The Universal Service Obligation System in the Postal Service

10Country

UK

FranceGermany

US

Japan

ProviderRoyal Mail

La Poste

Deutsche Post

USPS

Japan Post

Coverage
Business for
Universal
ServiceObligation

Postal service

Postal service

Postal service

Postal service

Postal service,
Banking,
Insurance(a)Postal mattersunder 20kg,
registered mail,guaranteedmail(b)Letters under
2kg, newspapers,
magazines under
2kg, parcels
under 20kg,
registered mail,guaranteed mailLetters under
2kg (including
registered mail,guaranteed mail,cash ondelivery),Parcels under
20kg

Services
provided by
USPS

Postal items under
4kg, registeredmail,content-certified
mail

Yes

Yes

Yes(d)

Yes

Yes

All

All

All

All except
monopoly fieldAll

Postal items withstandard tariff lessthan tariff as muchas 6 times & its
weight less than
12.5 ounce (about
350 g),
Monopoly on
postal receiving
box

None
(abolition in 2003)

Items for
Universal
ServiceObligation in
Postal Service
Description ofservicestandard (c)Competition
field

Monopoly
field(e)Financial
Backing for
the USO

None(abolition in
2006)

None
(abolition in
2011)

None
(abolition in
2008)

Tax Privilege:
Exemption from
Value Added Tax（VAT）
Subsidies: Support
from national
government(f)Tax Privilege:
Exemption from
Value Added Tax（VAT）
Subsidies: Support
from national
government(f)Fund: Contribution
to fund by eachorganizationaccording toamount of sales(g)Tax Privilege:
Exemption from
Value Added Tax（VAT）

Fund: Contribution
to fund by eachorganizationaccording toamount of sales (h)Fund: A portion ofJapan Post Holding
company profits

Others: Borrowing,issuing of bonds(Note):(1) This table was devised by the authors based on Mizutani (2012), the Ministry ofInternational Affairs and Communications (2013a), the Ministry of International Affairs
and Communications (2013b), ERGP (2012).
(2) In item (a), according to the Ministry of International Affairs and Communications (2013b),
the Postal Business Law was revised in 2012 to extend coverage of the universal service
obligation to postal banking and postal insurance services.
(3) In item (b), Article 3.4 and Article 3.5 in the EU Postal Directives in 1997 included different
items to be covered by the universal service obligation. Here we follow Article 3.5, which
stipulates that, at the discretion of individual countries, the minimum requirement be
expanded to parcels under 20kg.
(4) In item (c), as for details of USO service standards, see Mizutani (2012).
(5) In item (d), according to information from the Universal Union (2014), Deutsche Post
currently provides all universal services nationwide without a formal legal obligation.
(6) In item (e), before full liberalization, an exclusive reserve range had been approved in order11

to ensure financial sources for the USO in each country’s postal service market. This
exclusive reserve range remains in effect in, for example, the USPS, and is meant to allow
use of the profits generated by separating parts of service according to weight and tariff for
the USO. At beginning of EU Postal Directive in 1997, the exclusive reserve range covered
postal items with a tariff of less than 5 times the minimum tariff and less than 350g. Since
then, the exclusive reserve range has shrunk and it was decided in the EU Postal Directive
in 2008 that the range be abolished by 2010 or 2012.
(7) In item (f), according to the Ministry of International Affairs and Communications (2013a),
subsidies in the UK and France are not used for the USO. However, as we consider them tobe part of the USO, we listed them here.
(8) In item (g), La Poste and new entrants contribute to the fund according to the amount of
their sales.
(9) In item (h), organizations with annual sales of more than 500 thousand EURO contribute to
the fund.

4.2 Methods of Measurement of the Universal Service Obligation
As for calculation methods of the cost of the universal service obligation (USO cost),
in general, four kinds of approaches have been used in industrial countries since 2000: (i) the
Deficit Approach (DA), (ii) the Net Avoidable Cost Approach (NAC), (iii) the Entry Pricing(EP), and (iv) the Profitability Cost Approach (PC).

Each approach defines USO costdifferently.

Deficit Approach
In the deficit approach, the deficits in postal service that a postal service provider
must supply are defined as the universal service obligation (USO) cost.
The advantage of this approach is that it is easily calculated, and counterfactualassumptions are not necessary because this approach can use actual financial data fromproviders providing postal service. The disadvantage is that we cannot judge whether the USO
cost measured is the cost yield under the condition of the most efficient management by theprovider. If the USO cost is approved without factual observation of the situation, the USO cost
may include inefficiency.

Net Avoidable Cost Approach
In the net avoidable cost approach, USO costs are defined as those that a provider
need not incur if it does not provide services, that is, costs created in unprofitable areas (orservices). This approach was originally developed for calculation of USO costs in thetelecommunications industry. According to Maruyama (2002), this approach was further

12

developed by Elsenbast et al. (1995) with the aim of applying it to the postal service industry2.
As an example, USO costs according to the net avoidable cost approach are shown in
Figure 1, where the unit cost per postal item in a given area is arranged from the lowest to thehighest on the horizontal axis. Therefore, the curve of the unit cost per postal item delivered isincreasing. The difference between the unit cost and the uniform tariff, that is, the shaded areasin this figure, are the USO costs.
The calculated USO cost in this approach largely depends on the size of the delivery
routes (or areas).

If it is difficult to obtain information on delivery routes (or areas), then theunit size of delivery routes (or areas) will necessarily be manifested as large, resulting inunderestimation of the USO cost.

Unit cost
Price
Total unit cost per
post item delivered
Net cost of USO
under the NAC approach

Uniform tariff

Volume inprofitable
areas

Volume inunprofitable
areas
VolumeUSO
Volume(Note): This figure was devised by the authors based on Figure 5 in Frontier Economics (2013).

Figure 1 The USO Costs in the Net Avoidable Cost Approach2

As for estimation examples, there are studies such as Castro and Maddock (1997) for Australia,
National Economic Research Associates (1998) for 15 EU countries, Poscomm (2001) for Cosignia data,
Uranishi (2004, 2007) for Japan, and Mizutani and Uranishi (2006).

13

Entry Pricing Approach
The USO cost obtained by the entry pricing (EP) approach is defined as the reductionof profit of the incumbent postal service provider caused by a new entrant’s cream-skimmingdue to competition.
The EP approach makes certain assumptions. First, the USO is applied to anincumbent postal service provider. Second, the incumbent postal service provider maintains
services financially by cross-subsidizing from profitable to unprofitable services under auniform tariff. Third, a new entrant sets up marginal cost pricing lower than the uniform tariff ofthe incumbent and enters only postal service markets where the incumbent price is higher thanthat of the entrant (i.e. cream-skimming entry).
The EP approach has the advantage of recognizing the necessary USO costs undercompetitive circumstances, as it makes assumptions regarding competition in liberalized postal
service markets. However, the USO costs estimated here would vary with the varying
assumptions made about competitive environments.

Profitability Cost Approach
The profitability cost (PC) approach defines the USO cost as the difference between
the profitability level where the USO is in effect and the profitability level where it is not.
In a liberalized postal service market, a postal service provider without the USO cancross-subsidize between profitable and unprofitable postal service, reducing costs by lowering
service standards in the unprofitable postal service, thereby attaining profit maximization.
On the other hand, a postal service provider with the USO must provide services witha consistent service standard, even if services are not consistently profitable. It is difficult,therefore, for the provider with the USO to improve profitability, which remains lower than thatof the provider without the USO.
If the provider with the USO can be guaranteed compensation for the profit
difference (i.e. the difference between the profit with and without the USO), then it can attainthe same profitability level even while subject to the USO. The PC approach measures thisprofitability difference as the USO cost.
According to Cremer et al. (2000), the PC approach is considered as the best, mostsophisticated approach to calculating the USO cost in a liberalized competitive postal market.
14

5

Governance Structure and Strategy
This section describes governance structure and corporate strategies, with Deutsche

Post DHL (Germany), La Poste (France), Royal Mail (UK), USPS (US) and Japan Post (Japan)
selected as the main providers.

5.1 Governance Structure
The board structure of these five providers will be discussed here, with attention to thefollowing points: (i) board type, (ii) board size and composition, (iii) appointment of board, (iv)relationship with government, (v) important shareholders, and (vi) type of corporate governance.
The governance structure of each organization is summarized in Table 6.
First, according to Douma and Schreuder (2013), board structure can be categorized
into a one-tier or two-tier type. In a one-tier system, all board members are appointed by ashareholders’ general assembly and belong to the same board. In contrast, a two-tier system
consists of the executive board (top management members) and the supervisory board (outside
directors). The main difference in these systems is in the type of monitoring.

In a one-tiersystem, executive members are monitored by non-executive members of the same board, whilein two-tier system, top management members are monitored by outside directors.
The one-tier system is frequently seen in the US and the UK, while the two-tier system
is common in continental Europe and Japan. In the postal industry, in fact, Royal Mail and the
USPS have adopted the one-tier system, while Deutsche Post DHL and Japan Post use thetwo-tier system. However, La Poste and Japan Post Holdings, the parent company of Japan Post,
have one-tier boards.
The other important point on governance structure involves the monitoring system(i.e. market-oriented or network-oriented). In the market-oriented system, the markets play animportant role in monitoring through, for example, active “voice and exit” by shareholders andthreats of takeovers in the stock market, which can strongly influence corporate management.
In a network-oriented system, various organizational or individual networks with stakeholders
play a major role, important factors being relationships and connections between businessgroups, large shareholders, banks, and individuals in top management. In a network-oriented
system, a company can be heavily influenced by few large shareholders, such as banks and thegovernment.
In the postal service industry, the governance system of these five organizations has
15

been network-oriented. Since postal service providers are more or less regulated by thegovernment, they have been owned totally or mostly by the government through certain
organizations even after privatization, or have remained in some way connected to thegovernment. However, as the example of Deutsche Post DHL shows, governance systems forsome operators progress toward the market-oriented type. Shareholder composition has become
diversified in Deutsche Post DHL, though large shareholders retain their influential power. In
contrast to other organizations examined here, the USPS remains in the public sector, although
is organized as a public corporation.

16

Table 6 Governance Structure of Postal Organizations
Organization

Royal Mail

La Poste

Board type

One-tier board

One-tier board

Board size
andcomposition

1 chairman, 3
executive directors,
7 non-executive
directors

21 members (asrequired by law)

Appointmentof the board

Appointed by an
ordinary resolutionof the company orby the board.

12 recommended by
the government andappointed by theGeneral Meeting
2 - appointed bydecree7 - elected by theemployees
CEO - selected byboard of directors

Deutsche Post
DHL
Two-tier board

United States Postal
Service (USPS)
One-tier board

6 on board ofmanagement, 20 onsupervisory board(the number ofboard members isdetermined to be atleast 2 by law.
When the company
requires moremembers,
supervisory board
decides thenumber.)On supervisoryboard,
10 - representativesof shareholders
10 - elected by theemployees.
Supervisory board
appoints the boardof management.

9 Governors,
Postmaster General,
Deputy Postmastergeneral17

The President
appoints 9
governors, and 9
governors appoint
postmaster generaland deputy
postmaster general.

Japan Post
One-tier board at
Japan Post Holdings,
two-tier board at
Japan Post
Japan Post Holdings:
13 members (8 areoutside directors).
Japan Post: 9
members on board ofmanagement (6 areoutside directors), 3
on supervisory board(2 are outside
auditors).

Shareholders’ general
assembly appoints
the board ofmanagement andsupervisory board.
Board ofmanagement
appoints andmonitors CEO.

Relationshipwith thegovernment

Importantshareholders

Type ofcorporate
governanceThrough Postal
Services Holding
Company, thegovernment has theright to nominate
one non-executive
director to maintainat least 10 per centcontrol in voting
rights.
Postal Services
Holding Company(totally owned by
UK government),
which has 29.98%
voting rights.

Representatives of
the government can
attend board of
directors' meetings,
though they do nothave voting rights.

The government
holds 21% of theshares via KfW
Bankengruppe.

Quasi-independent
organization in thegovernment.

Japan Post is totallyheld by Japan Post
Holdings, and Japan
Post Holdings is
totally held by thegovernment.

French government(73.7%) and French
public financial
institution, Caisse
des Depots etConsignations(26.3%).

-

Japan Post Holdings(100%) in Japan
Post, Government(100%) in Japan Post
Holdings

Market-oriented
and partially
Network-oriented(Shareholder
composition isdiversified, while
the influential
power of thegovernment is

Network-oriented(The government
has large, direct
influential poweron themanagement.)

KfW
Bankengruppe(21%, largest
shareholder).
The othershareholders:institutional
investors 67.8%(USA 13.8%, GreatBritain 14.85%,
Germany 12.3%,
and others
26.95%), private
investors (11.2%)
Market-oriented
and partially
Network-oriented(The floating stock
ratio is relatively
high: 79% at theend of 2013.
Shareholder
composition is

Network-oriented(Directly involvedin governmental
policy.)Network-oriented(Under highinfluential power ofthe government via
Japan Post
Holdings.)

18

consolidated inmanagerial
decision-making.)

diversified but
maintains theinfluential power ofthe government.)(Note): This table was devised by the authors based on Deutsche Post DHL (2013) , Le Groupe La Poste (2013), Royal Mail plc (2014), UnitedStates Postal Service (2013), and Japan Post Holdings (2014).

19

5.2 Diversification Strategy
A relatively important strategy in postal service has been diversification, as it cancompensate for the decline in the core mailing business through a shift to more profitable
activities, even though providers face severe competition with rivals.
Postal providers have most commonly diversified into the logistics, parcel, express,
and finance industries, all of which utilize the existing synergies of network, market, and/or
technology. Providers can realize combined innovations and shared costs through collaborations
among business lines. In contrast, diversifying into non-related business requires additional
management resources not common or readily available to providers of postal service.
The related diversification strategy is common and can be classified into two types:
the post-banking-insurance service type and the postal-service-only type.
La Poste and Japan Post are included in the post-banking-insurance diversification
type. La Poste has diversified through affiliated companies and joint ventures, with La Poste
S.A., for example, engaged in the banking business (i.e. La Banque Postale) and the mobile
telephone business (i.e. La Poste Mobile). Other business diversification includes real estate
activities (e.g. industrial platforms, small and medium-sized retail spaces and commercial
premises) by Poste Immo. Revenue for the whole group was comprised of 47.4% for mail,26.9% for parcels and express, and 25.0% for banking in 2013. According to Le Groupe La
Poste (2013), the group plans to proceed with related diversification based on existing assets aspart of the new strategic plan "La Poste 2020: Conquering the Future."
There are legal restrictions on how Japan Post may diversify. Affiliated companies
are subject to legislative bounds, and their operating plans require permission from thegovernment. As a result, Japan Post Group is limited to banking (i.e. Japan Post Bank) andinsurance (i.e. Japan Post Insurance), logistics, and real estate, in addition to its core mailbusiness. Its revenue was comprised of 60.0% for mail, 20.5% for banking, 12.4% for life
insurance in 2013.
On the other hand, the postal-service-only type is limited mainly to such activities as
letter and parcel delivery. Deutsche Post DHL, Royal Mail and the USPS are included in thistype. Deutsche Post DHL has focused on the specific areas of mailing and global logistics, infact withdrawing from the banking business completely when all shares of Deutsche Postbank
AG were sold to Deutsche Bank AG in 2012. As a result, the divisional revenue of Deutsche
Post DHL was comprised of Post-eCommerce-Parcel (27.8%), Express (21.5%), Global
Forwarding, Freight (27.0%), and Supply Chain (25.9%) in 2013.
20

Royal Mail has affiliated companies which operate non-mailing services, such as
Royal Mail Investments Limited, Royal Mail Estates Limited, and Romec Limited. However,
the main activity is limited to post-related service. The divisional revenue of Royal Mail wascomprised of 82.4% for UK Parcels, International & Letters (UKPIL) and 17.5% for General
Logistics Systems (GLS) in 2013.
Diversification of the USPS is legislatively restricted. The Congress also requires
USPS to adhere to the core business of mailing and package service. Thus, USPS has only one
segment based on the same network. According to United States Postal Service (2013), themajor service categories are First-Class Mail, which is offered mainly for letters and postcards,
Standard Mail, which is offered for any item including advertisements and marketing packages,
Shipping and Packages, International, Periodicals, and Other. Services involving First-Class
Mail, Standard Mail, and Periodicals are dominant in the US market.

5.3 Internationalization Strategy
Diversification strategy frequently includes corporate internationalization. First,
Deutsche Post’s DHL operates in Europe, the Americas, Asia Pacific, the Middle East andAfrica. DHL has expanded its business through vigorous acquisition of local companies: Danzas
in Switzerland and Van Gend & Loos in Netherland in 1999, Airborne Express in USA in 2003,
Blue Dart in India in 2005, and Professional Parcel Logistics (PPL) in Czech Republic in 2006,
etc.
La Poste Group works actively on internationalization through affiliated companies.
For example, SofiPost has Asendia, a joint venture with Swiss Post. GeoPost also has affiliatedcompanies in various countries, such as GeoPost Intercontinental Entities, DPD Germany
Entities, DPD UK Entities, and SEUR Spain Entities. Moreover, the group actively acquires
foreign companies. For example, Asendia purchased Pitney Bowes in the UK and invested in
40% of eShopWorld in Ireland in 2013.
Royal Mail also aims for internationalization. According to Royal Mail plc (2014), it
has UK Parcels, International & Letters (UKPIL) division, which operates in the UK and on aninternational basis under the 'Royal Mail' and 'Parcelforce Worldwide' brands. In addition, as aninternational logistics company, General Logistics Systems (GLS) operates in European 37
countries. Moreover, Royal Mail is investing in joint ventures with the Bank of Ireland:
Midasgrange Limited for financial services and First Rate Exchange Services Holdings Limited
for foreign exchange services.
21

The USPS, operated by the government and subject to heavy regulation andgovernment policy, has no branches in foreign countries as of 2013.
Japan Post has a Chinese consolidated subsidiary, Japan Post International Logistics
Co., Ltd., for logistics in Japan and China.

However, Japan Post has no other branches in othercountries as of 2013.
In summary, Deutsche Post DHL, La Poste, and Royal Mail have taken active steps toexpand operations internationally, while the USPS and Japan Post are lagging behind ininternationalizing.

6

Concluding Remarks
This paper has aimed to provide information useful to policy makers involved inplanning for the management of postal service. Five countries were selected—the UK, France,
Germany, US and Japan—and the characteristics of their postal services were described in termsof regulation, liberalization, governance, and strategies. Variations were noted in regulatory
structures and liberalization policies. Governance structure and corporate strategies weredeemed to be of increasing importance as postal service providers adopt a more corporatecompany style. The important points made in this paper are summarized as follows.
First, variations have been observed in the liberalization of postal services among
countries. Two important factors are ownership and competition. Provision by the private sector
through privatization is more productive-efficiency-oriented, and it is necessary to introduce
competition in situations where monopolistic organizations exist. The general trend inliberalization is toward privatization and competition, with the UK and Germany in thevanguard.
Second, it is necessary to maintain the universal service obligation (USO), but
procuring financial backing is problematic. Among various financing methods, the USO fundseems reasonable.
Third, the governance structure of postal service provider varies from country tocountry, according to corporate law. As for company type, postal organizations are divided into
three groups: the single corporation type (e.g. Deutsche Post DHL and La Poste), the holding
company type (e.g. Royal mail and Japan Post), and the public corporation type (e.g. the USPS).
Last, as for internationalization strategy, Deutsche Post DHL, La Poste and Royal Mail
have taken steps to expand their operations internationally, while the USPS and Japan Post havebeen slower to make inroads abroad.
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