Implications of Electronic Mail and

Message Systems for the U.S. Postal Service

August 1982

NTIS order #PB83-265017
Library of Congress Catalog Card Number 82-600599

For sale by the Superintendent of Documents,

U.S. Government Printing Office, Washington, D.C. 20402
.

Foreword

This study of the implications of electronic mail and message systems (EMS)

for the U.S. Postal Service (USPS) is one of four components of the OTA assessment of Societal Impacts of National Information Systems. It should be read along

with the September 1981 OTA report on Computer-Based National Information

Systems: Technology and Public Policy Issues, which provides the larger context

for understanding EMS-related public policy questions. Also relevant is the March

1982 OTA background paper on Selected Electronic Funds Transfer Issues: Privacy, Security, and Equity.

The House Committee on Post Office and Civil Service, one of the original

requesting committees, indicated an interest in the possible impact of EMS and

electronic funds transfer (EFT) on the USPS mailstream and labor force, and implications for the future role of USPS in electronic mail and message systems.

The Senate Committee on Governmental Affairs, Subcommittee on Civil Service,

Post Office, and General Services, expressed a similar interest. In response, OTA

initiated a review of relevant EMS and EFT developments since the completion

of the work of the Commission on Postal Service in 1977. Several working papers

and computer-based models were developed by OTA staff and contractors. These

were reviewed by an OTA advisory panel representing postal, labor, telecommunication carrier, computer service, business, academic, and consumer interests.

On the basis of that review, a revised and integrated report was prepared.

OTA appreciates the participation of the advisory panelists, external reviewers,

and others who helped bring this study to fruition. It is, however, solely the responsibility of OTA, not of those who so ably advised and assisted in its preparation.

Director

. . .

I l l
OTA Electronic Message Systems Advisory Panel

Roy Amara

President

Institute for the Future

Paul Baran

President

Cabledata Associates

Harold P. Belcher

General Manager for Advanced

MailR&D

U.S. Postal Service

Robert L. Chartrand, ex officio

Senior Specialist in Information

Technology and Policy

Congressional Research Service

Kent W. Colton

Professor of Public Management

Brigham Young University

Donald Dunn

Professor of EngineeringEconomic Systems

Stanford University

Lawrence J. Gervais

Former Vice President

American Postal Workers Union

Maurice W. Gregg

Senior Vice President for Finance

The Gap Stores, Inc.

Jeremiah Gutman

Attorney at Law

Levy, Gutman, Goldberg &

Kaplan

J. Robert Harcharik

Former President

Tymnet, Inc.

Susan Nycum, Chairwoman

Attorney at Law, Gaston Snow & Ely Bartlett

Rob Kling

Professor of Information and

Computer Science

University of California at Irvine

John C. LeGates*

Director, Information Resources

Policy Program

Harvard University

Henry Lucas

Chairman and Professor of

Computer Applications and

Information Systems

New York University

Daniel McCracken

Past President

Association for Computing

Machinery

Arthur S. Miller

Professor of Law Emeritus

The George Washington

University

Sharon Nelson

Attorney at Law

Consumers Union (formerly)

Phil Nyborg

Former General Counsel

Computer and Communications

Industry Association

Russell Pipe

President

Translational Data Reporting

Service, Inc.

Ithiel De Sola Pool

Professor of Political Science

Massachusetts Institute of

Technology

James Rule

Professor of Sociology

State University of New York at

Stony Brook

Richard M. Schmidt

General Counsel

American Society of Newspaper

Editors

Sherry Turkle

Program in Science, Technology,

and Society

Massachusetts Institute of

Technology

Ron Uhlig

Manager, Business and Services

Planning

Bell Northern Research

Laboratory

Jacques Vallee

President

Infomedia

Carl Vorlander

Executive Director

National Association for State

Information Systems

Fred W. Warden

Former Director,

Telecommunication Relations

IBM Corp.

Willis Ware

Senior Computer Specialist

The Rand Corp.

Iram Weinstein

System Planning Corp.

Alan F. Westin

Professor of Political Science

Columbia University

*[{esigned in late 1979.

iv
OTA Electronic Message Systems Project Staff

John Andelin, Assistant Director, OTA

Science, Information, and Natural Resources Division

Sam Hale, Interim Program Manager

Communication and Information Technologies*

Fred B. Wood, Project Director**

Jean E. Smith, Study Coordinator

Zalman A. Shaven, Senior Analyst

Fred W. Weingarten, Senior Analyst

Elizabeth A. Emanuel, Administrative Assistant

Shirley A. Gayheart, Secretary

Jeanette Contee, Wordprocessor

Contractors

Charles C. Joyce, Jr., and Jeffrey Held,

Richard L. Deal & Associates, Inc.

Renee G. Ford, Tifford Producers, Ltd.

Keith Geeslin, Walter Hinchman Associates, Inc.

Marvin A. Sirbu, Jr., Massachusetts Institute of Technology

Michael F. Cavanagh, Cavanagh Associates

Robert Anthony, Mitre Corp.

Robert Johansen, Institute for the Future

Harley W. Radin, Consultant

OTA Publishing Staff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debra M. Datcher Joe Henson

*March 1981 through February 1982; Stephen E. Doyle served as Program Manager through February 1981; Fred W. Weingarten was appointed

Program Manager effective March 1982.

**since June 1979; Rumn E. Pengov served as Project Director through May 1979.

v
Acknowledgments

The following individuals also contributed as reviewers or provided assistance during the course of

this study.

William F. Bolger, The Postmaster General, and

staff members of the U.S. Postal Service

Ronald G. Carr, U.S. Department of Justice

Kathleen Casey, GTE-Telenet Communications

Corp.

Henry B. Freedman, Policy Studies Corp.

Dean Gillette, Bell Telephone Labs, Inc.

Henry H. Hitchcock, J. F. Coates, Inc.

Herbert N. Jasper, Ad Hoc Committee for

Competitive Telecommunications

John F. McLaughlin, Harvard University

Arnim H. Meyburg, Cornell University

Roger K. Salaman, National Telecommunications

and Information Administration

Stephen L. Sharfman, Postal Rate Commission

Jack D. Smith, Federal Communications

Commission

Scott K. Socol, Satellite Business Systems

Frederic Withington, Arthur D. Little, Inc.

vi
Contents

Chapter Page

1.

2.

3.

4.

5.

6.

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Background and Purpose of Study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Market Penetration Model and Technology Assumptions . . . . . . . . . . . . 23

Market Penetration Results . . . . .,’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Revenue/Cost Model and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Implications for Postal Rates, Service Levels, and

Labor Requirements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

7. Implications for the Telecommunication and Computer Industries,

EMS Privacy and Security, and USPS Long-Term Viability . . . . . . . . . 73

8. Congressional Policy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Appendix Page

A. Supplemental Detail on the Market Penetration Model . . . . . . . . . . . . . 101

B. Logistic Substitution Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

C. Equation Used to Calculate Labor Requirements . . . . . . . . . . . . . . . . . . 107

D. E-COM Interconnection Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

vii
Overview

Advances in communication and computer technology provide new ways to

convey messages and carry out financial transactions. These are called electronic

mail and message systems (EMS) and electronic funds transfer (EFT) systems.

Commercially offered EMS and EFT will increasingly compete with portions of

the traditional market of the U.S. Postal Service (USPS). While there is disagreement on how fast EMS and EFT may develop, it seems clear that two-thirds or

more of the current mainstream could be handled electronically, and that the volume

of USPS-delivered mail is likely to peak in the next 10 years. Any decline in the

volume of mail has significant implications for future postal rates, USPS service

levels, and labor requirements.

A key policy issue requiring congressional attention is how USPS will participate in the provision of EMS services, both in the near term and in the longer

term. If USPS does not attract and keep a sizable share of the so-called Generation II EMS market (electronic input and transmission with hardcopy output)

and conventional (especially first-class) mail volume declines, USPS revenues will

probably go down, with the likelihood of an unfavorable impact on rates and/or

service levels. If USPS does develop a major role in the Generation II EMS market,

and if Generation II EMS costs are low enough, the effect on USPS rates and/or

service could be favorable.

Two of the major factors influencing USPS labor demand are total mail volume

and worker productivity. Regardless of whether USPS participates in Generation II EMS, improving worker productivity and eventually declining conventional

mail volumes could lead to considerably lower labor demands in the future. If USPS

does participate successfully in Generation II EMS, this potential decline in labor

requirements could be deferred or partially offset.

USPS is already involved in EMS to a limited extent. For example, it delivers

some industry EMS hardcopy, provides a portion of Western Union’s Mailgram

service, and in January 1982 introduced a domestic service called “electronic computer-originated mail” or E-COM. (In E-COM, USPS accepts letters in electronic

form, converts them to hardcopy, including printing and enveloping, and delivers

them.) The role of USPS in EMS activities is already controversial, and it is likely to become more so if its role expands.

As a result of technological advances, historical (and legal and regulatory)

distinctions between conventional and electronic mail have blurred, along with

the application of the the congressional mandates embodied in the Postal and Communications acts. Absent congressional action to provide a clear direction for USPS

and to clarify or redefine regulatory boundaries, the controversy over the USPS

role in EMS is likely to continue indefinitely and Generation II EMS opportunities

for USPS, private telecommunication carriers, and mailers may be lost.

OTA identified a number of areas related to USPS participation in EMS that

warrant congressional consideration:

● Potential Contribution to USPS Mail Volume.—A USPS role in Generation II EMS has the potential to provide a volume “cushion” to partially

offset reductions in conventional mail. Since private firms are neither willing nor able to duplicate the nationwide physical delivery infrastructure

of USPS, any large-scale Generation II EMS service depends on the participation of USPS. There is, however, little consensus on what USPS role

ix
would be most conducive to growth of Generation II traffic (and hence USPS

mail volume).

● Potential Contribution to USPS Finances.—While Mailgram apparently

provides both a substantial avoidance of conventional USPS mailstream

costs and a significant contribution to covering USPS fixed costs, it is not

clear whether E-COM would do likewise at current rates and in its present

configuration. All parties, including USPS, agree that the original E-COM

cost estimates prepared in 1978 for the Postal Rate Commission are now

outdated. A comprehensive cost review of E-COM is needed if its contribution to USPS finances is to be understood.

. Impact on USPS Labor Force.—USPS labor force requirements are sensitive to mail volume. Any significant decline in mail volume for whatever

reasons (e.g., diversion to EMS and EFT, competition from nonelectronic

alternative delivery services, reduced demand due to general economic recession) would translate into labor force reductions beyond those that may

be needed as a result of higher worker productivity.

USPS participation in Generation II EMS would have two effects on

USPS labor requirements. A small number of new jobs would be created

to carry out EMS-related activities, and a considerably larger number of

jobs would be required in traditional USPS activities to process and deliver

the resulting hardcopy. Thus, USPS participation could offset, or at least

defer, some of the reductions in the existing labor force that might otherwise be necessary. The need for sizable reductions from the present level

of employees is not likely to be felt until the late 1980’s or early 1990’s.

● Size and Nature of the E-COM Market.--OTA concluded that prior

estimates of the Generation II market have probably been high, and that

prudent planning should be based on a mature market (20 years hence) in

the range of 7 billion to 17 billion messages annually, rather than 25 billion

as previously estimated by RCA (for comparison, conventional mail in 1981

totaled 110 billion pieces). Even the lower estimate depends on mailer acceptance and successful institutional marketing strategies. Several modifications to E-COM have been proposed that deserve consideration, such as

1-day guaranteed delivery rather than 2-day, flexible letter formats, and

the use of telecommunication carrier and mailer logos to personalize the

E-COM output and provide incentives for aggressive marketing. A full

review of the E-COM market should include governmental as well as private

sector mailing needs.

. Impact on Competition.—USPS believes its participation in E-COM is authorized by the Postal Reorganization Act mandate to use new facilities

and equipment to improve the convenience, efficiency, and cost effectiveness

of mail service. However, various telecommunication and computer firms

view E-COM as: 1) the entry of a Federal agency into competition with private industry; 2) possibly subject to the Communications Act as well as

the Postal Act; and 3) raising questions about the fairness and legality of

a USPS role in EMS in general. The applicability of the Private Express

Statutes to delivery of Generation II EMS hardcopy output has also been

challenged.

● Regulatory Jurisdiction.—The E-COM case has surfaced disagreements over

the division and extent of regulatory jurisdiction by the Postal Rate Commission and Federal Communications Commission. As a result, USPS

brought suit against both commissions and the Department of Justice

brought suit against USPS–all on jurisdictional grounds, not on the merits

or faults of E-COM. Some private firms believe this demonstrates the difX
ficulty of regulating USPS ratesetting and preventing the potential crosssubsidization of E-COM from conventional mail revenues. One proposed

response to that concern would be to require a separate USPS entity for

any EMS offering.

● E-COM Privacy and Security. –The involvement of USPS in E-COM has

pointed out the need for additional security measures to protect the privacy

of EMS messages. The Postal and/or Communications Act may need to

be amended to provide additional statutory privacy protection.

● Role in Telecommunication and/or Generation III EMS.—The USPS role

in E-COM does not involve either telecommunication or electronic delivery.

Whether there are conditions that would constitute demonstrated need for

USPS to contract with a telecommunication carrier to transmit messages

electronically on behalf of USPS needs to be clarified. Further study seems

warranted on the possible use of EMS Generation III (as well as Generation II) to help USPS maintain adequate service levels to rural and less

populated areas and to low volume, nonprofit, and educational mailers

(E-COM is currently designed for high-volume business mailers.)

● Increased Cooperation with the Private Sector.—At present, it is difficult

for USPS to conduct effective long-range planning and market testing of

EMS, since this requires good working relationships with private telecommunication and computer firms. If some clearer consensus can be reached

on the direction and limits of USPS involvement in EMS, perhaps a more

constructive relationship with the private sector can develop.

OTA’s analysis suggests that advances in technology and increased competition in the communications marketplace will significantly affect USPS finances,

service levels, and labor force requirements over the next two decades. It further

suggests that modification or clarification of the USPS role in EMS can, in turn,

help determine how effectively USPS accommodates to these changes. Given the

difficulty of modifying institutions as large and complex as USPS and the laws

and regulations that govern USPS actions, it would seem prudent for Congress

and USPS to address these issues aggressively. Changes are taking place so fast

in the so-called “communications revolution” that by the time USPS actually experienced significant reductions in conventional mail volume, most opportunities

for participation in EMS would have passed and it would be much more difficult

to adjust.

x i
Chapter 1

Summary
Contents

—

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USPS Mainstream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USPS Rates and Service Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Labor Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provide a Clear Direction for USPS Involvement it ems. . . . . . . . . . .

Reduce or Eliminate Further Regulatory and Judicial Delay . . . . . . . . .

Strengthen Privacy and security protection . . . . . . . . . . . . . . . . . . . . . . .

Maintain Oversight and Initiate Planning on USPS Long-Term

Viability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3

4

5

7

8

9

10

10

11
Chapter 1

Summary

Introduction

This study addresses three major questions:

1.

2.

3.

To what extent are privately offered electronic mail and message systems (EMS)

and electronic funds transfer (EFT) systems likely to affect the volume of mail

handled by the U.S. Postal Service

(USPS)?

Are changes in USPS mail volume likely

to lead to significant adjustments in

USPS rates, service levels, and/or labor

force requirements? and

What are the implications of EMS for the

future of USPS and how it might participate in the provision of EMS services?

These questions are of concern because historically USPS has served a variety of social

purposes mandated by Congress, such as “to

bind the Nation together through the personal,

educational, literary, and business correspondence of the people” and to provide mail

service “to (postal) patrons in all areas . . . and

all communities, ” including rural areas, communities, and small towns (Postal Reorganization Act of 1970). In recent years, there has

been a continuing revolution in computer and

communication technology, a gradual deregulation of the telecommunication industry (the

computer industry being essentially unregulated), and a proliferation of new and old firms

offering or planning to offer EMS and EFT

services that compete with portions of the traditional USPS market. Technology is, in effect, blurring the historical (and legal and

regulatory) distinctions between conventional

and electronic mail.

USPS is already involved in EMS to a limited extent. It currently delivers some industry EMS hardcopy output, provides a portion of Western Union’s Mailgram service, and

in January 1982 introduced a domestic service

called “electronic computer-originated mail”

or E-COM. However, the role of USPS in EMS

in general, and in E-COM in particular, continues to be in dispute before various regulatory agencies, the courts, and Congress. USPS

believes its participation in EMS is authorized

by the Postal Reorganization Act mandate to

use new facilities and equipment to improve

the convenience, efficiency, and cost effectiveness of mail service. Various mailer organizations, consumer groups, and postal labor

unions see a USPS role in EMS as essential

to USPS long-term viability and to maintaining, or at least minimizing any reductions in,

mail services that are vital to a large part of

the U.S. population. They point to the critical

role of USPS in providing a universal, lowcost, nondiscriminatory nationwide communication service. Various private telecommunication and computer firms view USPS involvement in EMS as the entry of a Federal

agency into competition with private industry

(possibly subject to the Communications Act

as well as the Postal Act), raising difficult

questions of ratesetting and potential crosssubsidy.

There are no easy answers to the questions

addressed in this study. Prior studies have

proven to be oversimplified. In order to better understand the complexities involved,

OTA used computer-based models to project

independently the levels of conventional and

electronic mail volumes under different sets

of assumptions, and to project the possible effects of changes in USPS mail volumes on

USPS rates, service levels, and labor requirements. Still, while computer modeling

permits consideration of a larger number of

variables and interrelationships than would

otherwise be possible, the precision of the projections can be misleading. The models are

highly sensitive to initial assumptions and

have limited ability to anticipate unexpected

events. The study as a whole, and the use of

computer modeling in particular, is intended

3
- -——

4 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

to help Congress better understand the possi- intended to make

ble implications of EMS for USPS, and is not course of events.

USPS Mainstream

a prediction of the future

To a substantial extent, the volume of

USPS-delivered mail in the future is beyond

the direct control of USPS. It will be affected

by diversion to electronic modes of “written”

communication (EMS and EFT), by overall

economic factors, and by competition from private message and parcel delivery systems.

Taken together, it seems clear that two-thirds

or more of the mainstream could be handled

electronically, and that the volume of mail is

likely to peak in the next 10 years and fall

below today’s level sometime in the 1990’s.

EMS penetration of the mainstream will be

paced by the introduction and widespread use

of technologies such as high-quality electronic

printers, office automation, home computer

terminals, viewdata/teletext, and inexpensive

home hardcopy terminals. EFT will be paced

by the increased use of automated teller machines and point-of-sale terminals, and consolidation of bills and payments through telephone bill payer, debit cards, and direct deposit. In the long run, both EMS and EFT are

likely to be possible over the same electronic

terminals and communication networks. But

in the shorter term, they are separate technologies. EMS itself has two distinguishable

modes-Generation II EMS (electronic input

and transmission with hard copy output) and

Generation III EMS (all-electronic). This diversion of mail from conventional paper-based

to electronic form is likely to stretch over

many years and probably decades, depending

on the rate of technological advance, on future

postal rates, on regulatory constraints, and in

part on intangible factors such as consumer

acceptance and institutional marketing strategies.

OTA made several estimates of the rate of

diversion of conventional mail to EMS and

EFT. Mail diverted to Generation III EMS

and EFT was assumed lost to the USPS mailstream. Because of the need to sort and deliver

the hardcopy output from Generation II EMS,

mail diverted to Generation II EMS was assumed to remain in the USPS mainstream.

Mailgram and E-COM are Generation II services. In all of 1980, about 40 million Mailgrams

were sent; in the first half-year of its existence

(January through June 1982), about 660,000

E-COM messages were sent. During July

1982, E-COM averaged about 172,000 messages weekly. USPS also delivers an unknown,

but small, number of letters that represent the

hardcopy output of private sector Generation

II EMS.

OTA did not independently estimate overall

future economic growth or competition from

private delivery services; representative past

growth rates of the USPS mainstream were

projected into the future. For example, the

USPS mainstream has grown by about 2 percent per year if averaged over the 1900-77

period, and 3 percent over the 1947-77 period.

In 3 of the last 4 years, the growth rate exceeded 3 percent. However, between 1971 and

1976, the growth rate was only about 1 percent.

If the recent 3 percent growth rate held for

the next 20 years, USPS conventional mail

would exceed the 1981 level (110 billion pieces)

until the mid-1990’s, even in the face of competition from high but plausible EMS and

EFT growth. Assuming that USPS delivers

the hardcopy output from Generation II EMS

in that timeframe, USPS total deliveries would

exceed the 1981 level until the turn of the century. Similarly, at 2-percent annual growth,

and the same conditions, USPS conventional

mail volume would exceed the 1981 level until

about 1990, and total mail until the

mid-1990’s.

OTA conducted several sensitivity analyses

to determine the conditions under which the
.

Ch. 1—Summary ● 5

USPS mainstream might decline even faster.

OTA concluded that the most likely condition

would be continued economic recession or depression, which in the past (early 1970’s and

early 1930’s) has resulted in a flat or even

negative mailstream growth. This, coupled

with even faster than anticipated introduction

of all-electronic Generation III EMS and EFT,

or escalation of USPS costs and rates above

the level of alternative conventional and electronic delivery services, would accelerate the

decline of the USPS mainstream.

Regardless of the underlying mainstream

growth, the effect of Generation II EMS volume is to “cushion” or offset some of the

decline in conventional mail, assuming USPS

delivers the Generation II hardcopy output.

Put differently, if Generation II volume

reached significant levels, USPS-delivered

mail volume (conventional plus Generation II)

might be maintained at or above a given level

for an additional 5 years or so.

For planning purposes, it is reasonable to

assume that mail volume is likely to remain

strong for most of the 1980’s, and decline

significantly in the 1990’s. Under any plausible scenario, USPS is still likely to be handling

a large volume (70 billion to 110 billion pieces)

of mail in 2000.

Independent of the total USPS mainstream,

the size of the potential Generation II EMS

market itself takes on considerable importance

with respect to decisions concerning USPS involvement. OTA has concluded that prior market estimates probably have been high. For example, RCA Corp. previously estimated a mature Generation II market (20 years hence) of

25 billion pieces. However, this exceeds even

OTA’s high but plausible Generation II projection by roughly 40 to 80 percent, depending

on the underlying growth in demand for mail.

It appears that RCA was overly optimistic

about Generation II market development, ignored competition with Generation III EMS

services, or both. OTA also identified a slowgrowth Generation II path that projects a volume of about 40 million messages 5 years

hence, increasing to about 600 million messages after 10 years and around 3 billion after

15 years. Given the highly volatile and unpredictable nature of the EMS market, it appears

that prudent planning should be based on a

maximum of one-half of the RCA-projected

volume on down to the OTA-projected volume

for Generation II slow growth. This would

place the projected Generation II market 20

years hence in the range of 7 billion to 17 billion pieces rather than 25 billion.

There are legitimate differences of opinion

as to how Generation II would fare after 2000,

which was beyond the timeframe of the OTA

study. Some analysts believe that Generation

II would taper off very slowly and remain significant for many years. Others are convinced

that Generation II might decline rather precipitously. However, it is likely that Generation III would surpass Generation II in absolute volume well before 2000. Indeed, unless

Generation II grows at a high or very high

rate, it is possible that Generation II would

never exceed Generation III. Various private

telecommunication carriers have indicated

that most research and development (R&D)

and marketing effort is going into Generation

III, not Generation II.

USPS Rates and Service Levels

USPS has some control over the way in

which changes in mail volume might be reflected in rate and service level adjustments.

While USPS is not allowed to make a profit

overall, it need not “markup” all classes and

subclasses of mail by the same amount over

the costs specifically allocatable to each (“variable” costs). Thus, individual classes and subclasses make varying contributions to covering common (“fixed”) costs. For example, firstclass mail, with high volume and relatively

high markup, historically has made the largest

97-918 0 - 82 - 2
6 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

contribution to fixed costs of any class of mail.

In fiscal year 1980, first-class mail made up

about 57 percent of the total mainstream. Its

contribution to USPS fixed costs was about

$4.2 billion, based on an actual volume of 60

billion pieces (and assuming 20¢/piece revenue

and 13¢/piece variable cost). This was about

55 percent of total fixed costs ($7.6 billion) in

that year.

The example of first-class mail just cited is

particularly relevant to this study because it

is likely that most of the conventional mail diverted to EMS or EFT over the next 20 years

will be first-class mail. Not only does it represent the largest volume of mail, but it is generally more amenable to electronic transmission than are other classes. Three-quarters of

first-class mail is made up of correspondence,

negotiable instruments (e.g., checks), and bills

and financial statements.

If the first-class mainstream declined 10 billion pieces by the year 2000, and the 1980 cost

and markup is assumed, first-class mail would

contribute $700 million less to USPS fixed

costs than it does today. Making up that loss

by raising first-class rates alone would require

a 7-percent increase. To the extent that USPS

was delivering Generation II EMS hardcopy

and making a profit on it, some or all of this

rate increase could be avoided. This latter possibility is highly dependent on the cost of Generation II EMS (not well known) and the market price (also not well known).

Cost cutting would ease the necessity of increasing rates. This strategy would be particularly prudent if first-class rate increases

would lead to a further volume reduction,

which could set off a spiral of rate increases

and volume reductions. Whether or not cutting costs would result in service cuts would

depend in part on the USPS cost structure.

Under the current cost structure (36 percent

fixed costs, 64 percent variable), some service

cuts would appear to be necessary. For example, USPS officials have estimated that delivery 5 days a week (instead of 6) would save

about $650 million (1980 dollars). A 1976

USPS staff study projected a $1.1 billion (1977

dollars) savings for delivery 3 days a week.

In the longer term, USPS fixed costs may

be reduced below the current 36 percent; other

ways to improve productivity might be identified such that service levels could be maintained even at lower volumes and revenues.

However, some significant portion of USPS

costs clearly is required to pay for maintaining the basic nationwide delivery system and

infrastructure, largely irrespective of the

volume. For example, a substantial number of

carriers are required to cover the approximate

ly 69 million city USPS delivery points and

15 million rural delivery points (as of 1980)

each day, 6 days a week, and to maintain window service at over 30,000 post offices, 9 hours

or more a day, 5 or 51⁄2 days a week. Likewise,

some minimum level of truck transportation

between post offices must be maintained to

meet delivery performance standards, regardless of whether the trucks are carrying several

dozen or several thousand letters. Labor currently accounts for about 85 percent of USPS

costs and transportation about 7 percent

(largely for trucks and other postal vehicles,

plane and rail transportation). Thus, from this

perspective, it is not clear that fixed costs

could be reduced substantially without cutting

service levels.

In sum, any projections of USPS revenues,

costs, and rates are difficult at best, given:

1.

2.

3.

4.

5.

the complexity of USPS revenue and cost

relationships;

the fact that costs obviously vary by type

of mail route (e.g., urban, suburban, rural),

although USPS does not collect such cost

data;

the problem of how to assign common

costs properly to different mail services;

the uncertainty in determining what costs

are variable with volume changes over

various time periods; and

the uncertainty over future costs, rates,

and volumes of Generation II EMS.
Ch. 1—Summary ● 7

Labor Requirements

USPS is a labor-intensive organization, with

labor representing about 85 percent of total

USPS costs. By making assumptions about

the kind of service provided by USPS, the division of labor among its employees, and their

productivity, it is possible to estimate the

labor requirements for projected future mail

volumes.

For the purposes of this labor force analysis,

OTA assumed that the kind of service provided by USPS (service levels) would remain

constant. That is, there would be no change

in the number of delivery days (e.g., 6 days a

week), post offices (over 30,000), weekday window service hours (typically 9 hours), or city

and rural delivery points (over 84 million).

OTA calculated the division of labor among

USPS employees by assuming that each functional group of employees would allocate their

time in the future the same as they do now.

That is, each employee group spends a certain

fraction of its time in activities that are independent of the volume of mail (“fixed

labor”); most groups also spend time in activities that do vary directly with the volume

of mail (“variable labor”).

OTA estimated variable and fixed percentages for each major group of USPS employees

from the USPS fiscal year 1980 Revenue and

Cost Analysis. The variable labor percentage

is based on the variable attributable cost from

the USPS analysis; the fixed labor percentage

on the sum of specific fixed attributable costs

plus all other institutional costs for each

employee group. The variable and fixed labor

percentages determined by OTA were reviewed with USPS and found to be reasonable.

The overall cost split for the entire USPS

labor force was calculated to be 61 percent

variable and 39 percent fixed. Individual

employee groups varied from those independent of USPS mail volume to those almost completely dependent on it. As of 1980, 14,268

employees, or about 2.1 percent of the total

USPS labor force, had no activities that varied

with mail volume. Included would be headquarters, regional, and inspection service

employees. On the other hand, almost all of

the activities carried out by clerks and mail

handlers varied with mail volume (86 percent

variable/14 percent fixed). In fiscal year 1980,

this group included 303,560 full- and part-time

employees, or about 45 percent of the total

1980 USPS work force of 667,000 employees.

The clerks and mail handlers would have limited participation in a Generation II EMS

service, which would bypass many of the traditional mail sorting and processing functions

performed by clerks and handlers. The hardcopy output of Generation II EMS would still

require physical delivery by city or rural

carriers.

Most other employee groups fall in between,

having some activities that vary with total

USPS-delivered mail volume (conventional

plus Generation II EMS) and some that do

not, but with a larger fixed component than

clerks and handlers. These would include supervisory and technical personnel (48 percent

fixed), city delivery carriers (50 percent fixed),

maintenance personnel (about 55 percent

fixed), and rural delivery carriers (73 percent

fixed).

With respect to productivity, OTA assumed

an average labor productivity improvement of

1.5 percent per year as a baseline. For comparison, USPS labor productivity is credited

as increasing by roughly 3 percent annually

during the 1970’s, as measured by the number

of pieces of mail per workyear. In fiscal year

1970, 741,000 postal employees delivered 85

billion pieces of mail, while in fiscal year 1980,

667,000 employees delivered about 106 billion

pieces. The 3-percent figure may not reflect

true labor productivity since service levels did

change. For example, mailbox collection frequencies (per day) were generally reduced and

cluster boxes were substituted for home delivery in many new suburban residential developments. Still, between 1971 and 1980 the

number of city delivery points increased by
8 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

about 21 percent and the number of rural delivery points increased by about 50 percent.

Even assuming that the 3-percent annual average during the 1970’s is an accurate measure,

this does not appear to be a realistic expectation for the 1980’s in view of the fact that most

productivity improvement from automation

and mechanization has already been realized.

Even the expanded ZIP code program, known

as ZIP + 4, would realize a total labor productivity improvement of only 2.3 percent, according to USPS estimates.

Taking these variables together, and assuming high but plausible EMS growth, OTA concluded that the USPS labor force requirement

in 2000 is most likely to be roughly 20 to 25

percent below the 1980 level. This result is projected for the base case of 1.5-percent annual

labor productivity improvement and 2-percent

annual underlying mainstream growth, and

also for the cases of 3-percent productivity improvement/3-percent mailstream growth, and

O-percent productivity improvement/1-percent

mainstream growth. Under all three of these

scenarios, the need for significant labor force

reductions is not likely to be felt until the late

1980’s and early 1990’s, but would increase

quite rapidly thereafter.

Whatever the level of reductions, they are

not likely to be spread evenly among all employee groups. The post office clerks and mail

handlers group would be expected to be hit the

hardest, losing perhaps two-fifths of their 1980

complement by 2000. Post office supervisors

and city delivery carriers could, by 2000, be

reduced by about one-fifth and rural delivery

carriers by about one-tenth of their 1980 complements.

Whether or not these labor force reductions

could be handled through attrition depends

largely on future USPS retirement, quitting,

and new hire rates. But the uneven impact of

reductions on various employee groups makes

this unlikely. In addition, the uneven distribution of minority employment among employee

groups raises the possibility that such reductions may fall disproportionately on black and

perhaps other minority employment. For example, as of late 1978, the mail handlers,

whose employment would be reduced the

most, had one of the highest percentages of

black employment. Involuntary labor force reductions in this area, if needed, would likely

raise some difficult social and political issues.

Overall, the impact of labor force reductions

on promotion opportunities, upward mobility,

employee morale, and union contract negotiations could be significant. These areas warrant

further study.

Policy Implications

The OTA analysis indicates that, regardless

of what role USPS plays in Generation II electronic mail, reductions in USPS-delivered mail

volume due to diversion to Generation III

EMS and EFT could reach significant levels

by 2000. The threat to USPS-delivered mail

could come even sooner if Generation III EMS

services (all-electronic) develop faster than currently anticipated, if the underlying growth

in the mainstream is less than the historical

average, or if diversion of second- and thirdclass mail to alternative (nonelectronic) delivery services increases significantly beyond current levels.

Although a USPS role in Generation II

EMS has the potential to provide a volume

and revenue “cushion” to partially offset reductions in conventional mail volume and revenue, there is little consensus among USPS

and major stakeholders on exactly what the

USPS role should be in the provision of Generation II EMS.

The market penetration results indicate that

USPS-delivered mail volume (conventional

mail plus Generation II EMS hardcopy output) is one key factor in considering a USPS

role in Generation II EMS. USPS-delivered

volume is a function in part of the rate of
.

Ch. 1—Summary ● 9

Generation II EMS growth. Assuming that

USPS delivers Generation II EMS hardcopy

output, the faster the rate of growth (and the

earlier the takeoff), the larger the Generation

II EMS volume and USPS-delivered volume.

There is currently little agreement on which

USPS role would contribute the most to Generation II EMS growth and volume.

The revenue/cost results indicate that Generation II EMS cost displacement and contribution to covering USPS fixed costs are also

key factors in considering a USPS role. The

greater the cost displacement (avoidance of

conventional mainstream costs) and contribution to covering USPS overhead, the less likely

the need for service (and/or labor) reductions.

Mailgram apparently provides both a substantial cost displacement and contribution to

fixed costs; it is not clear whether E-COM

would do likewise at current rates and in its

present configuration. All parties, including

USPS, agree that the RCA cost estimates prepared for the Electronic Message Service System in 1977 and the original E-COM cost estimates prepared for the Postal Rate Commission in 1978 are now outdated. If E-COM is

to be fully evaluated and its role in USPS’

future understood, a comprehensive cost review of E-COM is needed.

In contrast, there is general agreement that

USPS participation in Generation II EMS

would generate only a relatively small number

of new jobs. An estimated 200 persons (125

operations, 50 maintenance, 25 marketing and

administrative) currently work on E-COM. A

fully deployed service (at 150 serving post offices (SPOs) rather than the current 25) is estimated to require perhaps 2,000 persons. The

additional volume from USPS delivery of Generation II EMS hardcopy output could help

to offset some of the reductions in the existing

labor force that will be necessary if the projected decline in USPS-delivered mail materializes.

Based on interviews with many of the stakeholders and a comprehensive review of the historical record, OTA has concluded that absent

congressional action, the controversy over the

USPS role in EMS is likely to continue indefinitely. The fairness and legality of a USPS

role in EMS, the impact on innovation and

competition in the EMS industry, and implications for EMS privacy and security continue

to be in dispute. Although the U.S. District

Court of Appeals has denied a Department of

Justice petition to block E-COM, further regulatory proceedings are anticipated and additional legal actions are possible.

With continuing uncertainty over the future

of E-COM, and in general over the USPS role

in EMS, the prospects for a successful USPS

entry into domestic EMS services are uncertain. This affects both USPS and its potential

competitors in the private sector. Some firms

have indicated to OTA that they are reluctant

to make any major commitments until they

are certain what role USPS is going to have.

Meanwhile, most private sector R&D efforts

are going into Generation III EMS, which

would completely bypass USPS. In addition,

given the continuing adversarial atmosphere,

USPS is unable to establish effective working

relationships with many private carriers and

potential Generation II EMS users.

Should Congress wish to take action, there

are several possibilities: 1) provide a clear

direction for USPS involvement in EMS; 2) reduce or eliminate further regulatory and judicial delay; 3) strengthen privacy and security

protection; and 4) maintain oversight and initiate planning on USPS long-term viability.

These possibilities are outlined below.

Provide a Clear Direction for

USPS Involvement in EMS

There is a range of alternatives for a USPS

role in EMS:

.

1. no real involvement other than delivery

2

3

of Generation II EMS hardcopy output

when deposited into the mainstream;

delivery of all hardcopy output when conveyed over postal roads;

hardcopy delivery plus location of

carrier-provided EMS terminal equipment on USPS premises (as in Mailgram);
—

10 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

4. the current E-COM role or variations of

it (e.g., the use of logo envelopes to retain

carrier and mailer identities);

5. involvement in the telecommunication

portion of EMS as well-as printing, enveloping, and delivery; and

6. involvement in Generation III EMS as

well (e.g., through lease or contract with

private industry).

Each of these alternatives is technically

feasible. In evaluating each, Congress may

wish to take into account some or all of the

following broad considerations:

●

●

●

●

●

●

●

the extent to which each alternative

would contribute to Generation II EMS

growth and volume;

the extent to which each alternative

would favorably affect USPS finances,

i.e., EMS cost displacement and contribution to covering USPS fixed costs;

the extent to which each alternative,

through creating new jobs and increasing

USPS mail volumes, would defer or partially offset labor reductions that might

otherwise be necessary;

the extent to which each alternative

would provide incentives for marketing

by USPS and/or private firms;

whether changes in the Postal Reorganization Act are needed to permit more flexibility in the USPS decisionmaking process (including regulatory review) with respect to USPS involvement in EMS;

whether the term “demonstrated need”

for USPS to contract with a telecommunication carrier to transmit messages electronically on behalf of USPS needs to be

clarified; and

whether or not there are any conditions

that would constitute demonstrated need

for USPS involvement in electronic delivery (presumably by contract with private

Generation III EMS firms); for example,

in geographic areas where conventional

mail service could no longer be maintained at present levels.

With regard to E-COM itself, Congress may

wish to review the following specific issues:

●

●

●

●

whether or not space should be provided

in SPOs for carrier output equipment;

whether or not the technology selected by

RCA for E-COM is the best available;

whether technical modifications to the

current E-COM interconnection arrangement could permit more total lines (and

at what cost) for carrier and user access,

and whether alternative access allocation

schemes should be considered; and

whether E-COM performance standards

and design should be modified to guarantee 1-day delivery.

Reduce or Eliminate Further

Regulatory and Judicial Delay

The most important action Congress can

take to reduce delay is to provide clear direction for USPS involvement in EMS. A note

of caution is in order. If the direction set out

is not well understood and does not reflect a

substantial consensus, further regulatory disputes and litigation could result.

Additionally, Congress could:

●

●

●

clarify the applicability of the Private Express Statutes to delivery of Generation

II EMS hardcopy output;

delineate the division of regulatory jurisdiction between the Postal Rate Commission and the Federal Communications

Commission; and

decide on the desirability of a separate

USPS entity for any EMS offering.

Strengthen Privacy and

Security Protection

Privacy protection in a USPS EMS service

is a continuing issue. Preliminary discussions

with USPS indicate that while the E-COM

equipment is apparently physically secure, the

potential for security breaches does exist. User

account numbers are visible on the outside of

E-COM envelopes. When combined with an access code and familiarization with the E-COM

technical interconnection standards, this information would permit unauthorized use of
Ch. 1—Summary ● 1 1

E-COM. Incoming messages are stored for 1

week in computer memory or on magnetic

tape, providing another target for security

violations. These archived messages could also

be tapped via the management information

system, since the E-COM computers in the 25

centers are connected electronically with this

system.

Congress may wish to consider: 1) whether

an independent review of E-COM security is

warranted to ensure that adequate security

measures are in place to protect the privacy

of EMS messages, and 2) whether the Postal

Act and/or Communications Act should be

amended to provide additional statutory privacy protection (including the possible mandating of data encryption to provide additional

technical privacy protection).

Maintain Oversight and

Initiate Planning on USPS

Long-Term Viability

Although the immediate focus is on E-COM,

and on providing a clear direction for USPS

involvement in EMS and resolving current

regulatory problems and delays, EMS issues

are likely to be with Congress for many years,

driven by the impact of EMS on USPS, the

role of USPS in EMS, and the broader impact

of EMS on American society and the public

at large. For a discussion of these broader impact areas, see the related OTA report on Computer-Based National Information Systems

(1981). Within this context, Congress will need

to maintain oversight and initiate planning on

USPS long-term viability.

The following areas warrant further study:

● USPS initiatives designed to develop improved working relationships with private

telecommunication and computer firms;

●

●

●

●

●

joint technical and market tests with private firms to evaluate various EMS alternatives;

use of EMS to help USPS maintain adequate service levels to rural and less populated areas;

use of EMS to help USPS offset the reduction (or elimination) of the revenue forgone subsidy (which is provided to offset

revenue losses from mail service provided

at reduced rates) and permit continuation

of a lower rate to nonprofit and educational organizations;

use of EMS in the future in combination

with the USPS infrastructure (perhaps

scaled down) and delivery network to provide other Federal Government services

(e.g, printing and delivery of forms and

documents); and

USPS long-range planning on the possible need for labor force reductions, job retraining, adjustments in retirement and

new hire rates, and implications for union

contract negotiations.

In view of aggressive private sector Generation III EMS activity and the continuing economic trends that work in favor of electronic

mail and against paper-based mail, it seems

clear that Congress and USPS should begin

planning now for the future viability of USPS.

Changes are taking place so fast in the socalled “communications revolution” that by

the time USPS might actually experience significant impacts on mail volume, most opportunities for participation in EMS will have

passed and it will be much more difficult to

adjust.
Chapter 2

Background and

Purpose of Study
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Congressional Interest.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . + . . . . . . . . . . . . 17

Study Purpose and Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Chapter 2

Background and Purpose of Study

Introduction

By some measures, the U.S. Postal Service

(USPS) has done remarkably well in the 10

years since postal reorganization.* Gross productivity, as measured by number of pieces of

mail per workyear, has increased by 34 percent since fiscal year 1970 when 741,000 postal

employees delivered 85 billion pieces of mail.

In fiscal year 1980, 667,000 employees delivered 106.3 billion pieces of mail. In 1980,

mail volume increased by 6.5 percent over

1979. First- and third-class mail volumes continue to show strength with increases of approximately 15 and 36 percent, respectively,

over the last 5 years. During the same period,

pieces of mail per capita have increased by

about 13 percent, from 418 pieces per person

in fiscal year 1976 to 480 pieces in 1980.1

On the financial side, USPS more than broke

even over the combined 1979-80 period. The

surplus of $470 million in fiscal year 1979 offset a deficit of $306 million in 1980. The cost

of postage continues to rise, but since 1975 at

a rate that is lower than the consumer price

index. If fully adjusted for inflation since 1975,

a first-class stamp would cost 22¢ rather than

the current 20¢. However, if fully adjusted for

inflation since 1967, a first-class stamp would

cost only about 14¢. Thus, about 6¢ out of the

current 20¢ represents a real increase in the

first-class letter rate since 1967. The letter rate

in the United States continues to be well below

rates in most other countries. For example, in

1980 the letter rate was about 29¢ in Britain

and Japan, 31¢ in France and Sweden, and 33¢

in West Germany.2

*The po9~ Mrgani.zation Act of 1970 enacted by Congress

abolished the Post Office Department as a cabinet level agency of the executive branch. Postal functions were transferred

to an independent Government agency known as the United

States Postal Service, which commenced operations on July 1,

1971.

IAnnual Report of the Postmaster General fiscal 1980.

‘Ibid.

Why, then, is there concern about the future

of USPS? While recent years have been relatively good, the 1980’s and 1990’s will pose

a number of new and perhaps more difficult

challenges.

First, the potential for further improvements in postal productivity through presort

discounts and through mechanization and

automation is limited. Even a fully implemented expansion of the ZIP code to nine

digits (known as ZIP + 4) would mean a

cumulative reduction of only about 15,600

workyears by 1987 according to USPS estimates. Compared to the current USPS annual

workyears of 679,000, the productivity improvement would amount to about 2.3 percents This means that continued automation

will provide only a small part of the total productivity improvement needed by USPS to

offset inflationary increases in employee compensation and transportation, which together

account for over 92 percent of total USPS annual expenditures.4

Second, while USPS operating statistics indicate that ontime delivery has been maintained for 95 percent of first-class mail destined for local or metropolitan area overnight

delivery, ontime delivery within 600 miles and

for cross-country fist-class mail generally has

declined since 1977. Two-day delivery of letters within 600 miles was achieved 86 percent

of the time in 1980 compared to 90 percent in

1977. Three-day delivery of cross-country letters was achieved 87 percent of the time in

1980 compared to 91 percent in 1977.5 Part of

‘Comptroller General of the United States, Imph”cationsof

Ekctmnic Mad for the Postal S&vice Work Fome (Washington,

D. C.: U.S. General Accounting Office, Feb. 6, 1981), p. 32. The

estimated changes in workyears per year from the nine-digit

ZIP are as follows: 1981 ( +3), 1982 (+87), 1983( – 1334), 1984

(–2382), 1985 (–3301), 1986 (–4378), and 1987 (–4295) for

a total reduction of 15,600 workyears. Per Nov. 4, 1981, discussion with Douglas Lynn of the USPS Operations Group.

‘Annual l?epor~ op. cit., p. 24.

‘Ibid., pp. 8, 11.

15
16 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

—.

the problem can be attributed to cutbacks in

air carrier service, but it is also possible that

the rising total volume of mail has begun to

tax the capacity of the overall mail distribution system. For example, postal officials have

testified that the elimination of Saturday

delivery alone would create a mail backlog sufficient to overload the system for Monday

delivery. On the other hand, postal officials

point to the system’s ability to handle peak

volumes during holiday periods as evidence

that overall capacity has not been reached.

Third, a variety of technical regulatory, and

market developments are contributing to a

rapid increase in commercially offered electronic mail and message systems (EMS) that

increasingly will compete with USPS As early

as 1977, studies projected that EMS could

divert substantial portions of mail from USPS,

to the extent that total mail volume might actually start to decline by the early 1980’s.6

None of these projections has yet been realized. However, the large number of commercial firms now in the electronic message

market,* coupled with recent developments in

personal computers, viewdata/teletext, and

other home information systems, suggests

that this prospect is much more realistic than

it was just a few years ago. Furthermore, regulatory decisions by the Federal Communications Commission over the last few years,

coupled with congressional actions to rewrite

the Communications Act of 1934, are clearing

the way for increased competition in the electronic message market. Thus, while EMS will

undoubtedly stimulate new message “traffic”

between individuals and organizations, they

also have the potential for diverting existing

%%, for example, F. B. Wood, R. W. Anthony, et al., USPS

and the (hnxnunications Revolution: Impacts, Options, and

Issues, Final Report to the Commission on Postal Service,

prepared by the Program of Policy Studies in Science and Technology, The George Washington University, Washington, D. C.,

Mar. 5, 1977. Also see Arthur D. Little, The Impact of Electronic (%mmunication Syst%ms on First Class Mail Volume in

J9801990, Cambridge, Mass., April 1978.

*Ex~ple9 include Quik-COmm (General Electric), Telemail

(GTE Telenet), On-Tyme (Tymnet), InfoPlex (Plexus), Faxgram

(Graphnet), Mailgram (Western Union), and Datapost (southern

Pacific). Electronic mail is also one of several services offered

by Satellite Business Systems and other specialized or value-

-added common carriers.

traffic from other media, including a portion

of the message traffic currently handled by the

U.S. Mail. This diversion would come at a time

when mail volume may also be reduced by the

consolidation of many bills and payments, or

the elimination of some billing and payment

transactions altogether, as a consequence of

the implementation of electronic funds transfer (EFT) systems.

Substantial erosion of U.S. Mail volumes,

particularly first-class mail, could tend to raise

the unit cost of carrying the remaining mail

volume and/or force a reduction in the quality and convenience of mail service, thus providing further incentive for mail users to

switch to alternatives such as private delivery

services, newspaper inserts, and the like. Such

a development could disadvantage users without a viable alternative to the U.S. Mail,

jeopardize the ability of USPS to provide

universal service, and adversely affect USPS

employees.

An important issue for USPS is whether and

how it will participate in the provision of electronic mail and message services. USPS currently provides a portion of Western Union’s

Mailgram service, and in January 1982 introduced a domestic service called “electronic

computer-originated mail” (E-COM). An international EMS service, known as “international electronic post,” has also been initiated.

INTELPOST is outside the scope of this

study. USPS has been developing a more advanced “electronic message service system”

or EMSS which, for the purposes of this study,

is considered to be an extension of E-COM to

full nationwide deployment at all or most serving post offices. There are a variety of ways

in which USPS could play one or more roles

in the provision of EMS services, ranging from

the delivery of hardcopy output to the provision of a complete end-to-end electronic mail

service.

The Annual Report of the Postmaster General for fiscal year 1979 states flatly: “In the

future, the only way the Postal Service will be

able to keep its volume rising and finances

dependable is through participating in elec-
Ch. 2—Background and Purpose of Study ● 1 7 ———-——

tronic mail services.”7In a July 1979 policy

statement, the White House agreed, stating

that “the national interest requires a Postal

Service which can serve all Americans and interface with the world’s postal services efficiently and economically. The service has progressively achieved productivity improvement

by mechanization and automation in processing of conventional mail . . . A postal EMS is

the next logical step to achieve further cost

reduction and mail processing improvement.”8

Over the last 3 years, the role of USPS in

EMS has been in dispute before various regulatory agencies, the courts, and Congress.

USPS initiated E-COM service in January

1982 after the USPS Board of Governors approved the Postal Rate Commission’s (PRC)

1980 recommended decision, with the exception of PRC’s “experimental” designation (of

E-COM as an experimental rather than a permanent service) which was successfully appealed by the Governors to the courts. However, several private firms and the current administration believe that E-COM as present7AnnuaJ Report of the Postmaster Genera4 fiscal 1979, p. 6.

8Administration Policy Statement, The White House, July

19, 1979.

ly implemented differs significantly in other

ways from the concept originally recommended by PRC. A 1981 inquiry opened by

PRC to review what form of E-COM USPS

should be offering was suspended after its

legality was challenged by USPS.

Comments filed before PRC jointly by the

Departments of Commerce and Justice and a

court challenge to E-COM filed by Justice indicate that the current administration is not

supportive of E-COM as presently operating,

or possibly of any USPS role in EMS that involves telecommunication, data processing, or

printing. This in part reflects continuing concern that E-COM places an independent Government agency (USPS) in competition—perhaps unfairly and/or illegally-with private

firms. Some of these firms believe that the demand for EMS can be met by private offerings, and that the USPS role should be restricted to the delivery of hardcopy output

from electronic message systems. Others are

concerned that in the future USPS may expand its EMS role from printing, enveloping,

and physical delivery-as in E-COM—to include telecommunication and perhaps electronic delivery as well.

Congressional Interest

The implications of electronic mail and

message systems for USPS, and especially the

role of USPS in EMS, have been and continue

to be a primary concern of congressional committees with direct jurisdiction over USPS

and the Postal Reorganization Act of 1970,

i.e., the House Committee on Post Office and

Civil Service (and particularly the Subcommittee on Postal Operations and Services and the

Subcommittee on Postal Personnel and Modernization) and the Senate Committee on Governmental Affairs (especially the Subcommittee on Civil Service, Post Office, and General

Services).

The role of USPS is also of interest to the

committees with jurisdiction over telecommunications to the extent that USPS becomes

involved with an EMS service that is subject

to the Communications Act of 1934, in whole

or in part. These committees include the

House Committee on Energy and Commerce

(and the Subcommittee on Telecommunications) and the Senate Committee on Commerce, Science, and Transportation (Subcommittee on Communications). In addition, other

committees, such as the House Committee on

Government Operations Subcommittee on

Government Information and Individual

Rights, have an interest in the privacy, competitive, and related implications of a USPS

role in EMS.

Despite a variety of legislative initiatives in

recent years, Congress has yet to agree on a

clearly defined EMS role for USPS. H.R. 2813,

introduced in the 97th Congress, would require
18 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

USPS to establish a separate organizational

unit to provide EMS service, would prohibit

cross-subsidization of EMS from public funds,

would prohibit USPS from owning telecommunication services (but would permit USPS to

contract for same), and would limit USPS to

EMS services where the output is physically

delivered through the U.S. Mail.9 H.R. 4758,

also introduced in the 97th Congress, would

prohibit all Federal agencies, including USPS,

from providing data-processing or telecommunication services to non-Federal persons or

entities unless explicitly authorized by

statute. This bill would appear to prohibit

USPS from offering telecommunication transmission and data-processing services without

specific congressional approval.10 In the

‘H.R, 2813, 97th Cong., 1st sess., Mar. 25, 1981, to amend

title 39 of the United States Code, referred to the Committee

on Post Office and Civil Service.

10H.R. 4758, 97th Cong., 1st sess., Oct. 15, 1981, to amend

the Federal Property and Administrative Services Act of 1949.

See (2mgressiona] Record-House, Oct. 15, 1981, p. H7425.

Study Purpose

This study addresses three major questions:

1.

2.

3

To what extent are privately offered EMS

and EFT systems likely to affect the

volume of mail handled by USPS?

Are changes in USPS mail volume likely

to lead to significant adjustments in

USPS rates, service levels, and/or labor

force requirements? and

What are the implications for the future

of USPS and how it might participate in

the provision of EMS services?

At the heart of the study are two computerbased quantitative models. The first is a

market penetration model used to project the

level of conventional and electronic mail

volumes under different sets of assumptions,

and the second is the USPS revenue and cost

model. There are four basic inputs to the

market penetration model: 1) the baseline

description of the mail flows derived from a

survey based on 1977 data conducted for

USPS by the Survey Research Center at the

Senate, S. 898, “The Telecommunications

Deregulation and Competition Act of 1981,”

as enacted includes an amendment intended

to clarify provisions of the act relating to electronic mail. The amendment makes clear that

S. 898 does not authorize or prohibit USPS

from offering telecommunication services or

the electronic delivery of messages, whether

by resale or otherwise. If, at some future time,

Congress should authorize USPS to offer such

service or if current law is interpreted to

authorize it, the amendment stipulates the

conditions under which such service would be

offered, including the establishment of a

separate organizational entity, among other

things. Thus, in effect, S. 898 and the related

Senate floor debate prior to enactment reaffirm the absence of congressional consensus

on the participation of USPS in EMS.11

11% ~wssjonal &ord—&na@ Oct. 7, 1981 ~ PP.

S.11211-11216.

and Approach

University ofMichigan;122) a set of EMS and

EFT technology assumptions; 3) a set of

assumptions about the underlying growth rate

of the mainstream; and 4) the range of selected

alternatives (e.g., low, medium, high growth)

for EMS development. The market penetration model is explained in chapter 3 and appendixes A and B, and the results are outlined

in chapter 4.

The second quantitative model is the USPS

revenue and cost model. It is designed to project the impacts of the growth or decline of

overall USPS mail volume (conventional and

EMS) on USPS rates, service levels, and labor

requirements. The USPS revenue and cost

model and the results for first-class mail are

presented in chapter 5.

IZM. K~& W. Rodgers, et al., Household MaJ%Jtream Stidy,

Find Report prepared for Mail Classification Research Division, U.S. Postal Service, 1978.
—.

Ch. 2—Background and Purpose of Study ● 1 9

This study gives primary emphasis to impacts on the USPS mainstream (based on results of the market penetration model) and on

USPS rates, service, and labor (based on combined results of the market penetration model

and the revenue and cost model). Implications

for rates, service, and labor are summarized

in chapter 6. Secondary emphasis was placed

on the potential implications for the telecommunication and computer industries, EMS privacy and security, and the long-term viability of USPS, discussed in chapter 7. Congressional policy considerations are discussed in

chapter 8.

A note on computer modeling is in order.

Prior studies on mail diversion have proven

to be oversimplified. In order to better understand the complexities involved, OTA developed and used computer-based models to permit consideration of a larger number of variables and interrelationships than would otherwise be possible. While this approach is more

systematic and complete than those used in

prior studies, computer modeling has its

limitations.

First, the precision of the projections can be

misleading. The reader should focus on general

trends and relationships rather than the specific numbers projected. Second, the models

are highly sensitive to initial assumptions. For

this reason, sensitivity runs were conducted

to see how much projections would change

with different assumptions. Third, the models

have limited ability to anticipate unexpected

events. For example, the possibilities of a

World War III, second Great Depression,

mandatory wage/price freeze, nationwide

postal labor strike, or repeal of the Private Express Statutes were not included. In other

words, the models are based on a relatively

“surprise-free” future. Fourth, the models do

not fully reflect the possible effect of rates on

mail volumes. There is a feedback process, but

its exact nature is unknown. That is, changes

in rates may have a significant effect on mail

volume, which in turn affects mail rates 1, 2,

or 3 years later (in the next ratesetting cycle).

Despite these limitations, computer modeling

can be a useful analytical tool.

Again, the study as a whole, and particularly the use of computer modeling, is intended

to help Congress better understand the possible implications of EMS for USPS. The study

is not intended to make a prediction of the

future course of events. Many variations are

possible. Finally, the study specifically avoids

making judgments about the impacts identified and makes no recommendations relative

to the role of USPS.
Chapter 3

Market Penetration Model

and Technology Assumptions
Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mailstream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EFT Diversion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EMS Diversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Generation II Growth and Timing Estimates . . . . . . . . . .

Generation III Growth and Timing Estimates . . . . . . . . .

Relationships Between Generation II and Generation III

Alternative Generation II Growth and Timing Estimates

Mainstream Growth . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

Estimates. . .

. . . . . . . . . . . .

. . . . . . . . . . . .

TABLES

Table No.

l. Baseline Mainstream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Mail Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Major Mailstream Segments Vulnerable to Penetration by Electronic

Funds Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Major Mainstream Segments Vulnerable to Penetration by Electronic

Mail and Message Systems ....,... . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Assumptions About Rate of EFT Penetration . . . . . . . . . . . . . . . . . . . . .

6. Assumptions About Rate of EMS Penetration . . . . . . . . . . . . . . . . . . . . .

7. Assumptions for Generation II Growth Alternatives . . . . . . . . . . . . . . .

8. Alternative Assumptions About Underlying Mainstream

Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

23

24

26

27

29

30

31

32

33

Page

24

24

25

25

26

29

32

33

FIGURES

Figure No. Page

l. Market Penetration Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2. Comparison of Conventional Mail Service With Generations I,II,

and III EMS Service . . . . . . . . . . . . . . . . . . . ........... 28
Chapter 3

Market Penetration Model

and Technology Assumptions

Introduction

The primary purpose of the market penetra- 1995, and 2000. The basic elements of the modtion model is to estimate the level of electronic el are shown in figure 1. (See app. A, fig. A-1,

and conventional mail volumes in 1985, 1990, for further details.)

Figure 1.— Market Penetration Model

SOURCE: Office of Technology Assessment, see app. A, table Al for further details.

23
24 . Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Baseline Mainstream

As one input to the market penetration model, the baseline mainstream was divided into

a number of different submarkets (subclasses

of mail) in two ways—by mail content and by

sender/receiver pairs. The mail content categories included correspondence, merchandise,

bills, financial statements, and advertising,

among others. Senders and receivers were

grouped into households and nonhouseholds.

Thus, the four possible sender/receiver pairs

included household-to-household, household/

nonhousehold, nonhousehold/household, and

nonhousehold/nonhousehold.

The baseline volume for every class of conventional mail (first, second, third, fourth,

other) was estimated for each category of mail

content and sender/receiver pair. These estimates were based on data in two studies conducted for the U.S. Postal Service (USPS) by

the University of Michigan Survey Research

Center known as the Household Mainstream

Study and Nonhousehold Mailstream Study,

which in turn were based respectively on 1977

and 1979 mainstream data.1 For consistency,

the 1979 nonhousehold data were used to establish ratios among the types of mail and

then applied to 1977 mail volumes so that all

data would be for the 1977 calendar year.

The resulting baseline mainstream is highlighted in tables 1 and 2 and detailed in appendix A (table A-l). It is possible that some

shifting among the mail segments has occurred since 1977, although a comparison of

data for the 1977 and 1980 fiscal years indicates no major changes. The total mail volume

has grown from about 92 billion to 106 billion

pieces between 1977 and 1980. First-class mail

has decreased from 58 percent of the total to

56.6 percent; second-class mail has decreased

from 9.4 percent to 7.9 percent; and third-class

mail has increased from 26 percent to 28.5 percent of the total mail volume.2

‘M. Kallick, W. Rodgers, et al., Household Maiktnwn Study,

Final liepor~ prepared for the Mail Classification Division,

USPS, 1978. Also, Nonhouwhold MaiMrearn Study, Interim

Report for First Postal Quarter PFY 1979, July 1979.

‘Annual Report of the Postmaster General, fiscal 1980, pp.

28-29.

Table 1.— Baseline Mainstream

To households To nonhouseholds

From 7.60/o 9.90/0

households . . . . . . . . . (7.1 billion pieces) (9.2 billion pieces)

From 53.3 % 29.20/o

nonhouseholds. . . . . . (49.7 billion pieces) (27.3 billion pieces)

SOURCE: 1977 data, University of Michigan Millstream Study conducted for

USPS; percentages shown are based on total 1977 mail volume of

93.3 billion pieces, See app. A, table A-2, for further details

Table 2.—Mail Content (illustrative)

To households To nonhouseholds

From Correspondence—7.1 Negotiable Instruments

households percent of total mail (e.g., checks)–7.0

volum e percent

Correspondence—1. 5

percent

From Third-class (mostly bulk Bills and financial statenon- rate) mail— 10.2 ments—9.1

households percent percent

Bills—9.5 percent Correspondence–6. 1

Advertising—9.1 percent percent

Financial statements— Advertising—5.7 percent

2.8 percent

SOURCE: University of Michigan Millstream Study conducted for USPS. Percentages shown are based on total 1977 mail volume. See app. A,

table A-2, for further details

Mail originating from nonhouseholds constitutes over four-fifths of the total mainstream.

Nonhousehold-originated bills and financial

statements alone account for over one-fifth of

the total, advertising about one-seventh, and

bulk rate mail over one-tenth. Of the one-fifth

of the mail originating from households, most

is either correspondence (letters and cards) or

negotiable instruments (checks).

All mainstream segments were evaluated to

determine whether they potentially could be

handled (in whole or in part) by electronic

funds transfer (EFT) and/or electronic mail

and message systems (EMS). Those major segments judged to be vulnerable to penetration

by EFT and/or EMS are listed in tables 3 and

4. (See app. A, table A-2, for a complete list.)

As shown in tables 3 and 4, accounting only

for major mainstream segments, about twothirds of the mainstream is vulnerable to penetration by EFT and/or EMS. This translates

into about three-quarters of first-class mail
Ch. 3—Market Penetration Model and Technology Assumptions ● 2 5

Table 3.—Major Mainstream Segments Vulnerable to Penetration by

Electronic Funds Transfer

1977 volume Percentage

Mail (billions of of first- Percentage of

Mainstream segment class pieces) class mail total mail

Nonhousehold to household

bills . . . . . . . . . . . . . . . . . . . . . . 1 8.9 15.4% 9.50/0

Non household to household

financial statements. . . . , . . . 1 2.6 4,5 2.8

Non household to

nonhousehold bills and

financial statements. . . . . . . . 1 8.4 14.6 9.0

Household to

nonhousehold negotiable

instruments . . . . . . . . . . . . . 1 6.5 11.3 7.0

Totals . . . . . . . . . . . . . . . . . . . . 26.4 45.8% 28.3%

SOURCE: University of Michigan Mainstream Study conducted for USPS. Percentages based on total 1977 mail volume of

93.3 billion pieces and 1977 first-class mail volume of 57.7 billion pieces. First-class mail defined to include

penalty and franked mail.

Table 4.—Major Mainstream Segments Vulnerable to Penetration by

Electronic Mail and Message Systems

Mail 1977 volume Percentage of mail class

Mainstream segment class (billions of pieces) First Third Total

Household to household

correspondence . . . . . . . . . . . . . . . . 1 6.6 11.4% — 7.1 %

Household to nonhousehold

correspondence . . . . . . . . . . . . . . . . 1 1.4 2,4 — 1.5

Non household to household thirdclass (mostly bulk rate) mail . . . . . . 3 9.5 — 38.80/o 10.2

Nonhousehold to household 1 1.1 1.9 — 1.2

advertising . . . . . . . . . . . . . . . . . . . . . 3 7.2 — 29.4 7.7

Nonhousehold to nonhousehold 1 2.3 4.0 — 2.5

advertising . . . . . . . . . . . . . . . . . . . . . 3 3.0 — 12.3 3.2

Non household to nonhousehold

correspondence . . . . . . . . . . . . . . . . 1 5.2 9.0 – 5.6

Totals . . . . . . . . . . . . . . . . . . . . . . . . . 36.3 28.70/o 80.50/o 39.00/0

SOURCE: University of Michigan Mainstream Study conducted for USPS. Percentages based on total 1977 mail volume of

93,3 billion pieces and 1977 first-class mail volume of 57.7 billion pieces, and 1977 third-class mail volume of

24.5 billi~ pieces. First-class mail defined to include penalty and franked mail.

volume and about four-fifths of third-class natures, endorsements, and documentation for

mail. Actually, only the merchandise and mis- many such instruments. Even here, the possicellaneous segments and nonhousehold to non- bilities for electronic certified mail and elechousehold legal/financial instruments were tronic contract signing are being researched.3

assumed to have no vulnerability. Legal/financial instruments were assumed to have no

potential for electronic handling due to the fre- “’Cryptographers Gather to Discuss Research,” Science, vol.

quent requirement for verified and original sig- 214, NOV. 6, 1981, p. 647.
26 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service —

EFT Diversion

The next step in the market penetration

model was to subtract from the baseline mailstream the mail that could be diverted to EFT.

While for some purposes EFT might be viewed

as a special type of EMS, other EFT applications, such as the point-of-sale use of debit

cards, could eliminate certain payment

messages altogether. Accordingly, in this

study EFT was considered to be separate from

EMS. Mail diverted to EFT was considered

unavailable for EMS. For mainstream segments such as bills and statements where both

EFT and EMS could produce diversion, EFT

diversion was assumed to occur first. The

residual mail volume in each mail segment

after EFT diversion was then considered the

potential market for EMS diversion. The

diversion to EFT was modeled using the logistic substitution process described in appendix B.

Based on the results of a separate OTA

study, 4 current trends suggest that a significant consolidation of bills and financial statements is likely to take place via EFT, but that

it will take many years. OTA has assumed

that the use of EFT for bills and financial

statements in the long run would result in a

90-percent reduction in total bills and statements received via conventional mail by the

average household or nonhousehold. Thus, the

maximum potential fraction (or penetration

potential) of bills and statements that could

be diverted to EFT is 0.9, as shown in table

5. OTA assigned an initial growth rate of 20

percent, as indicated in table 5. Given the

nature of the logistic substitution process, a

20-percent initial growth rate would decline to

a 5-percent growth rate for the 20th year out.

It would take 20 years to progress from 5 to

75 percent of the maximum potential diversion. The year of 5-percent diversion (time

when 5-percent diversion occurs) was estimated to be 1985. The year of 75-percent diver4See OTA report Sleeted Electronic finds Transfer Issues:

Privacy, Security, and Equity, OTA-BP-CIT-12, March 1982.

See also El?/l The Next Fifteen Y- Electronic Banking, Inc.,

June 1980, a working paper prepared for the above report.

Table 5.—Assumptions About Rate of EFT

Penetration

Year of 5 percent penetration—1985

Year of 75 percent penetration—2005

Initial exponential growth rate (1985)—20 percent

Growth rate at 50 percent penetration (year 2000)–

5 percent

Penetration potential —0.9 for bills and financial statements

1.0 for negotiable instruments

Key technologies

Automated teller machines (ATMs)

25,000 in operation (1981)

ATMs estimated by industry to at least double by 1990

and could increase to 120,000 (an annual growth rate of

roughly 10 to 20 percent):

. deposit

● cash withdrawal

● bill or loan payment

● cash advance

Point-of-sale terminals

87,500 in service (1981):

• check validation

● credit card authorization

● debit of transaction balance

Telephone bill payment (TBP)

302 financial institutions offer (1980)

TBP transactions estimated by industry to be growing by

27 percent a year:

● bill or loan payment

● account status inquiry

● interaccount transfer

SOURCE Off Ice of Technology Assessment, see app A, table A-3, for further

deta{ls.

sion was estimated to be 2005. As shown in

table 5, this growth rate is generally consistent with rates of growth projected by industry

for key EFT technologies.

Likewise, the results of the OTA study suggest that EFT is likely to displace checks and

other paper-based negotiable instruments, but

that this displacement will take many years.

OTA has assumed that all such instruments

eventually could be displaced by EFT. Thus,

the EFT penetration potential is 1.0 for negotiable instruments sent to households or nonhouseholds. As with bills and financial statements, OTA has assigned an initial growth

rate of 20 percent and estimated the year of

5-percent diversion to be 1985. (See app. A,

table A-3, for details.)

The OTA assumptions for bills and financial statements and for negotiable instruments

were optimistic in the sense that the actual
—

Ch. 3—Market Penetration Model and Technology Assumptions ● 2 7

penetration potential might be lower than 0.9 the mainstream. The assumptions about EFT

and 1.0, respectively. Therefore, the actual may be affected by various intangible considEFT penetration is more likely to be lower erations important to EFT and EMS users,

than assumed. EFT was defined, in effect, as especially those relating to consumer preferan all-electronic service completely outside of ences and institutional marketing strategies.

EMS Diversion

As noted earlier, the residual mail volume

in each mail segment after EFT diversion is

the potential market for EMS diversion. EMS

diversion is divided between Generation II and

Generation III and was calculated through use

of the same logistic substitution process used

for estimating EFT diversion (see app. B). The

terms Generation II and Generation III are

explained and compared in figure 2.

The EMS diversion model was based on a

set of EMS technology assumptions discussed

below, highlighted in table 6, and detailed in

appendix A (table A-4). The assumptions relate to the following six categories of technology as applied to the various combinations of

mail content and sender/receiver pairs:

1.

2.

3.

4.

5.

Generation II EMS systems with early

electronic printers (no color). This category includes such industry offerings as

Mailgram, Datapost and Tyme-Gram,

and USPS offerings such as E-COM.

Generation II EMS systems with advanced electronic printers (including a color capability).

Electronic data processing and office

automation. This category includes Generation III technologies such as computer

networks, communicating word processors, public and private message and packet-switching networks, and facsimile systems oriented toward nonhousehold use.

Home computer terminals. Included are

home computers and associated communications concepts/services such as PC

Net (Personal Computer Network).

Viewdata/teletext. This category includes

services, primarily to the home, based on

6.

the use of the television set and the telephone.

Inexpensive hardcopy receiver. Facsimile

receivers or character printers at a price

which could find acceptance in a majority of homes are included in this category.

The maximurn market penetration potential

was estimated for each mainstream segment.

As with EFT, the assumptions about EMS

penetration potential were optimistic in the

sense that the actual penetration potential

might be lower due to restrained consumer acceptance and other intangible factors. In most

instances, the entire segment was judged 100-

percent susceptible to Generation II and Generation III EMS. The exceptions are as

follows.

About 30 percent of the “other nonadvertising” segments (nonhousehold to nonhousehold

and nonhousehold to household) is made up of

pamphlets, newsletters, official documents,

coupons, and stockholder communications.

Items of this type were judged not likely to

be susceptible to EMS technologies that are

expected to achieve widespread use over the

next 20 years. Hence a maximum potential

penetration of 70 percent (P = 0.7) was

estimated.

The displacement of direct mail “advertising” and greeting “cards” segments to the

home (nonhousehold to household and household to household) by TV-based Generation

III home terminals was judged to be limited

by the constraints of the video medium. Thus,

a maximum Generation III penetration potential of 30 percent (0.3) was estimated for these

segments.
28 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Figure 2.—Comparison of Conventional Mail Service With Generations I, II, and Ill EMS Service

SOURCE: Office of Technology Assessment; and National Academy of Sciences, .Hectromc ~essa9e Systems for the U.S. Postal Service, 1976.
.—— .

Ch. 3—Market Penetration Model and Technology Assumptions ● 2 9

Table 6.—Assumptions About Rate of EMS Penetration (illustrative)

Early Generation II EMS (using current technology black

and white printers) for correspondence, bills, third-class

bulk mail:

Year of 5 percent penetration—1983

Year of 75 percent penetration—1996

Initial exponential growth rate (1983)—30 percent

Advanced Generation III EMS (using inexpensive home

hardcopy receiver) for nonhousehold to household bills and

statements:

Year of 5 percent penetration—1990

Year of 75 percent penetration—2010

Initial growth rate—20 percent

Advanced Generation II EMS (using high resolution color

printers) for advertising, greeting cards:

Year of 5 percent penetration—1995

Year of 75 percent penetration—2015

Initial growth rate (1995)—20 percent

Generation Ill EMS (using public and private message and

packet-switching networks, communicating word processors, computer networks) for intraoffice correspondence:

Year of 5 percent penetration—1983

Year of 75 percent penetration—1996

Initial growth rate (1983)—30 percent

for interoffice correspondence:

Year of 5 percent penetration—1984

Year of 75 percent penetration—2004

Initial growth rate (1984)—20 percent

Generation Ill EMS (using viewdata/teletext) for household

to household cards:

Year of 5 percent penetration–1985

Year of 75 percent penetration—2005

Initial growth rate—20 percent

Advanced Generation Ill EMS (using home computer terminals) for household to household correspondence:

Year of 5 percent penetration—1987

Year of 75 percent penetration—2007

Initial growth rate (1987)—20 percent

for nonhousehold to household correspondence and bulk

mail:

Year of 5 percent penetration—1987

Year of 75 percent penetration—1997

Initial growth rate (1987)—40 percent

Key technologies:

Home computers:

● 500,000 installed (1980)

● Estimated by industry to grow to 4.5 million installed

by 1985 and 33 million by 1990 (roughly a 50 percent annual growth rate).

Video computer games:

● Revenues increased from $308 million in 1978, to $968

million in 1979, to $2.8 billion in 1980 (roughly a 300 percent annual growth rate).

Mini and small business computers:

● Revenues of about $9.4 billion worldwide (1980)

• Estimated by industry to continue to grow at 25 to 35

percent a year.

Computer software products:

● Revenues of about $1.5 billion (1980)

. Estimated by industry to grow at 30 percent annually

over the next 5 years.

Data communications:

● Estimated revenues of about $4 billion (1979) and growing at 30 to 35 percent a year.

SOURCE: Office of Technology Assessment, see app. A, table A-4, for further details,

Generation II Growth and

Timing Estimates

The attractiveness of Generation II services

is determined primarily by the capabilities and

cost effectiveness of the devices for converting

the electronic signals back to hardcopy. Devices that have black and white capability only

and limitations in page size and print style are

frequently not as attractive as conventionally printed material. Also, printing systems

must be very cost effective or EMS prices will

be too high to compete successfully with conventional mail.

For the purposes of this study, OTA assumed that the electronic printers available in

the 1980’s will be limited in resolution and

flexibility and will lack color capabilities. Advanced electronic printers, which are expected

to become available at cost-effective prices in

the 1990’s, will add greater resolution, grey

scale, and color capabilities and probably will

include greater flexibility in materials handling. Recent technology and product announcements suggest that advanced printers

may be available earlier than assumed for this

study.

Generation II EMS services using early electronic printing capabilities, if priced competitively with mail service, could begin to find

substantial use by nonhousehold senders in

the next few years. For correspondence, bulk

statements, and other nonadvertising content,

OTA estimated a 5-percent diversion of existing mail to Generation II EMS by 1983, with

a high initial rate of growth (30 percent) which

could lead to a 75-percent market share about

13 years thereafter, as summarized in table 6.

The use of Generation II for advertising purposes, however, is expected to be largely delayed until color capabilities become available,

and even then growth will be slower to the ex-
30 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

tent that cost and relative inflexibility continue to limit the advantages of electronic color

printing over conventional printing. Thus, for

the advertising segment (nonhousehold to nonhousehold and nonhousehold to household) a

5-percent market share was forecast for 1995,

with an initial growth rate of 20 percent.

Households will not be able to initiate a significant volume of Generation II EMS until

home terminals capable of originating text

come into widespread use. About 500,000

home computers had been sold by 1980,5

though many of these were not equipped for

communications. OTA assumed that it will

take several more years before 5 percent of

households, or roughly 4 million homes, are

equipped with communications-capable home

computers, and that there will be additional

delays before many of these home computers

are used routinely for correspondence. Thus,

OTA assumed that the EMS market share for

correspondence originating in the home will

not reach 5 percent before 1987. A high initial

growth rate (30 percent) was projected, which

is consistent with growth rates projected by

industry for home computers, as indicated in

table 6.

The requirement for a color capability is expected to put greeting cards in the same position as advertising, thus delaying a 5-percent

market share for Generation II EMS until

1995.

Generation III Growth and

Timing Estimates

Generation III EMS services between nonhousehold senders and receivers are expected

to be based largely on electronic data-processing and office automation technologies. There

are strong incentives within this sector for

keeping information in electronic form and for

machine processing by the receiver. As a result

of these incentives, there is a healthy competition among several technologies for this market, including word processors, computer6U.S. Congress, Office of Technology Assessment, (%mputen

Based National Information $@.ems: Technolo~ and Pubfic

Policy Issues OTA-CIT-146, September 1981.

based message systems, intelligent communication networks, and store and forward message systems. Until recently, this competition

has tended to impede the development of

standards among different vendors supporting

each technology, and for information exchange

between systems based on the different technologies. The International Standard Organization, the Consultative Committee for International Telephone and Telegraph, and the

U.S. standards groups continue to work on

developing standards. The process of agreeing on and then implementing standards has

been slow but appears to be accelerating. The

time required to achieve and implement standards at a variety of system levels will be a principal determinant of the rate of growth of Generation III message systems within the nonhousehold sector.

The problem will be easiest to resolve within

individual companies. OTA estimated a 5-percent market share for Generation II EMS in

1983, and initial growth at a fast rate (30 percent). As shown in table 6, OTA estimated a

75-percent market share for Generation III

EMS intra-office correspondence in 1996. A

slower initial growth rate (20 percent) was projected for interoffice correspondence due to incompatibility and the number of different

standards issues involved. These rates of

growth are generally consistent with industry

projections (listed in table 6) for small business

computers, computer software, and data communications.

The standards problem will begin to be resolved first for correspondence, which requires

a minimum of content standardization. OTA

estimated a 5-percent market share in this segment in 1984. Generation III will become attractive for bills and statements when the recipients can automatically process the information received. This requires considerable

standardization of data elements and formats.

OTA anticipated a slow penetration of these

complex standards to other sectors, in part

due to the software development required to

employ them. Initially, exchanges frequently

are likely to be via hand-carried or mailed computer tapes substituting for numerous paper
Ch. 3—Market Penetration Model and Technology Assumptions ● 3 1

documents. Five-percent penetration in this

market for Generation III is not expected to

occur until 1985.

Generation III systems will begin to replace

advertising within the nonhousehold sector

when “online” catalogs and order entry systems are implemented between corporate buyers and their suppliers. Such systems will require extensive software development and

standardization. Thus, OTA projected an additional 2 years (compared to bills and statements) to reach a 5-percent penetration of

advertising (1987).

Generation III systems involving the household as either sender or receiver will be paced

by the rate of acceptance of one of three principal home terminal technologies-the home

computer terminal, the video-based viewdata/

teletext terminal, and the inexpensive home

hardcopy receiver.

A home computer terminal or its equivalent

will be required for households to originate correspondence. As discussed above, OTA projected that a 5-percent market share for message services using home terminals would occur about 1987. By that time, however, many

standards issues relating to home computer

services are likely to have been resolved.

Hence, OTA assumed very rapid initial

growth (40 percent) for Generation III correspondence and other nonadvertising messages

between households and nonhouseholds.

For correspondence between households,

Generation III EMS growth is expected to be

slower, since both sender and receiver must

be equipped with a terminal device. For example, with 50 percent of households equipped,

only 25 percent of household pairs on the average would have a terminal available at both

ends. For this reason, the projected initial

growth rate for household-household Generation III EMS correspondence is slower (20 percent).

Viewdata/teletext systems are most likely

to penetrate the advertising and greeting card

segments involving household receivers,

though the maximum penetration potential is

limited. These systems are projected to

achieve a 5-percent market share somewhat

ahead of home computers–OTA estimated

1985. Advertising by viewdata/teletext is expected initially to grow very rapidly (40 percent), since it is paced only by availability of

the home receiver. The greeting card segment

is likely to grow slowly, again because of the

requirement that both sender and receiver be

equipped.

The use of Generation 111 EMS services to

transmit bills and financial statements to

households requires home terminals as a prerequisite. In addition, it seems likely that

many consumers will desire a hardcopy of

their statements or bills for tax records and

other purposes, thus making consumers more

reluctant to accept bills and statements over

a viewdata-like terminal. OTA assumed that

home hardcopy equipment sales will be

delayed 3 years behind video terminal sales

and will grow at a slower rate, thus affecting

the use of Generation III for bills and statements. OTA estimated that inexpensive hardcopy printers capable of reproducing the contents of a TV display will be produced in volume quantities for under $200 (1980 dollars)

per unit when market penetration reaches 5

percent (1990).

Relationships Between

Generation II and

Generation III Estimates

Generation II growth rate and timing estimates are not assumed to have any significant

effect on the rate or timing of mail diversion

to EFT systems or on the rate and timing of

Generation III growth. The latter assumption

may seem surprising at first since Generation

II and III are in some sense competing. However, while the decision to send messages by

Generation II as opposed to conventional mail

is almost entirely at the discretion of the

sender, the decision to receive mail electronically-and hence via Generation III–is largely at the discretion of the receiver. Thus, if

Generation III is available, the recipients of
32 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

messages will elect Generation III instead of

hardcopy delivery when it suits their purposes

or is convenient to do so, regardless of whether

the hardcopy comes from conventional mail

or is the output of a Generation II system.

Thus, the rate of penetration of Generation III

is not likely to be significantly affected by the

state of penetration of Generation II.

It may also be thought that Generation III

is but a simple extension of Generation II—

perhaps just running a telecommunication line

from a Generation II terminus to the ultimate

user. In this view, earlier introduction of

Generation II would speed the introduction of

Generation III. However, many Generation

III EMS systems are quite different in character from Generation II EMS systems.

Therefore, sending greeting cards by viewdata, transmitting bills or statements between

computers, reading messages from a computer-based message system, or placing orders

against a supplier using an online catalog and

order entry system are not functional extensions of a store and forward message system

like that which forms the basis for Generation

II. Both developer and user decisions for Generation III message systems are expected to

be quite independent of the status of Generation II.

Alternative Generation II

Growth and Timing Estimates

The assumptions outlined above for the

growth and timing of Generation II EMS are

intentionally on the high side (i.e., optimistic

in terms of rate and extent of development),

but still are plausible in terms of technical,

economic, and market realities. Henceforth,

this set of assumptions will be referred to as

the baseline alternative for Generation II

EMS development.

In order to test the sensitivity of the market

penetration model and the projected mail volumes to changes in the baseline Generation II

EMS assumptions, OTA has defined three

other alternatives, as presented in table 7: 1)

very high Generation II EMS growth, 2) moderate Generation II EMS growth, and 3) slow

Table 7.—Assumptions for Generation II Growth

Alternatives

High but plausible Generation II EMS growth (baseline

alternative):

● Peak volume (year 1995) about 60 to 75 percent of RCA

projected year 2000 volume

● Early Generation II—5 percent penetration in 1983

initial growth rate 30 percent

● Advanced Generation II—5 percent penetration in 1995

initial growth rate 20 percent

Very high Generation II EMS growth:

● Peak volume (year 1995) about 110 to 130 percent of

RCA projected year 2000 volume

● Early Generation II—5 percent penetration in 1983

initial growth rate 40 percent

● Advanced Generation I I—5 percent penetration in 1992

(accelerated by 3 years)

initial growth rate 30 percent

Moderate Generation II EMS growth:

● Early Generation II—5 percent penetration in 1987

(delayed by 4 years)

● Peak volume (year 2000) same as very high alternative

peak in 1995

● Advanced Generation II—5 percent penetration in 1993

● Initial growth rates same as very high growth alternative

Slow Generation II EMS growth

● Peak volume (year 2000) about 25 percent of RCA projected year 2000 volume

● Generation II growth rates cut in half compared to

moderate growth alternative—20 percent for Early

Generation II

—15 percent for Advanced Generation II

SOURCE: Office of Technology Assessment (see flg 8, ch. 4, for graphic comparison of alternatives).

Generation II EMS growth. When compared

to the 1977 estimates made by RCA for the

USPS with respect to EMSS,6 the baseline

alternative (high but plausible Generation II

growth) would project a peak volume of about

60 to 75 percent of the RCA peak of 25 billion

messages. The very high growth alternative

would project a peak of 110 to 130 percent of

the RCA peak, and the slow growth alternative about 25 percent of the RCA peak. The

moderate growth alternative would project a

peak of 55 to 65 percent of the RCA peak, but

would show a growth track substantially slower than the baseline alternative but faster than

the slow growth alternative. (See ch. 4, fig. 8,

for a graphical comparison.)

‘RCA Government Communications Systems Division, Elm

tronic Message Service System: Growth and Economic Analyses, Camden, N. J., 1977, p. 6-13.
Ch. 3—Market Penetration Mode/ and Technology Assumptions ● 3 3

These alternatives are used in later chapters force requirements to assumptions about the

to test the sensitivity of the projected mail vol- growth and timing of Generation II EMS.

umes, first-class revenues and costs, and labor

Underlying Mainstream Growth

Between 1970 and 1980, the overall volume

of mail handled by USPS grew at an annual

compounded rate of about 2.2 percent. Between 1900 and 1977, the annual compounded

rate of growth was about 2.0 percent. Therefore, OTA used an estimate of 2 percent as the

baseline underlying rate of growth in the mailstream. In other words, absent any diversion,

it was assumed that the mainstream would

grow by about 2 percent per year over the next

20 years (the timeframe of this study).

However, there are several indications that

this assumption may be on the low side. For

example, the University of Michigan study estimated an annual mainstream growth rate of

2.9 percent prior to technological diversion.7

Also, in 3 of the last 4 years the actual rate

of growth in the mainstream exceeded even

this 2.9 percent level.* The USPS estimated

rate of growth for fiscal year 1981 is 3.5 percent. 8 Finally, between 1947 and 1977, the

annual compounded mainstream growth was

about 3.2 percent.

Table 8 summarizes the various justifications for assuming a 2- v. a 3-percent underlying mainstream growth rate. The balance of

evidence appears to suggest that a 2- or even

l-percent rate is typical of economically depressed periods, while the rate has been 3 percent or more during better economic times.

These possibilities were accommodated in

the market penetration model by making sensitivity runs of the model under different sets

of assumptions, and by adjusting all results

upward by 10 percent to be consistent with

7Kallick, Rodgers, et. al., op. cit.

*5.1 ~rcent for figc~ year 1978; 2.9 percent for fiscal year

1979; 6.5 percent for fiscal year 1980; and 3.5 percent (estimated)

for fiscal year 1981.

‘Per Nov. 22, 1981, telephone conversation with Lou

Eberhardt, USPS Public Information Office.

Table 8.—Alternative Assumptions About

Underlying Mainstream Growth Rate

Justifications for 3-percent underlying growth rate

1947-77 average mainstream growth = 3.2 percent per

year

1977-81 average mainstream growth = 4.2 percent per

year

1951-77 average first-class mail growth = 2.8 percent

per year

University of Michigan mainstream study estimatea = 2.9

percent per year

Justifications for 2-percent underlying growth rate

1970-80 average mainstream growth = 2.2 percent per

year

1900-77 average mainstream growth = 2.0 percent per

year (includes 1930’s depression and both World

Wars)

1951-77 ratio of first-class mail to disposable personal

income declined from 76 million letters per $1

billion to 57 million letters per $1 billionb

Justifications for l-percent underlying growth rate

1971-76 average mainstream growth = 1.1 percent per

year

1971-76 average first-class mail growth = 0.7 percent

per year

afvI. Kall ick, W, Rodgers, et al., Househo/d Malktream Study, Final ~ePorf,

prepared for USPS Mail Classlflcatlon Division, 1978.

bJohn F, M~L~ughlin, et al,, Te/ep/rone.Letfer Conrpetltlon A ~irsf ~oo~, Har”

vard Unwersity, 1979.

SOURCE: Off Ice of Technology Assessment

the estimated fiscal year 1981 USPS overall

mail volume. Sensitivity runs were carried out

for both a higher (3 percent) and a lower (1 percent) underlying mainstream growth rate. The

results of selected sensitivity runs are presented in chapter 4.

The one-time 10-percent adjustment in results for consistency with 1981 data was

needed because the actual mainstream growth

during the 1977-81 period far exceeded the

2-percent annual rate that was assumed initially. As noted in chapter 4, the market diversion model was based on 1977 mainstream

data, which was the only detailed data available at the time of the study. The model assumed that, under the baseline growth of 2
—

34 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

percent per year, the total mail volume would

grow from about 93 billion pieces in 1977 to

about 100 billion pieces in 1981. The actual

USPS mail volume grew from about 92 billion

pieces in 1977 to an estimated 110 billion

pieces for fiscal year 1981.9 In order to compensate for this higher-than-expected growth

‘Ibid.

rate, all results of the computer modeling were

increased by 10 percent to make the projected

and actual figures for 1981 consistent and to

remove the effects of the 1977-81 growth discrepancy from future year projections. Without the 10-percent adjustment, future year

projections would have been penalized for this

discrepancy.
—

Chapter 4

Market Penetration Results
—. —

Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Base Case Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Sensitivity Analyses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Three-Percent Underlying Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Other Sensitivity Runs. . . . . . . . . . . . . . . ...... . . . . . . . . . . . . . . . . . 42

Comparison of Alternative Generation II EMS Growth and

Timing Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

TABLE

Table No. Page

9. Sensitivity Analyses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

FIGURES

Figure No. Page

3. Market Penetration for High But Plausible Generation II EMS

Growth Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

4. Breakdown of Mail by Class for High But Plausible Generation II

EMS Growth Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

5. Market Penetration for High But Plausible Generation HEMS

Growth Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

6. Breakdown of Mail by Class for High But Plausible Generation II

EMS Growth Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

7. Sensitivity Analyses of Market Penetration Projections Assuming

High But Plausible Generation II EMS Growth . . . . . . . . . . . . . . . . . . . 43

8. Generation II EMS Market Projections . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Chapter 4

Market Penetration Results

Introduction

This chapter presents the results of the market penetration analysis using the model and

technology assumptions described in chapter

3. The primary use of the model here is to

estimate future levels of conventional and electronic mail volumes under a variety of conditions.

To recap, the starting point for the model

is the baseline mainstream, which is then

broken down into a number of different submarkets (classes or subclasses of mail). The

model estimates the maximum potential fraction of each submarket which appears to be

suitable for handling by (i.e., diverted to) electronic funds transfer (EFT) or electronic mail

and message systems (EMS). Then, based on

specific assumptions about the relevant technology, the model estimates the rate and timing of penetration of EFT and/or EMS into

each submarket.

For each submarket, the model is thus able

to estimate the portion of the mainstream that

would be diverted to EFT and EMS and the

portion that would remain as conventional

mail. OTA has assumed that, unless otherwise

indicated, the U.S. Postal Service (USPS)

would deliver the hardcopy output of EMS

services but not the electronic output. The portion of the mainstream diverted to EMS is further divided into Generation II (defined as

EMS with hardcopy output and delivery) and

Generation III (defined as EMS with electronic delivery). The total remaining USPS

mainstream for any given set of assumptions

will then be the sum of all submarkets of undivertable conventional mail (mail not suitable

for electronic handling), plus residual conventional mail (mail that is suitable for electronic

handling but has not yet been diverted), plus

Generation II EMS volume. As defined in this

study, Generation III EMS and EFT both involve electronic delivery and therefore are

assumed to be completely outside of the USPS

mainstream.

Base Case Results (High But Plausible

Generation II EMS Growth, 2-Percent

Underlying Mainstream Growth)

The results of the market penetration analysis for the high but plausible Generation II

EMS growth alternative under the baseline assumptions are shown in figure 3.

Under the base case, assuming a 2-percent

growth rate in the underlying mainstream,

USPS-delivered mail (conventional plus Generation II EMS) would rise to about 118 billion

pieces by 1990 and then decline to about 89

billion pieces in 2000. By 1995, USPS-delivered mail would be about equal to the 1980

USPS mail volume of 106 billion pieces. Conventional mail would have declined significantly as a percentage of total mail, from

about 94 percent in 1985 to only 47 percent

in 2000. Thus, conventional mail would constitute less than one-half of the total mailstream, although still representing a substantial absolute volume of about 75 billion pieces.

In contrast, the combined total of EFT and

EMS would have risen from about 5.6 percent

of the total mainstream in 1985 to about 53

percent in 2000. Of the roughly 85 billion

pieces of “electronic” mail in 2000, Generation

III EMS would account for about 56 percent,

37

97-918 0 - 82 - 4
Figure 3.—Market Penetration for High But Plausible Generation II EMS Growth Alternative

(assuming 2°/0 growth in underlying mainstream)

.; “1 mail (conventional -

and Generation II EMS)

.,1 . USPS - delivered

., ‘ .; ~

“,.

~, , (conventional and

.i .’; . ,!* - IT ‘*. f

Generation II EMS) . . . ...115.77 118.21 106.20 88.52 ‘: ““%

,:1

SOURCE: Office of Technology Assessment.

EFT about 28 percent, and Generation II

EMS about 17 percent. By 2000, Generation

III EMS and EFT would still be increasing

at a fairly rapid rate, while Generation II EMS

would have peaked and started to decline.

Overall, the picture that emerges is one

where conventional mail volume would decline

by about 32 percent by 2000 compared to the

1981 volume of 110 billion pieces. USPSdelivered mail would decline somewhat less–

by about 20 percent–due to the offsetting effect of increases in Generation II EMS

volume. However, this Generation II EMS

“cushion” would peak about 1995 and be on

the decline by 2000 in the face of competition

from Generation III EMS.

The breakdown of USPS-delivered mail

among the various classes of mail would also
Ch. 4—Market Penetration Results ● 39

change significantly. As shown in figure 4, the

split in conventional mail between first class

and all other classes would essentially reverse.

In 1985, first-class conventional mail would account for about 61 percent of total conventional mail, and all other classes would account

for about 39 percent. This is essentially the

same as the split indicated by actual fiscal

Figure 4.— Breakdown of Mail by Class for High

(assuming 2°/0 growth

70

60

50

40

30

20

10

0

year 1980 mail volume statistics. By 2000,

however, first-class conventional mail would

account for only about 43 percent of total conventional mail, while the share for all other

classes of mail would increase to 57 percent.

When Generation II EMS first-class mail is

taken into account, all first-class mail (conventional plus Generation H EMS) declines someBut Plausible Generation II EMS Growth Alternative

in underlying mainstream)

Volume of mail

(in billions of pieces)

Type of mail 1985 1990 1995 2000

Conventional first-class . . . . . . . . . . . . . 68.84 63.56 47.15 32.37

. Conventional other a . . . . . . . . . . . . ....44.32 45.60 43.57 42.72

Generation II EMS first-class . . . . . . . . . 1.90 7.26 13.64 12.51

Generation II EMS otherb . . . . . . . . . . . . 0.61 1.79 1.84 0.92

USPS - delivered totals

First-class. . . . . . . . . . . . . . . . . . . . . . . 70.74 70.82 60.79 44.88.. 

Other classes . . . . . . . . . . . . . . . . . . . . 44.93 47.39 45.41 43.64 

 .

asecond, third, fourth classes, and miscellaneous. w

,,

.

I t

1985 1990 1995 2000

Year

SOURCE Office of Technology Assessment.
40 Implications of Electronic Mail and Message Systems for the U.S. Postal Service

what less as a percentage of total USPSdelivered mail. However, even including Generation II EMS, the split between first class

and all other classes of mail would change from

61/39 in 1985 to essentially an even split

Several computer runs

Sensitivity

were performed to

determine the- sensitivity of the base case

results to changes in key variables and/or

assumptions.

Three-Percent Underlying

Growth Rate

As discussed in chapter 3, the growth in

USPS mail volume since World War II has

averaged over 3 percent compounded annual-

(51/49) in 2000. Given the revenue/cost structure of USPS, this change could have significant implications for USPS revenues, rates,

and competitive posture, as will be discussed

later.

Analyses

ly. A 3-percent growth rate can be justified on

the several grounds summarized earlier in

table 10. Some researchers believe that a

3-percent rate should be defined as the baseline

rather than 2 percent. Figure 5 shows the

results of the market penetration analysis for

high but plausible Generation II EMS growth,

assuming a 3- rather than a 2-percent underlying growth rate in the mainstream. The differences from the base case are significant.

USPS-delivered mail would peak at about 134

Figure 5.—Market Penetration for High But Plausible Generation II EMS Growth Alternative

(assuming 30/’ growth in underlying millstream)

SOURCE: Office of Technology Assessment.
Ch. 4—Market Penetration Results 4 1

billion pieces in 1990 and decline to slightly

more than 110 billion pieces in 2000. Thus, if

the underlying growth rate in the mainstream

equals or exceeds 3 percent annually, USPSdelivered mail volume would exceed 1981

levels at least through 2000. In other words,

with a 3-percent underlying growth rate, the

USPS-delivered mail volume (conventional

plus Generation II EMS) would not drop

below the estimated 1981 volume of 110 billion

pieces until 2000. Even the conventional mail

volume would not drop below 110 billion pieces

until roughly 1994. The relative breakdown of

mail by class would not be significantly different for an underlying growth of 3 percent

as compared with 2 percent, but the volumes

for all types of mail would be significantly

higher, as indicated in figure 6.

Figure 6.—Breakdown of Mail by Class for High But Plausible Generation II EMS Growth Alternative

(assuming 3°/0 growth in underlying mainstream)

80

70

60

u) c

.-o—--n

c

40

.-

20

10

0

. Volume of mail

(in billions of pieces)

Type of mail 1985 1990 1995 2000

Conventional first-class . . . . . . . . . . . 74.43 72.16 56.20 40.51

Conventional othera . . . . . . . . . . . . . . . 48.03 51.78 51.94 53.47

Generation II EMS first-class . . . . . . . 2.06 8.25 16.26 15.65

. Generation II EMS otherb . . . . . . . . 0.66 2.02 2.19 1.17

USPS - delivered totals

First-class. ... . . . . . . . . . . . . . . . . 76.49 80.41 72.46 56.16

Other classes ., . . . . . . . . . . . . . . ....48.69 53.80 54.13 54.64

aSecond, third, fourth classes, and mmcellaneous

bThlrd class

.

1985 1990 1995 2000

Year

SOURCE: Office of Technology Assessment.
42 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

——.. ———.-——

Other Sensitivity Runs

In order to fully test the sensitivity of the

base case results to changes in key assumptions, several other sensitivity runs were conducted. The results are summarized in figure

7. The projected USPS-delivered mail volumes

would be higher than the base case if: 1) EFT

growth rates were cut in half (half of what were

assumed for the base case); 2) the underlying

growth in the mainstream was 3 percent rather

than 2 percent (discussed earlier); 3) 5-percent

penetration of Generation III EMS was delayed 3 years; or 4) Generation II EMS stimulated 100 percent additional traffic. If two or

more of these changes from the base case occurred simultaneously, the projected USPSdelivered mail volume would be even higher

than shown in figure 6.

On the other hand, the projected USPS mail

volumes would be lower than the base case if:

1) Generation III penetration was accelerated

by 3 years; 2) USPS did not deliver 100 percent of industry Generation II EMS hardcopy

output; 3) the underlying growth in the mailstream was 1 percent rather than 2 percent;

or 4) a large percentage of second- and thirdclass mail was lost to alternative delivery services. Again, if two or more of these changes

from the base case occurred at the same time,

the projected USPS-delivered mail volumes

would be even lower than indicated in figure 7.

OTA’s qualitative evaluation of the likelihood of various changes is summarized in

table 9. With respect to changes that would

 reduce mail volume compared to the base case,

OTA concluded that a l-percent underlying

mainstream growth rate, a doubling of the initial EFT growth rate (from 20 to 40 percent),

and an acceleration of the year of 5-percent

Generation III penetration (from 1987 to 1984)

were all unlikely, as was a significant reduction in USPS delivery of industry Generation

II hardcopy output (short of a major revision

in the Private Express Statutes). OTA did conclude that significant diversion of second- and

third-class mail to alternative delivery services

was possible, although probably not at the

rate assumed in the sensitivity run shown in

figure 7.

With respect to changes that would increase

projected mail volume compared to the base

case, OTA concluded that while a 4-percent

underlying mainstream growth rate was unlikely, a 3-percent rate was quite possible,

given growth trends during periods of economic prosperity. However, the current uncertainty in the short- and long-term economic

outlook suggested to OTA that a 3-percent underlying growth rate assumption would have

to be considered somewhat optimistic. OTA

also concluded that reductions in the base case

rates of development for EFT and Generation

III EMS were possible, due to marketing and

competitive (and, in the case of EFT, regulatory) uncertainties. On the other hand, technology per se does not appear to be a limiting

factor, and the sales of home computers, computer games, and small business computers

are indicative of rapid development. As for the

stimulation of additional Generation II EMS

volume, OTA could not determine whether the

experience with all-electronic technologies

(e.g., telephone) is applicable. Some stimulation of additional messages, although probably considerably less than the 100-percent

stimulation assumed in the sensitivity run

shown in figure 7, seems possible. This and

two other sensitivity runs are discussed in

more detail below.

One-Hundred-Percent Stimulation of Generation II- EMS Traffic.--The base case assumed that Generation II EMS traffic would

be diverted on a one-for-one basis from the conventional mainstream; that is, Generation II

EMS volume is subtracted from the conventional mail volume. In actual practice, Generation II EMS systems might stimulate additional traffic, rather than just diverting conventional mail traffic.

Experience with other electronic communication services suggests that the availability

of Generation II EMS may indeed stimulate

demand for new messages not presently sent

through the mail at all. Figure 7 shows the
Ch. 4—Market Penetration Results ● 4 3

—

Figure 7.—Sensitivity Analyses of Market Penetration Projections Assuming High But Plausible

Generation II EMS Growth

130 —

\

30/. growth in underlying mainstream . . . . . . . . . . . . . . . . . . . 125.17 134.20 126.59 110.80

1000/. stimulation of additional Generation II EMS . . . . . . . . 118.28 127.26 121.68 101.97

EFT growth rates cut in half . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.76 119.90 112.10 100.22

Generation Ill EMS delayed in 3 years . . . . . . . . . . . . . . . . . . 117.03 123.19 118.17 98.93

20/. growth in underlying mainstream . . . . . . . . . . . . . . . . . . . 115.67 118.21 106.20 88.52

Generation Ill EMS accelerated by 3 years . . . . . . . . . . . . . . . 112.99 109.22 94.37 80.62

USPS does not deliver industry Generation II . . . . 113.26 109.16 90.74 75.10

10/0 growth in underlying mainstream . . . . . . . . . . . . . . . . . . . 107.47 104.01 88.95 70.58

Second-/third-class mail diversion to alternative delivery. 103.31 98.95 82.98 62.59

SOURCE Office of Technology Assessment
44 . Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Table 9.—Sensitivity Analyses

USPS-delivered mail volume would be reduced compared to

the baseline projections if:

●

●

●

●

●

Growth in underlying mainstream were 1 percent—

Unlikely, except in event of economic depression.

EFT growth rate doubled from 20 percent (in 1985) to 40

percent—Unlikely.

Generation Ill EMS were accelerated by 3 years from

1987 (for 5 percent penetration) to 1984—Unlikely.

Significant reduction in USPS delivery of private sector

Generation II hardcopy output occurred—Unlike/y

under current USPS interpretation of Private Express

Statutes (PES); however, FCC and some private firms

believe that hardcopy output falls within the jurisdiction of the Communications Act, not the PES.

Significant diversion of second-/third-class mail to

alternative delivery occurred—Possible; some diversion known to be occurring, but second-class has remained essentially constant over last 10 years and

third-class has increased by 52 percent. USPS rate increases may accelerate use of alternative delivery.

USPS-delivered mail volume would be increased compared

to the baseline if:

●

●

b

●

●

Growth in underlying mainstream were 4 percent—

Unlikely over the long-term, although short-term

growth spurts of 4 percent are possible.

EFT growth rate were halved from 20 percent (in 1985)

to 10 percent— Possible due to marketing, competitive,

and regulatory uncertainties.

Generation Ill EMS were delayed by 3 years from 1987

(for 5 percent penetration) to 1990–Possible due to

marketing and competitive uncertainties; however,

sales of home computers, computer games, and small

business computers look very strong.

Stimulation of additional Generation II EMS volume

occurred—Possible given that other electronic technologies (e.g., telephone, computer conferencing) have

generated additional message volume; however,

whether experience with all-electronic technologies

applies to hybrid forms (such as Generation II EMS) is

unknown.

Growth in underlying mainstream were 3 percent—

Quite possible given the historical growth trends during periods of relative economic prosperity.

SOURCE: Office of Technology Assessment.

results of the market penetration analysis for

high but plausible Generation II EMS growth,

assuming 100-percent stimulation of EMS

traffic. This means that for each message

diverted from conventional mail to Generation

II EMS, a new Generation II EMS message

is generated.

Under this assumption, USPS-delivered

mail would peak at about 127 billion pieces in

1990 and decline to a little over 100 billion

pieces in 2000. USPS-delivered mail volume

would exceed present levels through about

1998, although the conventional mail volume

would drop below the present level by 1990.

Generation II EMS volume would grow much

faster and sooner, and would outpace Generation III EMS at least through about 1995. By

comparison, in both the base case and the

3-percent underlying growth case, Generation

III EMS would overtake Generation II EMS

as early as 1990. Overall, a 100-percent stimulation of Generation II EMS traffic would

result in a higher projected USPS-delivered

mail volume than the base case, but not as

high as the 3-percent underlying growth case.

There is, however, a question as to whether

the 100 percent EMS stimulation assumption

is realistic.

Generation III EMS Three Years Sooner.—

Generation III EMS involves end-to-end electronic service; that is, electronic delivery of

mail as well as electronic sending and transmission. Electronic delivery requires that both

senders and receivers of mail have the necessary terminal equipment. In developing the

market penetration model, OTA made a number of assumptions about the growth of Generation III. For example, OTA projected that

in 1987 home computer terminals (or their

equivalent) would achieve a 5-percent share of

mail segments involving the household as

either sender or receiver. While this was

OTA’s best estimate based on economic, market, and technological conditions at the time

of the study, the timing and rate of home computer development is a subject of considerable

debate.

In order to test the sensitivity of the baseline market penetration results to Generation

III, the model was run with all Generation III

timing estimates advanced by 3 years. That

is, 3 years were subtracted from all estimates

of the year of 5-percent penetration for a particular Generation III technology and market

segment. For example, the time to 5-percent

penetration for home computer terminal penetration of household-to-household correspondence was changed from 1987 to 1984.

Under the base case, Generation II volume

would be greater than Generation III volume

through about 1990. With 100-percent EMS
Ch. 4—Market Penetration Results ● 4 5 —— — —.

stimulation, Generation II volume would be

greater through about 1996. But if Generation

III came 3 years sooner than assumed in the

base case, Generation II would never exceed

Generation III. Even in the peak year (1995)

for Generation II, Generation III EMS volume would be more than four times larger. By

2000, Generation 111 would be about 56 billion

pieces (or messages) and rising rapidly, while

Generation II would be about 9 billion pieces

and declining.

As a result, the USPS-delivered mail volume

would be less compared to the base case, since

there would be less Generation II EMS hardcopy delivery to offset reductions in conventional mail delivery. As a consequence, by

1990 total USPS-delivered mail volume would

fall below the current 1981 level of 110 billion

pieces. By 2000, USPS-delivered mail volume

would be down to about 81 billion, a reduction

of about 27 percent from 1981. Thus, accelerating Generation III creates a worse case (in

terms of USPS mail volume) than the base

case.

Second- and Third-Class Mail Losses to

Alternative Delivery.–As discussed earlier

and presented in figure 4, first-class volume

for the base case declines significantly as a

percentage of total USPS-delivered mail. This

is because first-class mail is most susceptible

to diversion to EFT or Generation III EMS.

Other classes of mail, primarily second and

third classes, show very little decline over the

next 20 years. The reduction in first-class mail

might lead to a substantial increase in costs

(and rates) for other classes of mail, since these

other classes would have to cover a larger percentage of USPS fixed institutional costs.

Rate increases could in turn lead to additional

losses of second- and third-class mail.

In order to test the sensitivity to such

losses, OTA conducted a run of the market

penetration model assuming a 3-percent annual reduction in second-class mail and a

2-percent annual reduction in third-class mail.

While these assumptions are fairly extreme,

fourth-class mail has been declining annually

by an average of 3 to 4 percent over the last

few years. In contrast, third-class mail has increased significantly in recent years. However,

both second- and third-class mailers are increasing their use of alternative means of

distribution. For example, some third-class

mailers are shifting to newspaper inserts.

These are identical in purpose, content, and

appearance to items commonly carried as bulk

third-class mail and are much cheaper on a per

piece basis than bulk third class. In the 1980

rate case filings before the Postal Rate Commission, many mailers indicated that they are

close to the limit in terms of absorbing higher

mail rates. The rates for second- and thirdclass mail have already risen by about 400 percent since 1970 as a result of steps required

by the Postal Reorganization Act of 1970 to

bring rates for all classes of mail in line with

costs.

The impact of these assumptions is dramatic. USPS-delivered mail volume (conventional plus Generation II EMS) would start

declining right away, and by 2000 would fall

to about 63 billion pieces, about 43 percent

below the 1981 mail volume. Conventional

mail would decline to about 50 billion pieces,

more than 50 percent below the current 110

billion pieces. Thus, this level of second- and

third-class diversion clearly leads to the worstcase scenario with respect to USPS mail volume.

Comparison of Alternative Generation II

EMS Growth and Timing Estimates

Up to this point, all market penetration rate of Generation II EMS development. In

results have been for the baseline EMS alter- other words, for the base case as well as the

native, which assumes a high but plausible various sensitivity runs, the Generation II
.

46 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

——

EMS growth and timing parameters have

been held constant while other variables (e.g.,

EFT growth rate, Generation III 5-percent

penetration date, underlying mainstream

growth rate) have been changed. In order to

test the sensitivity of the projected mail

volumes to changes in the baseline Generation

II EMS assumptions, computer runs were conducted for each of the four Generation II EMS

alternatives defined in chapter 3 (table 7):

1. baseline alternative-high but plausible

Generation II EMS growth;

2. very high Generation II EMS growth;

3. moderate growth; and

4. slow growth.

The Generation II EMS market projections

for these four alternatives are presented in

figure 8. Results are shown for both 2- and

3-percent underlying mainstream growth rates.

The market projections developed by RCA

(under contract to USPS for the electronic

message service system concept, known as

EMSS) are also included in figure 8 for comparison purposes.

As expected, projected volumes for the high

but plausible Generation II growth alternative

fall in the middle when compared to the very

high, moderate, and slow alternatives. Somewhat surprisingly, however, volumes for the

high but plausible alternative are considerably

below the RCA projections. If this alternative

is indeed a high but plausible market development scenario, as assumed by OTA, then it

would appear that the RCA projections represent a very high (i.e., optimistic) market

development scenario, that they have ignored

competition with Generation III EMS services, or both. The size of the Generation II

EMS market takes on considerable importance with respect to the actual deployment

and pricing of any USPS EMS offering.

Based on the figure 8 results, it would appear that a conservative estimate (assuming

slow to moderate Generation II growth and

a 2-percent underlying mainstream growth)

would place the year 2000 Generation II EMS

volume in the range of 7 billion to 14 billion

pieces, rather than the RCA estimate of 25

billion. Likewise, a conservative estimate

would place the 1995 volume in the range of

3 billion to 10 billion pieces, rather than the

23 billion RCA estimate. If Generation II

EMS growth actually followed the slow

growth path, volume is projected to reach only

40 million pieces in 1985, equivalent to the

volume of Mailgrams for fiscal year 1980. On

the other hand, if Generation II EMS grows

very rapidly, the projected volume would exceed the RCA estimates until the late 1990’s.

If a 3-percent underlying mainstream growth

rate is assumed, the projected year 2000 volume of about 23 billion pieces for the high but

plausible Generation II EMS alternative is essentially the same as the RCA estimate.

In sum, the projected mail volumes are very

sensitive to the assumptions implicit in the

four alternatives considered for Generation II

EMS development.
Ch. 4—Market Penetration Results ● 4 7

Figure 8.—Generation II EMS Market Projections

/

/

\

Underlying Generation II EMS volume mainstream

growth (billions of pieces)
Chapter 5

Revenue/Cost Model

and Results
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

USPS Revenue/Cost Model for First-Class Conventional Mail . . . . . . . . . . 51

USPS Revenue/Cost Model for First-Class Electronic Mail . . . . . . . . . . . . 52

Results of the Revenue/Cost Analysis for First-Class Mail. . . . . . . . . . . . . 53

FIGURES

Figure No. Page

9. Contribution of USPS-Delivered First-Class Mail to USPS

Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

10. Contribution of USPS-Delivered First-Class Mail to USPS Fixed Costs

for High But Plausible Generation II Growth Alternative . . . . . . . . . . 55
Revenue/Cost Model and Results

Introduction

This chapter describes the revenue/cost

model used by OTA to project the impact of

U.S. Postal Service (USPS) involvement in

electronic mail and message systems (EMS)

on its finances and outlines the results of the

analysis. OTA originally intended to prepare

projections of USPS revenues and costs for all

classes of mail under the four alternatives considered for the years 1985, 1990, 1995, and

2000. However, the USPS revenue and cost

structure proved to be too complex, and the

available baseline data too ambiguous, to

make complete projections. Instead, OTA has

focused on the financial impacts for first-class

mail which, according to the results of the

market penetration analysis discussed in

chapter 4, will be affected most by EMS. The

revenue/cost model for conventional mail is

described first, followed by the model for electronic mail.

USPS Revenue/Cost Model for

First-Class Conventional Mail

USPS revenue and cost relationships are unusually complex for several reasons. First,

postal costs vary not only with the volume and

weight of mail delivered, but also according

to class of mail, number of route stops, speed

of service standards, size and shape of mail,

and whether (and how) the mail is ZIP-coded

and presorted. Costs also may vary between

urban, suburban, and rural routes, although

USPS does not collect cost data based on mail

destination.

Second, cost analysis is complicated by the

problem of how to assign joint and common

costs properly to the different services they

support; for example, allocation of delivery

route costs by class of mail.

Third, there is a problem in determining

what costs are variable with volume changes

over various time periods. Thus, some costs

that appear fixed in the short run (e.g., 1 to

3 years) may be variable (i.e. adjustable to

meet volume requirements) over a 10- or 20-

year period.

On the revenue side, postal revenues depend

on the volume of mail sent by customers in

each of the many service categories established by USPS, and on the rates in each category. Revenue projections are further complicated by the need to consider the impact of

inflation and public subsidies on rates, and in

turn the impact of rates on mail volumes in

each service category. There is a feedback

process, but its exact nature is unknown. That

is, changes in rates may have a significant effect on mail volume, which in turn affects mail

rates 1, 2, or 3 years later (in the next ratesetting cycle).

In order to simplify the revenue/cost analysis for the purposes of this study, OTA developed a USPS revenue and cost model based

on the following assumptions:

● Percentage Fixed v. Variable Costs. To

the extent that a significant fraction of

USPS costs are fixed, declining volumes

would cause an increase in the average

cost per piece of mail. This higher cost

would have to be recovered by increases

in rates or postal subsidies or offset by

cost reductions through service cutbacks.

OTA assumed a USPS fixed cost of about

36 percent based on the revenue and cost

analysis used in the 1980 rate case before

51
.

52 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service —. —

the Postal Rate Commission (PRC). The

primary fixed costs were estimated by

PRC to be $5.8 billion for USPS institutional costs (e.g., headquarters, postmasters, inspection service) and $1.8 billion

for service-related fixed costs that could

be assigned to various mail classes.’

● Revenue and Cost Per Piece. The 1980

PRC rate case was also used as the basis

for determining revenue and variable cost

per piece. For first-class mail, the per

piece revenue and variable costs were 20¢

and 13¢, respectively.2 The 20¢/piece revenue estimate assumed an 18¢ first-class

stamp.

● Economies of Scale. OTA assumed that

USPS is still operating with economies of

scale, so that mail volume reductions

would tend to increase the per piece cost

of the remaining mail. If mail volumes

reached or exceeded the optimal capacity

of the system, then volume reductions

might actually reduce rather than increase the per piece cost.

● Inflation. Clearly, inflation will cause

postal costs to rise, and presumably rate

increases will be necessary to keep up

with inflation (to the extent that increased

costs are not offset by improved productivity). For the purposes of this analysis,

future revenues and costs are expressed

‘Postal Rate Commission, Opinion and Recommended Decision, docket No. R-80-1, p. 222.

‘Ibid., app. G, schedule 1, p. 1.

●

●

●

in “constant dollars. ” Changes, too, are

expressed in so-called “real” revenues or

“real” costs—net of changes due to inflation.

Public Service Subsidy. For the purposes

of this analysis, the postal public service

subsidy level was held constant at the

$692 million level assumed by PRC in the

1980 rate case.3 At the present time, there

are no proposals to increase the subsidy;

in fact, the Omnibus Budget and Reconciliation Act of 1981 has reduced the

authority for such appropriations to zero

by fiscal year 1984.

Productivity. In terms of costs, any overall productivity improvements with respect to conventional mail were assumed

to be offset by increases in the cost of capital and increases in real wages. Productivity gains due to the introduction of

EMS were considered as part of the revenue/cost model for electronic mail.

Use of the Model By using the 1980 estimates of per piece first-class mail cost and

applying this to future projections of

USPS volumes for conventional first-class

mail, future costs were calculated in 1980

dollars. Likewise, by using the 1980 estimate of per piece first-class revenue and

applying this to projected mail volumes,

future revenues were calculated in 1980

dollars.

‘Ibid.

USPS Revenue/Cost Model for

First-Class Electronic Mail

In addition to a projected volume of conventional mail, USPS will deliver some volume of

electronic mail (defined as Generation II EMS

hardcopy). Thus, it was also necessary to develop revenue and cost assumptions for USPS

electronic mail services. The cost consists of

two parts: the cost for the USPS electronic

portion of the system (including printing and

enveloping), and the USPS mainstream cost of

delivering the hardcopy.

For the mainstream portion, OTA assumed

a cost displacement of 5¢/first-class piece,

based on 1980 PRC estimates of the cost

displacement for Mailgram.4 That is, the

mainstream cost of Generation II would be 8¢,

4

1bid; according to Frank Heselton, USPS Manager of Revenue and Cost Analysis, the 8@/piece Mailgram cost includes

only delivery and administrative costs. When the cost of operating Mailgram teleprinters is included, the per piece cost increases to about 24$.
Ch. 5—Revenue/Cost Model and Results ● 53

5¢/piece less than the mainstream cost of conventional mail. The 5¢/piece cost displacement

is also reasonably consistent with estimates

made by RCA for a USPS electronic system

(specifically the electronic message service system (EMSS) concept).’

For the electronic portion, OTA did not independently verify either the RCA estimates

for EMSS or the USPS estimates for electronic computer-originated mail (E-COM). Therefore, cost estimates were developed only for

‘RCA Government Communications Systems Division,

EMSS System Analysis Task AB, VOL II, (%st and Service

Impact of System Decentralization, October 1977.

USPS delivery of Generation II first-class

hardcopy output.

For average revenue per piece of Generation

II EMS hardcopy output delivered, OTA assumed that the “markup” of per piece revenue

over the per piece cost for EMS must be the

same as the markup for the corresponding

classes of conventional mail. Analysis of the

1980 PRC rate case indicated that the average

per piece revenue level for first-class mail was

roughly 50 percent higher than the per piece

variable cost. This 1.50 factor was used to estimate a 12¢/piece revenue for USPS delivery

of Generation II EMS hardcopy output.

Results of the Revenue/Cost

Analysis for First-Class Mail

Given the first-class mail volume projections

from chapter 4 and using the revenue and cost

models (for both conventional and USPS delivery of Generation II developed above), the

financial impacts on USPS for first-class mail

can be projected.

Figure 9 summarizes the results for the

years 1995 and 2000 for each of the four Generation II EMS alternatives under the baseline

assumptions (2-percent underlying mainstream

growth). The results are also shown for each

alternative under the alternative revenue/cost

assumption alone and in combination with the

100-percent EMS stimulation assumption.

The tabular data in figure 9 gives the mail

volumes for conventional first-class and Generation II EMS first-class with USPS delivery

of industry hardcopy output. The revenues

and costs for these volumes are indicated

along with the contribution of each to USPS

fixed costs. USPS is not allowed to make a

profit overall, but individual classes and subclasses of mail do make varying contributions

to fixed costs. First-class mail historically has

made the largest contribution of any class of

mail, and thus the continuing ability of firstclass mail volumes to generate a substantial

contribution appears to be very important to

overall USPS financial stability. In fiscal year

1980, the first-class mail contribution to USPS

fixed costs was about $4.2 billion, based on an

actual volume of 60 billion pieces and assuming 20¢/piece revenue and 13¢/piece variable

cost.

Basically, the results indicate that by 2000,

for the baseline assumptions, USPS-delivered

first-class mail is projected to contribute between $1.25 billion (for the slow Generation

II EMS growth alternative) to about $1.5 billion (for the very high, high, and moderate

growth alternatives) less to USPS fixed costs

than in fiscal year 1980. Thus, in 2000, for the

high but plausible Generation II EMS growth

alternative, the first-class mail contribution is

projected to be about $2.76 billion, which is

$1.44 billion less than the contribution in 1980.

If a 3-percent underlying mainstream rate is

assumed, in 2000 the net reduction in firstclass mail contribution for the high but plausible growth alternative would be less but still

significant. As shown in figure 10, under the

3-percent growth assumption, the first-class

mail contribution is projected at $3.46 billion, which is about $750 million below the

1980 contribution. With a l-percent underlying mainstream growth, the first class mail

97-918 f) - 82 - 5
54 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Figure 9.–Contribution of USPS-Delivered First-Class Mail (conventional plus Generation II EMS) to USPS

Fixed Costs (assuming 2°/0 underlying mainstream growth)

9

8

7

6

5

4

3

2

1

<

0
Ch. 5—Revenue/Cost Model and Results ● 55

Figure 10.—Contribution of USPS-Delivered First. Class Mail to USPS Fixed Costs for High But Plausible

Generation II Growth Alternative (assuming 1%, 2%, and 3% underlying mainstream growth)

s

1980 contribution

of first-class mail

s

II

to USPS fixed costs

—— —— _L —

,> j 1% 2% 3% 1% 2% 3%

Conventional first-class with 20¢/piece revenue, 13¢/piece cost ..’ ”

Volume (billions of pieces) . . . . . . . . . . . . ....39.49 47.15 56.20 25.81 32.37 40.51

Revenue ($ billions) . . . . . . . . . . . . . . . . . . . . . . 7.90 9.43 11.24 5.16 6.47 8.10

Variable cost ($ billions) . . . . . . . . . . . . . . . . . . 5.13 6.13 7.31 3.36 4.21 5.27

Contribution to fixed costs ($ billions) . . . . . . . 2.77 3.30 3.93 1.80 2.26 2.83

>* “; Generation II EMS first-class with 12¢/piece revenue, 8¢/piece cost

Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.42 13.64 14.78 9.98 12.51 15.65 “ ‘ ‘

Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.37 1.64 1.77 1.20 1.50 1.8 8

!. Variable cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.91 1.09 1.18 0.80 1.00 1.25

‘ . . . . Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.46 0.55 0.59 0.40 0.50 0.63

. .- Total first-class contribution to fixed costs. . . . . 3.23 3.85 . . . .’ 4.52 2.20 2.76 3.46

. ,.F k:” :“ : ‘ . .’ W’ ‘ ‘

‘. ,.

SOURCE. Off Ice of Technology Assessment,

contribution would be $2.2 billion, a full $2 would appear to be quite significant considerbillion below the 1980 level. ing that the total public appropriation (public

service subsidy plus revenue forgone) to USPS

How significant is a $0.75 billion, $1.25 bil- for fiscal year 1980 was about $1.6 billion. The

lion, or $1.50 billion reduction in first-class fiscal year 1980 revenue forgone appropriation

mail contribution to USPS fixed costs? It (to offset revenue losses from mail service pro-
56 ● lmplications of Electronic Mail and Message Systems for the U.S. Postal Service

tided at reduced rates, primarily nonprofit second-class mail, nonprofit bulk rate third-class

mail, library materials, and free mail for the

blind and handicapped) alone was $0.782 billion. And the incremental cost of delivery 6

days per week compared to 5 has been estimated by USPS to be about $0.65 billion.

In other words, the projected reduction in

first-class mail contribution in 2000 is roughly

equivalent, under the baseline assumptions,

to the combined 1980 public service and revenue forgone appropriation, or to the revenue

forgone appropriation plus the cost of Saturday delivery, or the equivalent. Under the

3-percent mainstream growth assumption, the

reduction in first-class mail contribution is

roughly equivalent to the 1980 public service

subsidy, or the revenue forgone appropriation,

or the cost of Saturday delivery.

In general, as long as Generation II first

class costs less per piece than conventional

first class but has the same markup of revenue

over cost per piece (50 percent), the first-class

mail contribution to USPS fixed costs will decline as Generation II volume increases (assuming Generation II EMS costs USPS less

than conventional.) Thus, as indicated in figure

9, the first-class contribution is greater for the

slow Generation II EMS growth alternative

than for the high or very high growth alternatives.

The financial contribution of Generation II

EMS could be increased if the rate for USPS

delivery of EMS hardcopy output were the

same as the rate for conventional mail delivery. Up to this point in the analysis, OTA assumed that all cost savings from EMS would

be passed on directly to the EMS user (i.e.,

whoever is paying the postage). Thus, the relationship between EMS first-class mail per

piece revenue and cost was assumed to be the

same as for conventional first-class mail. In

other words, cost savings from EMS were reflected in lower EMS rates rather than in lower

rates for other classes of mail or the mailstream as a whole. As a result, USPS could

not obtain any greater return (“markup” or

contribution to fixed costs) from EMS than

from conventional mail.

Under the alternative revenue/cost assumption tested by OTA, EMS first-class rates

were assumed to be the same as conventional

first-class mail rates. In this scenario, USPS

would, in effect, be pricing Generation II EMS

first-class mail to contribute a higher percentage (or markup) to fixed costs than would conventional mail. Thus, a revenue per piece of

20@ was used for EMS instead of 12¢. As

shown in figure 9, when using the alternative

revenue/cost assumption, the high, very high,

or moderate growth alternatives would result

in an additional first-class mail contribution

of roughly $1 billion in 2000 (compared to the

projected contribution under the baseline assumptions). This level would still be a few hundred million dollars below the current firstclass mail contribution to fixed costs. Note

that the analysis also assumed no loss in EMS

volume due to the higher USPS rates. If EMS

users were sensitive to the increase from 12

to 20¢/piece (for USPS delivery of Generation

II hardcopy output), then the increased revenue from higher rates might be offset by reduced revenue from lower volume.

If 100-percent EMS stimulation is also assumed (each Generation II message stimulates

an additional new message), the first-class mail

contribution to fixed costs in 2000 would be

significantly higher than the 1980 contribution, by as much as $1 billion for the high and

moderate growth alternatives and $1.5 billion

for the very high growth alternative. These

projections are included in figure 9. This

scenario would enable USPS to use net revenues from Generation II EMS to help keep

down overall rates for conventional mail, even

in the face of the declining conventional mail

volumes projected for 2000. However, as noted

in chapter 5, the 100-percent EMS stimulation

assumption is considered speculative at this

time.

Under current USPS pricing policies, to the

extent that private firms transmit Generation

II messages and present them to USPS for
Ch. 5—Revenue/Cost Model and Results ● 57

local delivery, these messages will be delivered veloping, and/or transmission) as well as

as first-class mail at the same rates as for con- physical processing and delivery, USPS would

ventional mail. Thus, the alternative revenue/ establish rates to cover the costs of electronic

cost assumption would apply, and the contri- services plus some markup over costs. This

bution to USPS fixed costs would be 12¢/piece would provide an additional contribution to

rather than 4¢. To the extent that USPS pro- fixed costs. OTA has not estimated or anavides electronic services (e.g., printing, en- lyzed this contribution.
.

Chapter 6

Implications for Postal Rates,

Service Levels, and

Labor Requirements
.—— .

Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Postal Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Service Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Labor Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

TABLES

Table No. Page

10. Projected First-Class Mail Rate Increases or Decreases,

11.

12.

13.

14.

15.

16.

Years 1995 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

USPS Service Levels, Fiscal Year 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Structure of the USPS Labor Force, Fiscal Year 1980 . . . . . . . . . . . . . 65

Changes in USPS Labor Force Requirements for High But Plausible

Generation II EMS Growth Alternative, Year 2000, As a Function of

Underlying Mainstream Growth Rate and Labor productivity

Improvement per Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Projected USPS Year 2000 Labor Force Requirements by Employee

Group, Assuming High But Plausible Generation II EMS Growth,

Z-Percent Underlying Mainstream Growth, and 1.5-Percent Labor

Productivity Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Projected USPS Year 2000 Labor Force Requirements by Employee

Group, Assuming High But Plausible Generation II EMS Growth,

Z-Percent Underlying Mainstream Growth, and 3-Percent Labor

Productivity Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Projected Year 2000 USPS Labor Force Reductions Assuming

2-Percent Underlying Mainstream Growth and 1.5-Percent Productivity

Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

FIGURE

Figure No. Page

11. Sensitivity Analyses of Projected Changes in USPS Labor Force

Requirements for 1995 and 2000 Assuming High But Plausible

Generation II EMS Growth and 1.5-Percent Annual Labor

Productivity Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Chapter 6

Implications for Postal Rates,

Service Levels, and

Labor Requirements

Introduction

Postal rates, service levels, and labor requirements are integrally related. By law, the

U.S. Postal Service (USPS) is required to

achieve break-even operations; that is, revenues should equal costs as nearly as possible.

Thus, postal rates are established at the levels

needed to generate revenues sufficient to cover

projected costs over a given period of time (2

to 3 years in a typical ratesetting cycle). The

projected costs are based on assumptions

about USPS mail volumes and service levels.

The major cost component is labor, which in

Postal

While OTA was not able to do a revenue/

cost analysis for all classes of mail, the results

of the analysis for first-class mail suggest that

under the baseline high but plausible Generation II electronic mail and message system

(EMS) growth alternative, postal rates would

have to increase in constant dollars (net of inflation) after 1995, assuming service levels

were not reduced. As shown earlier in figure

4 (based on the market penetration analysis),

the breakdown of mail by class for the high

but plausible Generation II EMS growth alternative indicates that through the early 1990’s

the split between first-class mail and other

classes would be roughly the same as in 1980.

Reductions in conventional first-class mail

would be largely offset by increases in Generation II EMS hardcopy output delivered by

USPS.

However, by 1995 the net reduction in total

USPS-delivered first-class mail would, for the

fiscal year 1980 accounted for about 85 percent of total USPS costs.1 For the current level

of service, about 60 percent of labor costs are

fixed; that is, are required to maintain the

service level regardless of variations in mail

volume. 2

IAnnual Report of the Postmaster Genera~ fiscal 1980, p. 24.

‘USPS fiscal year 1980 Revenue and Cost Analysis; also see

Robert W. Anthony, et al., Strategy for Decisions: American

Postal Workers Union and the Electronic Information R.evolutioq The George Washington University Program of Policy Science and Technology, Washington, D. C., Mar. 1, 1980, pp. 55-56.

Rates

baseline high growth alternative, require a

small rate increase to maintain the first-class

mail contribution to USPS fixed costs, based

on the chapter 5 revenue/cost analysis (see

figs. 9 and 10). By 2000, the required rate increase could be more substantial, on the order

of 18 percent. If the underlying mainstream

growth turned out to be 1 percent rather than

2 percent, a rate increase of more than 30 percent might become necessary. On the other

hand, for a 3-percent underlying mainstream

growth, the required rate increase in 2000

would be about 7 percent. For illustrative purposes, an 18-percent increase in first-class mail

rates would translate roughly into an increase

of 3.5¢/piece in the conventional first-class

mail rate and a 1.5¢/piece increase in the rate

for delivery of Generation II EMS first class.

These rate increases would recover the projected $1.5 billion shortfall in first-class mail

contribution to fixed costs in 2000 for the

baseline high growth alternative.

61
—.————

62 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Projected rate increases (or decreases) under

various assumptions are summarized in table

10. As shown, using the alternative/revenue

cost assumption (where revenue/piece is the

same for conventional and Generation II hardcopy fist-class delivery, as would be the case

under current USPS pricing policies), a small

rate decrease is projected for 1995. If the

100-percent EMS stimulation assumption also

applied, for the high Generation II growth

alternative, rate decreases of about 16 and 9

percent are projected for 1995 and 2000, respectively. Under these assumptions, the proTable 10.—Projected First-Class Mail Rate

Increases or Decreases, Years 1995 and 2000

1995 2000

High but plausible Generation II EMS growth alternative

Underlying mainstream growth rate

1 percent . . . . . . . . . . . . . . . . . . . . . . . + 10.50/0 + 31.40/0

Underlying mainstream growth rate

2 percent , . . . . . . . . . . . . . . . . . . . . . . + 3.2

Underlying mainstream growth rate

3 percent ... , . . . . . . . . . . . . . . . . . . . – 2.5

Assume alternative revenue/cost

figures. . . . . . . . . . . . . . . . . . . . . . . . . – 6.1

Assume alternative revenue/cost

figures and 100 percent EMS

stimulation . . . . . . . . . . . . . . . . . . . . . – 15.9

Very high Generation ii EMS growth alternative

Underlying mainstream growth rate

2 percent . . . . . . . . . . . . . . . . . . . . . . . + 6.2

Assume alternative revenue/cost

figures. . . . . . . . . . . . . . . . . . . . . . . . . – 9.9

Assume alternative revenue/cost

figures and 100 percent EMS

stimulation . . . . . . . . . . . . . . . . . . . . . – 23.7

Moderate Generation ii EMS growth alternative

Underlying mainstream growth rate

2 percent . . . . . . . . . . . . . . . . . . . . . . . + 2.0

Assume alternative revenue/cost

figures. . . . . . . . . . . . . . . . . . . . . . . . . – 4.4

Assume alternative revenue/cost

figures and 100 percent EMS

stimulation . . . . . . . . . . . . . . . . . . . . . —1 1.8

Slow Generation ii EMS growth alternative

Underlying mainstream growth rate

2 percent . . . . . . . . . . . . . . . . . . . . . . . + 0.3

Assume alternative revenue/cost

figures. . . . . . . . . . . . . . . . . . . . . . . . . – 1.6

Assume alternative revenue/cost

figures and 100 percent EMS

stimulation . . . . . . . . . . . . . . . . . . . . . – 4.3

+ 18.1

+ 7.4

+ 4.9

-9. 2

+ 20.4

+ 2.6

– 14.3

+ 18.1

+ 5.0

– 9.1

+ 14.6

+ 8.4

+ 0.1

( + ) = projected first-class mail rate increase

( -) = projected first-class mail rate decrease

Unless otherwise indicated, 2-percent underlying mainstream growth rate is

assumed.

SOURCE: Office of Technology Assessment; based on data from figs. 9 and 10.

jected rate decreases are even larger for the

alternative representing very high Generation

II EMS growth. Even the slow growth alternative would not require a rate increase in

2000.

In comments to OTA, the Department of

Justice (DOJ) has expressed the view that

USPS could not successfully charge a different

rate for delivery of Generation II as compared

to conventional first-class mail, either legally

under the Postal Reorganization Act’s ratesetting requirements or as a practical operational

matter. Both the Postal Rate Commission and

DOJ reviewers believe that OTA’s alternative

revenue/cost assumption is the most likely

rate basis, absent a change in USPS pricing

policies.

All of the foregoing projections assume

other variables are held constant, including

volume. If first-class volume was sensitive to

rate increases, a volume reduction could result

which might in turn necessitate further rate

increases, and so on. A 20- to 30-percent increase (net of inflation) in first-class rates could

be enough to adversely affect the competitive

position of first-class mail. If second- and

third-class volumes declined significantly, perhaps due to competition from alternative delivery services, additional pressure on rates

would be generated. Also, all of the rate projections are in constant 1980 dollars and do

not reflect increases due to inflation. And the

revenue/cost analysis in chapter 5 assumed

that productivity improvements with respect

to conventional mail would offset increases in

the cost of capital and real wages. Should the

real cost of capital or labor or both exceed the

inflation rate, further upward pressure on

postal rates would be experienced. In addition,

the revenue/cost analysis assumed significant

cost displacement for USPS delivery of Generation II EMS hardcopy output. If the cost

displacement turned out to be less, or if other

kinds of USPS EMS services resulted in a net

real cost increase, the rate projections could

be substantially different. Finally, the revenue/cost analysis assumed that current

USPS service levels would be maintained.
Ch. 6—implications for Postal Rates, Service Levels, and Labor Requirements ● 63

—

However, USPS could choose to reduce service levels and labor requirements rather than

increase rates in the face of declining USPSdelivered mail volume.

Service Levels

Based on projected mail volumes for the

baseline high Generation II growth alternative, it appears that USPS might have to

reduce current service levels significantly after

1995 in order to avoid real rate increases. After

that time, the shortfall in the first-class mail

contribution to USPS fixed costs could become large enough to warrant consideration

of service cutbacks rather than rate increases,

particularly if rate increases would further

reduce USPS mail volume. On the other hand,

if the alternative revenue/cost assumption held

up, and if Generation II EMS could contribute

significantly more per piece to USPS fixed

costs than could conventional mail, then major

real rate increases (net of inflation) or service

cutbacks could be forestalled until past 2000.

This would also be the case if the underlying

mainstream growth was 3 percent rather than

2 percent.

Present USPS service levels are summarized

in table 11. Since the USPS commenced operations on July 1, 1971, the number of days of

delivery per week has remained the same. The

number of post offices, branches, and stations

has declined at a very slow rate. For example,

over the last 5 years, the number of post offices declined at a rate of 1.4 percent per year.3

In contrast, the number of city delivery points

has increased by about 21 percent since 1971,

and the number of rural delivery points by

about 50 percent.4 Since USPS is obligated by

law to provide mail service to all business and

residential addresses in the United States, the

number of delivery points has expanded along

with growth in population and in populated

areas. USPS has instituted some measures,

such as the use of cluster mailboxes, to limit

the increase of delivery points in newly popu3AnnuaJ Report of the Postmaster Gener~ fiscal 1980, p. 31

and Annual Report of the Postmaster Gener4 fiscal 1979, p. 31.

‘Annual Report of the Postmaster General fiscal 1980, p, 10.

Table 11.— USPS Service Levels, Fiscal Year 1980

Service criteria Level of service

Days of delivery per week . . . . . . . . . 6

Number of post offices . . . . . . . . . . . 30,326

Number of branches and stations . . 9,160

Number of city delivery points . . . . . 68.5 million

Number of rural delivery points . . . . 14.7 million

Overnight delivery of local area

mail . . . . . . . . . . . . . . . . . . . . . . . . . 95 percent on time

2-day delivery of 600-mile radius .

mail . . . . . . . . . . . . . . . . . . . . . . . . . 86 percent on time

3-day delivery of cross-country

mail . . . . . . . . . . . . . . . . . . . . . . . . . 87 percent on time

SOURCE: Annua/ Report of the Postmaster Genera/, F/sea/ 1980, pp. 10, 11,

31.

lated areas such as suburban or exurban residential developments.

While OTA did not study USPS service levels in detail, there is some evidence to suggest

that the mail system is nearing capacity. In

other words, there may be limits to the volume

of conventional mail that can be handled

without sacrificing quality of service. For example, a USPS task force concluded that 5-day

delivery “would have a negative impact on

service, including overtime, inconsistent

delivery, delayed deliveries, equipment shortages, inadequate space to store accumulated

mail, and inadequate vehicle capacity.”5 Also,

since 1977 when total mail volume reached

about 92 billion pieces, first-class mail delivery

performance has declined for all but local area

mail. Ontime (overnight) delivery for local area

mail has remained quite stable at about 95 percent, but ontime delivery (2-day) for 600 mile

radius mail has decreased from 90 to 86 percent since 1977. Ontime (3-day) delivery for

cross-country mail has dropped from about 91

to 87 percent.6 The long-term performance

trends since 1973, the year when comparable

‘U.S. General Accounting Office, Implications of Electronic

Mail for the Postal Service’s Work Force, Feb. 6, 1981, pp.

34-35.

‘Annual Report of the Postmaster General fiscal 1980, p. 11.
64 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

—— .—-——— .—.——

delivery data first were collected, indicate that

possibly USPS has reached its peak in terms

of improvement in national delivery performance with the current mail system.7 While performance is dropping off (for other than local

area first-class mail), delivery work hours are

creeping up again after declining for many

years. More specifically, delivery work hours

decreased by about 8 percent from 1970 to

1978 while total USPS delivery points increased by 20 percent during that period. But

since 1978, delivery work hours have increased

by about 4 percent while delivery points rose

by 6 or 7 percent.8

● EMS have several implications for USPS

service levels. On the one hand, the projected

reductions in USPS-delivered first-class mail

for the baseline high Generation II EMS

growth alternative would reduce the year 2000

first-class contribution to USPS fixed costs by

about $1.5 billion and, in turn, could translate

into $1.5 billion worth of service reductions in

order to avoid rate increases. OTA did not

analyze in detail what kinds of service cuts

would save $1.5 billion. However, USPS officials have estimated that delivery 5 days a

week would save about $650 million (1980

dollars). A 1975 General Accounting Office

study estimated that closing 12,000 small and

rural post offices would save $100 million

(1975 dollars),9 and a 1976 congressional study

projected a saving of $1.1 billion (1977 dollars)

for delivery 3 days a week.10 Any of these service changes undoubtedly would be controversial.

‘Ibid.

‘Ibid., p. 12.

Comptroller General of the United States, $100 Million Cbuld

Be Saved Annualy in Postal Operations in Rural Americaj

Washington, D. C., U.S. General Accounting Office, 1975.

‘“U. S., Congress, House Committee on Post Office and Civil

Service, The Necessity for Change, 94th Cong., 2d sess., Dec.

10, 1976, p. 40.

On the other hand, Generation II EMS service could help to improve USPS performance.

To the extent that excessive mail delays now

occur in processing and sorting the large

volumes of conventional mail, Generation II

EMS could help to relieve these strains since

Generation II would bypass many of the processing and sorting steps now required. Presumably, Generation II EMS would also speed

up delivery of mail sent outside the local area

since electronic transmission would be much

faster than physical transport. A fully

deployed nationwide Generation II EMS service could reasonably be expected to provide

l-day delivery nationwide 95 percent of the

time. Cost savings associated with the reduced

sorting, processing, and transportation requirements of Generation II EMS were reflected in the 5¢/piece cost displacement (compared to conventional mail) assumed in the

revenue/cost analysis (ch. 5).

Finally, if Generation II EMS volume was

higher than the baseline and/or if Generation

II EMS made a greater per piece contribution

to USPS fixed costs than conventional mail,

then Generation II EMS could generate

enough revenue to offset the need for service

cutbacks and would contribute to improved

USPS performance at current service levels.

Even if service cutbacks became necessary,

Generation II EMS could help USPS maintain

service to particular geographic areas or types

of customers where full service conventional

mail might be considered too expensive or no

longer cost effective. For example, location of

Generation II EMS terminals in smaller or

more remote post offices could reduce or

eliminate long distance transportation costs

that might become prohibitively high, forcing

the closure of such offices.

Labor Requirements

USPS is a labor-intensive organization. As are primarily determined by three factors—

noted earlier, labor represents about 85 per- USPS service levels, labor productivity, and

cent of total USPS costs. Labor requirements mail volumes. By making assumptions about
—

Ch. 6—lmplications for Postal Rates, Service levels, and Labor Requirements ● 6 5

service levels and labor productivity, it is

possible to estimate the labor requirements for

projected future mail volumes.

As a first step in the analysis, OTA estimated variable and fixed percentages for each

major group of USPS employees. The results

are summarized in table 12, along with the

total number of employees in each group as

of fiscal year 1980. The variable percentage is

the labor component that varies directly with

mail volume. The fixed percentage is the labor

component that is necessary to maintain the

current service levels. The variable and fixed

percentages in table 12 were derived by OTA

directly from the USPS fiscal year 1980 Revenue and Cost Analysis. The variable labor

percentage is based on the direct and indirect

variable attributable cost from the USPS analysis, expressed as a percentage of total accrued costs. The fixed labor percentage is the

sum of specific fixed attributable costs plus

all other institutional costs for each employee

group. The variable and fixed labor percentTable 12.—Structure of the USPS Labor Force,

Fiscal Year 1980

Number of Variable Fixed

Employee grou p

a employees percentage percentag e

Headquarters employees 2,798 0 1000/0

Regional and other field

units . . . . . . . . 6,228 0 100

Inspection service .. . 5,242 0 100

Postmasters. ... . . 28,967 190/o 81

Post office supervisors

and technical

personnel . . . . . 36,481 52 48

Subtotal . . . . 79,716

Post office clerks and

mail handlers . . . . . . . 303,560 86 14

City delivery carriers and

vehicle drivers . . . . 193,730 50 50

Rural delivery carriers . . . . 53,069 27 73

Special delivery

messengers . . . . . . . 2,502 39 61

Building and equipment

maintenance personnel 29,409 45 55

Vehicle maintenance

facility personnel . 4,837 29 71

Total . . . . . . . . . . . . . . . . 666,823 6 1 % 3 9 %

alncludes fu1l- and part-time employees.

bB=ti on Annual Report of the Postmaster General, Fiscal 1980, P. 31, and data

supplied by F. L. Ben Kinney, USPS Manager of Financial Planning.

cB~ed on USPS, Fyao Revenue and Cost Analysis, Cost Se9menfs and Components Workpaperj pp. 742.

SOURCE: Office of Technology Assessment.

ages were reviewed with USPS and found to

be reasonable.

The overall cost split for the entire USPS

labor force was calculated to be 61 percent

variable and 39 percent fixed. This fixed

percentage is somewhat higher than the 36

percent fixed for total USPS costs used in the

OTA revenue/cost analysis (ch. 5). The 36 percent reflects the lower fixed percentages of the

cost components for transportation (primarily air, rail, and highway) and building occupancy (rents, fuel, and utilities). The 61/39 split

for labor is reasonably consistent with actual

data on the relationship between USPS labor

work hours and mail volume changes collected

during 1979 and 1980.11

As a next step, OTA calculated labor productivity index values at 5-year intervals from

1980 to 2000. An average productivity improvement of 1.5 percent per year was assumed as the baseline. USPS labor productivity improved by roughly 3 percent annually

during the 1970’s, and a goal of 3 percent improvement per year has been announced. But

this does not appear to be realistic in view of

the fact that most productivity improvement

from automation and mechanization has already been realized. Even the expanded ZIP

code program, known as ZIP + 4, would

realize a cumulative labor productivity improvement of only 2.3 percent, according to

USPS estimates. 12 For comparison purposes,

labor force requirements were also calculated

for 3.0- and O. O-percent productivity improvement per year.

Employee groups with 100 percent fixed

costs would not vary with mail volume. A total

of only 14,268 employees, or about 2.1 percent

of the total USPS labor force, fall into this

category. Included here would be headquarters, regional, and inspection service

employees. This assumes that current service

levels are maintained. If, for example, a significant number of major post offices were closed,

then some portion of the costs for these employee groups would become variable. In this

1lRobert W. Anthony, et al., op. cit., pp. 55-56,

12* Ch. 2, footnote ~.
—..

66 Implications of Electronic Mail and Message Systems for the U.S. Postal Service

case, the fixed percentage for postmasters

would be lower than the 81 percent shown in

table 12.

Costs for the 303,560 clerks and mail handlers (full- and part-time) would vary significantly with conventional mail volume. The

clerks and mail handlers represent the one

employee group with very limited participation in a Generation II EMS service. Generation II would bypass many of the traditional

mail sorting and processing functions performed by clerks and handlers, but would still

require physical delivery (whether by city or

rural carriers). The cost split for the clerks and

mail handlers is 86 percent variable/14 percent

fixed. Most other employee groups would vary

significantly with total USPS-delivered mail

volume (conventional plus Generation II

EMS). This would include supervisory, maintenance, and technical personnel plus the city,

rural, and special delivery employees. A total

of 320,028 employees, or about 48 percent of

the total USPS labor force, are in this category. This includes part-time and casual employees who function in part to help the USPS

accommodate to fluctuations in mail volume,

for example, at peak holiday mailing periods.

The equation used by OTA to calculate labor

requirements, given the variable labor cost,

labor productivity, and projected mail volume,

is provided in appendix C. In order to simplify

this analysis, clerks and mail handlers were

assumed to vary with total USPS-delivered

mail volume, not just with conventional mail.

This will tend to understate the projected

change in requirements for clerks and mail

handlers and in the total USPS labor force.

Figure 11 presents the projected overall

USPS labor force changes for the years 1985,

1990, 1995, and 2000 under the baseline high

but plausible Generation II EMS growth alternative, and assuming 1.5-percent annual labor

productivity improvement. The projected increase or decrease, expressed as a percentage

change in the total USPS labor force, is shown

for each of the various sensitivity assumptions

used in chapter 4 to develop the USPS-delivered mail volumes on which the labor requirement calculations are based. (See fig. 7

for the corresponding mail volume projections.) The projected labor force reduction

ranges from 2.7 to 22.8 percent in 1995, and

from 13.8 to 34.3 percent in 2000. The base

case (assuming 2-percent underlying mailstream growth) falls roughly in the middle of

the range, with a 12.2-percent labor force

reduction projected for 1995 and a 23.3-percent reduction projected for 2000.

For the base case, this translates into a

reduction of 81,352 employees by 1995 and

155,370 employees by 2000. By comparison,

between 1971 and 1980 the USPS labor force

declined by roughly 65,000 employees. Thus,

the projected rate of reduction under the base

case (high but plausible Generation II EMS

growth, 2-percent underlying mailstream

growth, 1.5 percent per year labor productivity improvement) over the next two decades

would be higher than the rate of reduction experienced during the last decade. However, as

shown in figure 11, if the underlying mailstream growth is 3 percent rather than 2 percent, the labor force reduction in 2000 would

be 13.8 percent or 92,022–significantly less

than the rate of reduction experienced in the

1970’s. On the other hand, if the underlying

mainstream growth rate turned out to be 1 percent or if USPS did not deliver industry Generation II hardcopy output, the labor force

reduction would be about 30 percent, which

translates into 200,000 employees.

Of course, if 3-percent-per-year labor productivity improvement is assumed, the projected labor force reductions would be even

higher or, if zero labor productivity improvement is assumed, labor force reductions would

be lower. The sensitivity of labor force requirements to both labor productivity improvement and underlying mainstream growth

rate is illustrated in table 13 for the high

Generation II growth alternative. As shown,

with 3-percent annual growth in the underlying mainstream and a zero-percent annual labor

productivity improvement, no reduction-and

indeed a small increase—in the labor force requirement is projected for 2000. At the other

extreme, with l-percent underlying mail-
Ch. 6—Implications for Postal Rates, Service Levels, and Labor Requirements ● 67

Figure Il.–Sensitivity Analyses of Projected Changes in USPS Labor Force Requirements for 1995 and 2000

Assuming High But Plausible Generation II EMS Growth and

1.5-Percent Annual Labor Productivity Improvement

I 1 J

i 1990 1995

Year

Sensitivity assumptions Change in USPS labor force

(assume 20/. underlying mainstream (percent of 1980 total employees)

growth unless otherwise indicated) 1985 1990 1995 2000

3% growth in underlying mainstream . . . . . . . . . . . . . . . . . . . + 5.7 + 5.6 – 2.7 – 13.8

100°/0 stimulation of additional Generation II EMS . . . . . . . . + 2.0 + 2.1 – 5.0 – 17.7

EFT growth rates cut in half . . . . . . . . . . . . . . . . . . . . . . . . . . . + 0.7 – 1.5 – 9.4 – 18.3

Generation Ill EMS delayed by 3 years . . . . . . . . . . . . . . . . . . + 1.4 + 0.1 – 6.6 -18. 9

2°/0 growth in underlying mainstream . . . . . . . . . . . . . . . . . . . + 0.6 – 2.4 – 12.2 -23. 3

Generation Ill EMS accelerated by 3 years . . . . . . . . . . . . . . . – 0.8 – 6.8 – 17.6 -26. 7

USPS does not deliver industry Generation II . . . . . . . . . . . . . – 0.7 –6. 8 – 19.2 – 29.0

10/0 growth in underlying mainstream . . . . . . . . . . . . . . . . . . . – 3.7 – 9.4 – 20.1 – 30.9

Second-/third-class mail diversion to alternative delivery. . . – 6.0 -12.2 – 22.8 – 34.3

SOURCE Off Ice of Technology Assessment
——

68 Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Table 13.—Changes in USPS Labor Force

Requirements for High But Plausible Generation II

EMS Growth Alternative, Year 2000, As a Function

of Underlying Mainstream Growth Rate and Labor

Productivity Improvement per Year

Labor productivity

Underlying mainstream improvement per year

growth rate per year 0% 1 .5% 3.0%

3% . . . . . . . . . . . . . . . . . + 2.7% – 13.8% – 25.6%

2% . . . . . . . . . . . . . . . . . – 10,1 – 23.3 – 32.9

1 0/0 . . . . . . . . . . . . . . . . . – 20.4 – 30.9 – 38.6

NOTE. Changes In labor force requirement expressed as percentage In.

crease ( + ) or decrease ( – ) from 1980 USPS labor force

SOURCE: Office of Technology Assessment

stream growth and 3-percent productivity improvement, a very substantial 38.6-percent

reduction in labor force is projected in 2000.

However, only about half of this reduction

would be due to declining mainstream volume,

with the other half due to labor productivity

improvement.

Labor requirements could be calculated for

every separate employee group under various

assumptions in any future year specified. OTA

estimated detailed labor force requirements in

2000 for the base case (high but plausible Generation II EMS growth alternative, 2-percent

underlying mainstream growth, 1.5-percent

labor productivity growth) and for the base

case modified to assume a 3-percent annual

labor productivity improvement. Actually, as

indicated in table 13, in terms of overall projected labor force changes, the base case is

roughly the same as the 1-percent mailstream/

O-percent labor productivity and 3-percent

mainstream/3-percent labor combinations. The

2-percent mainstream/3-percent labor productivity is about the same as the 1-percent mailstream/1.5-percent labor productivity combination.

As summarized in tables 14 and 15, the projected net reduction in the total USPS labor

force for these two cases is about 158,000 and

223,000 employees, respectively, with a remaining labor force in 2000 of roughly 506,568

and 452,813 employees.

The projected labor force reductions are not

spread evenly among all employee groups.

Almost two-thirds of the reductions would be

from the post office clerks and mail handlers

group--99,900 and 141,000, respectively, for

the two cases shown in tables 14 and 15. This

is because the work of clerks and mail handlers

is more directly related to mail volume than

any other employee group. In addition, USPS

delivery of Generation II EMS probably

would not require many of the sorting and

Table 14.—Projected USPS Year 2000 Labor Force Requirements by Employee Group, Assuming High But

Plausible Generation II EMS Growth, 2-Percent Underlying Mainstream Growth, and 1.5-Percent Labor

Productivity Improvementa

Percentage Number of Employees

change reduction from year 2000

Employee group year 2000b

fiscal year 1980 total

Headquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 2,800

Regional and other field units . . . . . . . . . . . . . . . . . . . . . . 0 0 6,220

Inspection service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 5,240

Postmasters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –7.3”!0 –2,120 26,900

Post office supervisors and technical personnel. . . . . . . – 19.9 –7,260 29,220

Post office clerks and mail handlers . . . . . . . . . . . . . . . . . --32.9 –99,900 204,000

City delivery carriers and vehicle drivers . . . . . . . . . . . . . – 19.1 –37,000 157,000

Rural delivery carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 10.3 –5,470 47,600

Special delivery messengers . . . . . . . . . . . . . . . . . . . . . . . -- 14.9 –373 2,130

Building and equipment maintenance personnel . . . . . . -- 17.2 –5,060 24,400

Vehicle maintenance facility personnel . . . . . . . . . . . . . . – 11.1 –537 4,300

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -

– 158,000 510,000

aRou@lY ~qulvalent tO s.p~rceflt mailstreafn growth/3-percent productivity improvement and l-percent mainstream growthlo-percent probductlvity improvement.

Based on total year 2000 USPSdellvered mail volume of 88.5 bllllon.

NOTE: All numbers rounded to three significant figures.

SOURCE: Off Ice of Technology Assessment.
Ch. 6—implications for Postal Rates, Service Levels, and Labor Requirements ● 69

Table 15.—Projected USPS Year 2000 Labor Force Requirements by Employee Group, Assuming High But

Plausible Generation II EMS Growth, 2-Percent Underlying Mainstream Growth, and 3-Percent Labor

Productivity Improvementa

Percentage Number of Employees

change reduction from year 2000

Employee group year 2000b

fiscal year 1980 total

Headquarters employees . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 2,800

Regional and other field units . . . . . . . . . . . . . . . . . . . . . . 0 0 6,220

Inspection service . . . . . . . ., ... , ... , , . . . . . . . . , . . . . . 0 0 5,240

Postmasters. . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . – 10.20/0 –2,960 26,000

Post office supervisors and technical personnel . . . . . . . – 28.0 – 10,200 26,300

Post office clerks and mail handlers . . . . . . . . . . . . . . . . . –46.4 – 141,000 163,000

City delivery carriers and vehicle drivers . . . . . . . . . . . . . – 27.0 –52,300 141,000

Rural delivery carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 14.6 – 7,750 45,300

Special delivery messengers . . . . . . . . . . . . . . . . . . . . . . . – 21.0 –525 1,980

Building and equipment maintenance personnel . . . . . . – 24.3 – 7,150 22,300

Vehicle maintenance facility personnel . . . . . . . . . . . . . . – 15.6 –755 4,080

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 223,000 444,000

aRoughly qe uivalent to 1-percent mainstream growthll .5-percent productivity improvement.

bBased on total year 2000 USPS-delivered mail volume of 88.5 billion.

NOTE: All numbers rounded to three significant figures.

SOURCE Office of Technology Assessment

processing functions now performed by clerks

and mail handlers. A lesser but still significant

percentage (almost one-quarter) of the total

employee reductions would be in the city delivery carrier group.

Overall, the clerks and mail handlers could

be reduced by about 33 to 46 percent of their

1980 complement, respectively, for the two

cases in tables 14 and 15. Post office supervisors could be reduced by about 20 to 28 percent, and city delivery carriers by 19 to 27

percent.

The projections in tables 14 and 15 do not

reflect any addition of employees for operation

of USPS Generation II EMS facilities. RCA

estimated that 5,000 new USPS jobs would

be created if a USPS Generation II EMS service were fully deployed.13 OTA did not independently verify this estimate. However, it

seems clear that, qualitatively, any increase

in USPS employees for Generation II operations would be very small compared to the projected employee reductions.

—.

19The RCA study conducted for USPS estimated that 5,000

new USPS jobs would be created through full deployment of

the EMSS. See RCA, IWctronic Message Service System:

Growth and Economic Analyses, 1977.

Up to this point, all the discussion and analysis of projected labor force requirements has

been in terms of the high but plausible Generation II EMS growth alternative. OTA conducted additional sensitivity runs to determine if the labor force changes would be

significantly different under very high, moderate, and slow growth alternatives. The results are summarized in table 16. Basically,

the net reduction in the overall USPS labor

force would not change unless the 100-percent

EMS stimulation factor applies. That is, if

each Generation II EMS message stimulates

a new Generation II message, then the overall

labor force reduction would be somewhat less

for all alternatives. The labor force reduction

would then be smallest (–15.3 percent) for the

very high Generation II growth alternative

and largest ( – 20.4 percent) for the slow

growth alternative.

Whether or not these labor force reductions

could be handled through attrition depends

largely on future USPS retirement, quit, and

new hire rates. In recent years, retirements

have averaged about 4 percent of the full-time

labor force and about two-thirds of all separations.” However, over the last 10 years, net

“U.S. Department of Labor, “The Labor Impact of Instituting Electronic Mail Systems in the United States Postal

Service” pp. 9-10, paper prepared for the 1979 Presidential)

Review Memo on USPS electronic mail policy.

97-918 0 - 82 - 6
. . ..

70 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Table 16.—Projected Year 2000 USPS Labor Force Reductions Assuming 2-Percent

Underlying Mainstream Growth and 1.5. Percent Productivity Improvement

USPS mail volume

in billions of pieces

Conventional Generation II Labor force

EMS alternative mail mail Total reduction

High but plausible growth . . . . . . .

Very high growth . . . . . . . . . . . . . .

Moderate growth . . . . . . . . . . . . . .

Slow growth . . . . . . . . . . . . . . . . . .

High but plausible growthb 

. . . . . .

Very high growthb

, . . . . . . . . . . . . .

Moderate growthb 

. . . . . . . . . . . . .

Slow growthb

. . . . . . . . . . . . . . . . . .

75.1 .- . -- . -- - .

69.9

75.2

81.8

75.1

69.9

75.2

81.8

13. 4

18.6

13.3

6.7

26.9

37.2

26.7

13.4

88.5 – 23.3 ”/0

88.5 – 23.3

88.5 – 23.3

88.5 – 23.3

102.0 – 17.5

107.1 – 15.3

101.9 – 17.5

95.2 – 20.4

aExPressed as a percentage of 1980 employee levels

bAs~umes loo-percent” EMS stimulation.

SOURCE: Off Ice of Technology Assessment.

separations (retirements plus quits minus new

hires) have averaged slightly under 1 percent.

This would be adequate to absorb the projected labor reductions for the baseline alternative (assuming 2-percent mainstream growth

and 1.5-percent productivity improvement).

But any significant drop in the retirement

and/or quit rates would mean fewer new hires,

restricted promotion opportunities, and limited upward mobility. If the labor force reduction was higher than the baseline, a further

cutback in new hires would be necessary. The

adjustment could be quite difficult for groups

that would be affected most, such as clerks

and mail handlers. All of these conditions

could adversely affect employee morale and

complicate future contract negotiations, and

deserve serious attention by USPS management and labor unions.

There is some evidence to suggest that retirement rates may decline in future years. As

of 1980, the age distribution of the USPS

workforce shows a bimodal distribution with

peaks at about age 58 and age 33. This means

that a peak has been passed in terms of the

numbers of employees reaching retirement

eligibility (age 55). Of course, many employees

wait until age 62 or 65 to retire. The age

distribution suggests that, for the next 17

years or so, decreasing although still significant numbers of USPS employees will be

reaching retirement eligibility each year.15 In

addition, the removal of mandatory age 70

retirement restrictions may encourage some

employees to work longer, and the poor state

of the economy could discourage retirements

and quits. Whether or not this poses a problem

would depend on the actual retirement and

quit rates in the late 1980’s and early 1990’s,

the time when the need for significant labor

force reductions (due to declining USPS-delivered mail volume) is first likely to be felt.

Finally, as noted earlier, the impact of labor

force reductions would fall unevenly on the

various employee groups. For example, the

mail handlers would be hit especially hard,

since to a substantial extent their current

skills would not be needed in processing electronic mail. This might be one employee group

where retraining opportunities for possible

EMS jobs might be emphasized. Another related concern is that, as of late 1978, the mail

handlers as a group had one of the highest

percentages of black employment, more than

double the USPS-wide average.16 Thus, the

possibility exists that labor reductions might

fall disproportionately on black and perhaps

other minority employment. This possibility

warrants further study.

“Ibid., p. 8.

“Ibid., p. 11.
Chapter 7

Implications for the

Telecommunication and

Computer Industries, EMS

Privacy and Security, and

USPS Long-Term Viability
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Telecommunication and Computer Industries . . . . . . . . . . . . . . . . . . . . . . . . 73

Fairness of USPS Role in EMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Legality of USPS Role in EMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Competition Between Generations II and III . . . . . . . . . . . . . . . . . . . . . . 77

Innovation and Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

EMS Privacy and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

USPS Long-Term Viability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Chapter 7

Implications for the

Telecommunication and Computer

Industries, EMS Privacy and

Security, and USPS Long-Term

Viability

Introduction

Although the primary emphasis of this electronic mail and message systems (EMS)

study is on the U.S. Postal Service (USPS) on the telecommunication and computer inmailstream and on rates, service, and labor, dustries, EMS privacy, and the long-term viaa discussion of the effects of a USPS role in bility of the Postal Service is included.

Telecommunication and Computer Industries

A major concern expressed in regulatory

and judicial proceedings by a number of private sector telecommunication firms, and

more recently by data-processing and computer firms, has been that a USPS role in EMS

would constitute unfair and perhaps even illegal competition with private industry.

Fairness of USPS Role in EMS

Private firms argue that USPS has the following advantages: 1) the Private Express

Statutes (PES), which protect certain mail

services from competition; 2) exemption from

income taxes; 3) access to the U.S. Treasury

for investment funds; 4) public funds appropriated by Congress; and 5) a cost and ratesetting

process that is complex and difficult to understand, which makes cross-subsidies possible

between different classes of mail.

On rebuttal, USPS has pointed out that the

PES protect only letter mail from competition,

and then only if it is carried over postal routes

and is not time sensitive. A number of competitive alternatives to the USPS letter delivery

services exist that are legal and apparently

viable. These alternatives include private special messenger services; electronic message

alternatives such as telephone, telegraph,

telex, and privately offered “electronic mail”

services; and certain kinds of media advertising (by newspaper, radio, or television) when

serving as a substitute for first-class or thirdclass advertising mail or direct mail solicitations.1

Competitive alternatives to USPS nonletter

mail include local and regional private delivery

services and successful nationwide delivery

services such as United Parcel Service (UPS),

Federal Express, and Purolater. In some market segments, such as surface delivery of parcels, the competitive impact on USPS has been

severe. For example, in 1957, USPS delivered

about 64 percent of total parcel volume and

UPS about 36 percent. By comparison, in

1977, USPS delivered only about 23 percent

‘See USPS Marketing Services Division, Competitors and

(%mpetition of the USPS, vol. XII, September 1978 and updated yearly.

73
74 . Implications of Electronic Mail and Message Systems for the U.S. Postal Service

of total volume while UPS delivered 77

percent.2

Thus, the so-called “postal monopoly” provided to USPS under the PES is limited to

only a few of the many classes of mail service

offered by USPS. Available evidence suggests

that even among these protected services

USPS market power is eroding in the face of

competitive alternatives, both electronic and

nonelectronic. 3 Nonetheless, the Department

of Justice (DOJ), among others, believes that

there is a significant chance that a USPS EMS

offering (such as E-COM) could be subsidized

by revenues from the USPS monopoly on delivery of first-class letter mail.

If E-COM were priced artificially below

what it costs, DOJ believes that E-COM

might be used at the expense of both conventional first-class mailers and the taxpayers (to

the extent that USPS continues to receive

public funds appropriated by Congress). DOJ

also argues that underpricing of E-COM might

discourage other firms from offering a similar

service, thereby decreasing competition. In

general, the DOJ position is that the existing

regulatory structure and oversight process do

not provide adequate safeguards against the

impacts of E-COM that could be anticompetitive and discriminatory.

With respect to taxes, as an independent

Federal Government agency USPS is not legally subject to Federal or State income taxes.

Whether or not this is a real competitive advantage is a matter of dispute. USPS argues

that under the Postal Reorganization Act and

current ratesetting procedures it is effectively prohibited from making a profit; thus, even

if it were subject to income taxes USPS generally would pay none because it would have no

taxable net income. Also, while USPS does not

pay property taxes on USPS-owned property,

some State and local property taxes are paid

indirectly when USPS is the lessee rather than

the owner. Finally, USPS points out that it

does not benefit from tax advantages (such as

accelerated depreciation) available to private

‘Ibid., p. 25.

‘Ibid.

firms, and that any advantage from tax exempt status is more than offset by the costs

of service and regulatory requirements imposed on it by the Postal Reorganization Act.4

Still, to the extent that private EMS firms are

profitable and pay income and other taxes,

such taxes represent a cost not incurred by

USPS. Some firms believe that nonprofit

status offers USPS a price advantage over

private competitors.

On the subject of access to the U.S. Treasury for investment purposes, the Postal Reorganization Act authorizes USPS to issue and

sell obligations not to exceed $10 billion outstanding at any one time. As of September 30,

1980, USPS long-term debt totaled about

$1.84 billion, consisting of $250 million in

Postal Service bonds and $1.59 billion in notes

payable to the Federal Financing Bank.5

USPS observes that “private industry obtains

various forms of financial aid including loans

from the Treasury. Moreover, private firms do

not operate under the same statutory or practical limits on their borrowing authority as

does the USPS.”6 In addition, the Secretary

of the Treasury has the option not to pledge

the full faith and credit of the U.S. Government for USPS bond issues if the Secretary

determines that it would not be in the public

interest, although the Secretary has never exercised this option. Clearly, USPS competitors

do not have comparable access to the U.S.

Treasury for purposes of long-term borrowing,

a factor that becomes even more significant

when money is tight and interest rates are

high.

USPS also receives annual appropriations

from the U.S. Government as authorized by

the Postal Reorganization Act. In fiscal year

1980, the annual appropriations totaled $1.6

billion, which included $828 million for public

service costs and $782 million for revenue forgone due to free and reduced rates for certain

mail services.7 Some USPS competitors have

‘Sept. 18,1980, letter to OTA from Charles R. Braun, USPS

Assistant General Counsel, pp. 11-12.

‘Annual Report of the Postmasta General fiscal 1980, p. 21.

‘Letter from Braun, op. cit., p. 11.

7Annual Report of the Postmaster General fiscal 1980, p. 24.
Ch. 7—Telecommunication and Computer Industries, EMS Privacy and Security, and USPS Long-Term Viability ● 75

argued that this constitutes an unfair public

subsidy to the USPS. However, the revenue

forgone subsidy is intended to reimburse the

USPS for the revenue given up or “forgone”

as a result of providing mail service free (for

the blind and handicapped) or at a reduced rate

(e.g., for library materials, nonprofit bulk mail,

and classroom publications), as required by the

Postal Reorganization Act.

Likewise, the public service subsidy is intended to reimburse USPS “for public service

costs incurred by it in providing a maximum

degree of effective and regular postal service

nationwide.”8 In any event, the public service

subsidy was reduced from $828 million in fiscal year 1980 to approximately $468 million

in fiscal year 1981. * The fiscal year 1982 continuing resolution provided a public service appropriation of about $221 million, and the Omnibus Budget and Reconciliation Act of 1981

reduced the public service authorization to

$100 million for fiscal year 1983 and $0 for fiscal year 1984. The phasing out of the public

service subsidy minimizes or eliminates any

competitive advantage this may have given

to USPS. DOJ and some private firms have

expressed concern that there is nothing to prevent a future administration and Congress

from reinstituting the subsidy, thereby possibly resulting in a significant USPS advantage over private industry in any competitive

activity.

The USPS cost and ratesetting process is

admittedly complex, which has led some private firms to be concerned about possible hidden cross-subsidies. These firms are particularly concerned about cross-subsidies from conventional mail services to EMS services; that

is, the use of revenues from conventional mail

to subsidize EMS costs which would keep

down the rates for EMS services. OTA has not

independently verified USPS costs and revenues by class of mail. However, the Postal Reorganization Act generally prohibits crosssubsidization between classes of mail and includes the requirement that “each class of mail

or type of mail service bear the direct and indirect postal costs attributable to that class

or type plus that portion of all other costs of

the Postal Service reasonably assignable to

such class or type.”9

In addition, all USPS rate requests are subject to usually extensive and lengthy hearings

conducted by the Postal Rate Commission

(PRC) at which all postal rates (for all classes

of mail and service) normally are considered.

Many USPS competitors and mail users participate in these hearings, along with USPS,

PRC and the Officer of the Commission

(charged with representing the interests of the

general public), and occasionally other Government agencies (such as, in the E-COM proceeding, the Departments of Commerce and Justice). Given the statutory requirements and

the adversary regulatory process in which all

interested parties are represented (and which

itself is subject to judicial review), postal

cross-subsidies would seem to be rather difficult to hide. Nonetheless, there is no absolute

guarantee against cross-subsidies since the allocation of indirect and institutional costs is

always somewhat arbitrary (in any organization), and the statutory criteria included in the

Postal Reorganization Act may not be necessarily as applicable or appropriate now as they

were when it was enacted in 1970. Some private firms are concerned that the rates initially set for E-COM service do not fully reflect

the actual costs, and that at the present time

there may be a hidden cross-subsidy of E-COM

by other classes of mail. OTA has not independently evaluated this concern. However,

the public record indicates that the PRC approved the E-COM rate of 26¢ based on an estimated capital cost of $7.4 million and first

year volume of 12.5 million messages (240,000

per week). In comparison, the actual capital

cost of E-COM is apparently close to $39 million, with volume averaging about 25,000 messages per week for the first 6 months of 1982.

8

1 bid., p. 20.

*$1,25 b~on continuing appropriation ta USPS for fiscal year

1981 less $782 million revenue forgone subsidy.

’39 USC 3622(b)(3). Institutional costs are also apportioned

by class or service based on statutory criteria.
.———.—

76 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Legality of USPS Role in EMS

From a strictly legal perspective, some private firms have argued that a USPS role in

EMS (other than delivery of hardcopy output)

is beyond the mandate of the Postal Reorganization Act of 1970, and is in direct conflict

with Federal Communications Commission

(FCC) regulations promulgated pursuant to

the Communications Act of 1934 and with Office of Management and Budget regulations

concerning Federal Government procurement

of goods and services from and competition

with the private sector.

The Postal Reorganization Act mandates

USPS to “provide prompt, reliable, and efficient service,“ “give the highest consideration

to the requirement for the most expeditious

collection, transportation, and delivery of important letter mail,” and “emphasize the need

for facilities and equipment designed to create

. . . a maximum degree of convenience for efficient postal services . . . and control of costs

to the Postal Service.”10 Thus, USPS views its

use of electronic equipment and technology as

consistent with the Postal Act and as a simple extension of its prior use of, for example,

automated sorting machines to carry outpostal policy as defined in the act. From this

perspective, EMS technology would be considered, along with the stagecoach, pony express,

railroad, truck, and airplane, as another step

in a long succession of new technologies used

to expedite the provision of postal services. No

private firm or Government agency has successfully challenged the USPS interpretation

on legal grounds. In its original Opinion and

Recommended Decision, PRC supported the

use of EMS technology by USPS although it

differed with USPS in the application of that

technology. More specifically, the PRC recommended that USPS provide only the printing,

enveloping, and hardcopy delivery functions

and not the telecommunication function.11

‘“Public Law 91-375, sec. IOl(a), (e), and (g).

“U.S. Postal Rate Commission, Opinion and Recommended

lkbion on Ekxtronic Mad Classification Proposal docket No.

MC78-3, Dec. 17, 1979, pp. 278ff.

The PRC Recommended Decision was based

substantially on its finding that “the general

obligation imposed on regulatory agencies to

consider and promote competitive policies applies to this Commission."12 The PRC decision

was also based on the clearly procompetitive

policy of FCC and the fact that the FCC asserted jurisdiction over the original USPS

E-COM proposal, primarily on the grounds

that it included telecommunication transmission functions to be provided by a telecommunication firm (Western Union), which was

subject to FCC jurisdiction under the Communications Act of 1934.13 PRC concluded that

competition would be best served if USPS did

not provide telecommunications. This also permitted PRC to avoid both a possible regulatory impasse with FCC and any direct concession of FCC jurisdiction over postal services

per se.

USPS subsequently appealed the FCC ruling which asserted jurisdiction over E-COM.

However, the appeal was dismissed and the

FCC ruling vacated as moot by the court in

view of the PRC Recommended Decision and

USPS cancellation of the Western Union contract.* Thus, the court did not rule on the

merits, and the legal jurisdiction of FCC over

USPS involvement in EMS remains unclear.

However, regulatory developments since the

FCC ruling on E-COM suggest that so-called

“enhanced services” such as electronic mail

may not be subject to active FCC regulation

under title II of the Communications Act. In

other words, as long as USPS does not own

and operate its own telecommunication transmission system and uses telecommunication

services of firms who are regulated as providers of so-called “basic services, ” the USPS

EMS offerings would not necessarily be regulated by FCC.14 The applicable FCC decision,

known as Computer II, is still under

regulatory reconsideration and judicial challenge, and also may be affected by congres-

]Z1bid., ~. 52 (caps and underlining removed).

“Ibid., pp. 36-51.

*SW rela~d discussion in ch. 3.

14Dec. 8, 1980, letter to USPS from Philip L. Verveer of FCC.
Ch. 7—Telecommunication and Computer Industries, EMS Privacy and Security, and USPS Long-Term Viability ● 77

sional revision of the Communications Act. As

noted in chapter 2, S. 898 as passed by the

Senate would limit FCC jurisdiction to USPS

EMS services involving USPS leasing of telecommunications from private firms, and then

only to establishing costs of the telecommunication portion of the EMS service and to

assuring that such service is offered by a separate organizational entity within USPS.

More recently, various computer service and

data-processing firms, among others, have expressed concern that a USPS role in Generations I or II EMS, let alone Generation III,

could violate Federal Government policy (expressed, for example, in OMB Circulars A-76

and A-121) that the Government should not

produce goods and services otherwise available from the private sector and should not

compete with private firms, except as a last

resort. USPS has procured the computer and

electronic equipment for E-COM from private

firms, but USPS operation of E-COM is construed by some to constitute a computer-based

electronic message processing service.15 It is

unclear whether or not this is any different

from USPS owning (through purchase from

private manufacturers) and operating its own

fleet of nearly 120,000 vehicles as it does

now. 16

At present, the use of computers and message processing in the E-COM service is internal to USPS, and serves to convert the electronic input to hardcopy output within a given

postal facility. As long as USPS is not involved in telecommunication or electronic delivery, there is no direct competition with private Generation III EMS providers. However,

various Generations I and II electronic mail

providers and computer service bureaus believe that USPS to some extent is competing

with them. These firms have suggested several

alternatives (discussed in ch. 8) to establish

what would be, in their judgment, a cooperative rather than competitive relationship. As

mentioned in chapter 2, H.R. 4758, introduced

‘We Association of Data Processing Service Organizations,

position paper on “Government Provision of Electronic Message Services, ” Feb. 16, 1982.

‘“Annual Report of the Postmaster General fiscal 1980, p. 14.

in the 97th Congress and the subject of extensive hearings by the House Government Operations Subcommittee on Government Information and Individual Rights,17 would appear

to have the effect of prohibiting USPS from

providing data-processing or telecommunication services to non-Federal entities or persons

unless explicitly authorized by statute.

Competition Between

Generations II and III

Other implications for the telecommunication and computer industries are also difficult

to assess. The market penetration projections

suggest that by 2000, even with 100-percent

Generation II EMS stimulation, Generation

III EMS volume (end-to-end electronic mail including electronic delivery) would exceed Generation II EMS volume. The sum of electronic

funds transfer (EFT) (a form of Generation III)

plus Generation III EMS would exceed Generation II EMS by the mid-1990’s. Under the

high but plausible Generation II EMS growth

alternative, as shown in figure 3, Generation

III EMS would surpass Generation II EMS

by 1990, and EFT plus Generation III EMS

would exceed Generation II EMS as early as

1985. However, Generation II EMS volume

could still be substantial in 2000 and beyond,

even though the Generation II market share

would be declining.

To some extent, perhaps until 1990, Generation II EMS would compete with Generation

III EMS for relative but not absolute market

share. In developing the market penetration

model, OTA assumed that development of

Generation III EMS and EFT would be largely independent of the USPS role in EMS (short

of a role in electronic delivery or ownership and

operation of telecommunications). * Preliminary review of the initial responses to the

USPS invitation for telecommunication industry participation in E-COM indicates that

“See statements of Philip M. Walker of GTE-Telenet and

William D. English of Satellite Business Systems before the

Oct. 5, 1981, hearings of the House Government Operations

Subcommittee on Government Information and Individual

Rights.

*See app. A.
78 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

none of the major domestic Generation III

EMS providers (such as Tymnet, GTE-Telenet, or Satellite Business Systems) indicated

a desire for dedicated access to E-COM facilities. Whether this is because of continuing

uncertainty over E-COM rates and service

and/or because they perceive E-COM as irrelevant to, or as a competitive threat to, their

own marketing and product development

plans is not known.

The firms that did respond are primarily

those providing international EMS service

(such as ITT World Communications and

Western Union International) seeking to expand into the domestic EMS market; those already providing a domestic EMS service (such

as Dialcom, Inc., and Graphnet, Inc.) who presumably see E-COM as a way to increase or

at least maintain their own shares of the

domestic market; or those with telecommunication expertise who wish to enter anew market (such as TRT Telecommunications Corp.).

TRT officials see E-COM “as a unique opportunity to participate in a new venture which

has a very large market.”18

Of the firms who actively opposed USPS involvement in EMS, Graphnet is the only one

(as of December 1981) that has indicated an

interest in dedicated access to E-COM. Of

course, other firms will be able to gain access

on a dial-up basis. One major firm with dialup access, Western Union, has recently made

application for dedicated access. Various local

telephone companies have apparently expressed an interest, although AT&T has not.

Even firms that are primarily in the Generation III business could supplement their service through dial-up access to the Generation

II E-COM.*

laRichmd Yden, TRT Telecommunications Vice President,

as quoted in Michael Selz, “Electronic Mail Service Promises

2-Day Delivery, ” The Tampa !lYibunq Dec. 10, 1981, p. 6-B.

*For ~mple, sa~~ Business SYSIX?mS, TYmnet, GTE! ‘d

AT&T among others, already offer or have plans to develop nationwide networks with Generation III electronic mail capability.

Innovation and Standards

Some private firms have expressed concern

that the entry of USPS into the EMS market

might stifle innovation and possibly lead

toward adoption of technically inferior standards in the telecommunication industry. While

these concerns were justified to some extent

with respect to the original USPS proposal for

E-COM, the protracted regulatory proceedings before PRC and FCC have had the effect

of significantly upgrading the E-COM technology. In essence, the regulatory process in this

case had the effect of mandating improvement

in the E-COM design.

The final USPS provisions for interconnection between telecommunication providers and

E-COM facilities at the 25 serving post offices

(SPOs) appear to be substantially responsive

to comments received from private firms. ’g

USPS is providing four different interconnection arrangements for those firms desiring

dedicated access to E-COM facilities, and two

different arrangements for dial-up access at

each SPO. The interconnection arrangements

are summarized in appendix D. The dedicated

access interconnection arrangements appear

to meet the technical needs of most firms that

provided comments to USPS. In addition,

USPS has stated that it “will consider providing additional arrangements as necessary

and feasible” and “will consider requests to

accommodate user-provided interface circuit

boards.” 20 The dial-up access arrangements

will permit dial-up access via any public telephone network.

The E-COM interconnection arrangements

use technical standards that are currently accepted in the industry. Thus, it appears that

while USPS cannot realistically be expected

to be a source of new standards, it is not like-

%ee USPS, “Telecommunications Connection Arrangements

for Postal service Electronic Computer Orginated Mail (E-COM)

Service and Invitation for Capacity Planning Cooperation,”

Federal Registw, vol. 46, No. 199, Thursday, Oct. 15, 1981.

*“Ibid., p. 50879.
Ch. 7—Telecommunication and Computer Industries, EMS privacy and Security, and USPS Long-Term Viability ● 79

ly to impose inferior standards on the industry

as long as current regulatory oversight and

safeguards are maintained.

With respect to technology, the picture is

less clear. The selection of technology (e.g.,

computers and printers) for E-COM was made

by RCA under contract to USPS, not by

USPS itself. Some private firms have questioned whether the best state-of-the-art technology was selected, particularly with respect

to the printing equipment. USPS believes that

the initial E-COM technical configuration was

the best possible using off-the-shelf products

with proven reliability, and given the nature

of the E-COM market. USPS also believes that

it can stimulate innovation in some areas, such

as advanced high-volume printing and enveloping technology, where USPS is one of the

largest users. However, given the relatively

limited expertise of USPS in telecommunication and computer technology, and the rapid

EMS Privacy

The subject of privacy with respect to EMS

includes two components of interest. One is

the legal protection afforded such services, and

the other is the technical vulnerability of such

systems to interception of information, and

the willingness and ability of system providers

to secure these systems against such interception. 21

USPS is required by law to maintain “one

or more classes of mail for the transmission

of letters sealed against inspection.”22 Firstclass mail, priority mail, express mail, and international letter mail are “sealed against inspection.

The sender’s choice of the class of mail service determines whether the contents are

“This section of the report is based in part on a 1980 USPS

memorandum regarding “Applicability of Mail Privacy Legal

Protections to Electronic Mail. ” For additional general discussion see chs. 7 and 8 of the OTA report C%mputer-Based i’Vational Information Systems: Technology and Publik Policy

Issues, OTA-CIT-146, Washington, D. C., September 1981.

2239 USC 3623(d),

rate of private sector development, the

mainstream of technological innovation appears to be beyond the scope of the USPS research and development capability, present or

planned.

As for market innovation, USPS believes

that a Generation II offering like E-COM will

help stimulate innovation by private firms. Indeed, as mentioned earlier, some of the smaller

firms that applied for dedicated access view

E-COM as an opportunity to get into the EMS

market and compete with the larger, more

well-established firms. But various telecommunication carriers and computer service

bureaus have stated that their EMS service

innovation will be stifled unless the relationship with USPS is cooperative rather than

competitive, and have proposed alternatives

(discussed inch. 8) that they believe will encourage maximum innovation in the EMS

market.

and

“sealed

Security

against inspection. ” Generally it does

not matter whether the mail is physically

sealed. The message contents of a postcard are

legally or constructively sealed, as are the contents of letters opened in the dead letter office to determine to whom they might be delivered. The effect of being “sealed against inspection” is to prohibit the mail from being

opened without a warrant, or any use or disclosure of information obtained in the course

of opening a sealed letter without a warrant.

The Supreme Court has held that mail which

is sealed against inspection must be considered as though it had been retained in the

sender’s home. It cannot be opened without

the consent of the sender or addressee, except

under the authority of a search warrant issued

by a court upon probable cause.23

Access to addressor-addressee information,

however, is possible without a warrant. Access

23Exp=& Jac~oa 96 U.S. 727, 732-733 (1877); uni~ s~~s

v. Van Jkeuwen, 397 U.S. 249, 251-252 (1970).
80 Implications of Electronic Mail and Message Systems for the U.S. Postal Service

to the information contained on the envelope

of a letter can be secured by convincing designated postal officials that the “mail cover”--

as this access is called-is needed to locate a

fugitive, to obtain evidence of a crime, or to

protect the national security. According to

USPS, the number of mail covers is declining

and the amount of mail that comes under a

mail cover is very small.

The privacy protection afforded to mail content and addressee-addressor information

passed through a telecommunication system

is less clearly established. First, it does not appear that the postal statutes apply in full

measure to information when it is in electronic

form, perhaps even if the electronic system is

operated by or for USPS and/or if the information is ultimately to be printed out and delivered as first-class mail. This is because of a

distinction between information in tangible or

corporeal form and information that exists in

“incorporeal” form. It is only certain that the

postal statutes apply when the letter is a tangible object.

Electronic communication is afforded a

measure of protection by other statutes, but

the degree of protection is presently somewhat

less than that afforded by the postal statutes.

Further, the application of these other statutes

is confused. Section 605 of the Communications Act of 1934 prohibits the unauthorized

disclosure of any communication by wire or

radio. However, the enforcement of legal protections is more difficult when mail is in electronic form than in physical form and under

the direct supervision and control of USPS.

It seems clear that the postal privacy laws

and regulations would apply when an electronic message is printed out in hardcopy form

at a postal facility, or printed out elsewhere

and deposited into the USPS mainstream. The

hardcopy output when delivered over postal

routes would remain fully protected as long

as it remains in the mainstream. Thus, the

physical delivery of hardcopy output and the

printing and enveloping of the EMS output

at postal facilities would be protected.

However, the telecommunication portion of

the EMS service when provided by private

firms appears to be subject only to the Communications Act and not to the Postal Reorganization Act. Therefore, for services like

E-COM, unless the electronic input of messages to USPS were considered to be an integral part of the service and under USPS jurisdiction, there would seem to be no obvious

basis for applicability of the Postal Act.

On the other hand, where USPS provides

the telecommunication (as well as the printing,

enveloping, and delivery), the electronic portion of a Generation II service could conceivably be protected. USPS notes that the “question of whether these (postal) laws would apply

to the electronic portion of any electronic mail

services offered by the Postal Service has never been authoritatively tested, ” but finds that

“there is little in the laws, however, to suggest that they would not.”24 In other words,

according to USPS the electronic signals apparently could be construed to represent mail

in postal custody even during transmission

over the telecommunication portion of a postal

EMS service. However, some independent privacy analysts dispute this interpretation and

believe that the postal laws do not apply to

the telecommunication portion of an electronic

mail system.

With respect to security, legal safeguards

may offer less than total protection if message

contents can be intercepted by third parties

with little risk of detection. Thus, security

measures are intended to safeguard messages

transmitted through electronic systems to protect against eavesdropping. At the present

time, it is left to the telecommunication carriers to determine the degree of physical and

electronic protection to be provided. Some carriers offer the user the option of encrypting

data, and it maybe that a market or a requirement for such protected communication will

evolve.

z4usps memorandum, “Mail Privacy,” op. cit., pp. 5-6.
Ch. 7—Telecommunication and Computer Industries, EMS Privacy and Security, and USPS Long-Term Viability ● 81

The nature of an EMS service raises some

security concerns beyond those encountered

in conventional mail delivery. Because messages may be stored for some time (1 week in

the case of E-COM), there is the potential for

access to an historical file of traffic. Also, EMS

systems could easily produce extensive data

on sender-addressee patterns. Finally, the

hardcopy output of EMS systems maybe vulnerable to unauthorized inspection at the point

of printing and/or enveloping. None of these

types of security intrusion can be performed

as easily or as efficiently in the conventional

mail system.

In these respects, electronic mail is more vulnerable than conventional mail. Any EMS alternative that involves telecommunications,

whether offered by USPS or by private firms,

faces the threat of interception and monitoring of telephone, microwave, and/or satellite

transmissions. While available data encryption technology can help to secure telecommunication systems, most transmissions at present are unencrypted and therefore interceptable. To the extent EMS services include

growing volumes of sensitive personal, business, and financial information, the incentives

to intercept such messages would increase.

Some security experts have recommended

that USPS provide, in cooperation with telecommunication carriers, an ‘‘electronically

sealed” message service that offers protection

(through encryption) at least equivalent to

that of conventional first-class mail.

Electronic mail is also vulnerable to security threats at the electronic switching and computer locations (including printing and enveloping functions). The security of conventional mail is protected by sealed envelopes,

diligent monitoring of postal employee activities, locked delivery and route mailboxes, and,

as discussed earlier, a variety of postal statutes that provide criminal sanctions for unlawful intrusion by postal employees or private

parties. Additional new security measures will

be necessary at switching and computer centers involved in providing electronic mail.25

“For further discussion of privacy and security, see chs. 4

and 5 of the OTA background paper on Selected Electronic

Funds Transfer Issues: Privacy, Security, and Equity,

OTA-BP-CIT-12, March 1982.

USPS Long-Term Viability

The results of the OTA analysis indicate

that, regardless of what role USPS plays in

Generation II electronic mail, reductions in

conventional mail volume due to diversion to

Generation III EMS and EFT could reach significant levels by 2000. The threat to conventional mail could come even sooner if Generation III EMS services (all electronic) develop

faster than currently anticipated, if the underlying growth in the mainstream is less than the

historical average, or if diversion of secondand third-class mail to alternative (nonelectronic) delivery services increases significantly

beyond current levels.

Moreover, almost surely by 2000, probably

by 1995, and perhaps as early as 1990, Generation III EMS and EFT are likely to catchup

to and pass Generation II while it begins to

decline. At that point, the volume and revenue

“cushion” from Generation II EMS would be

reduced, and significant rate increases and/or

service and labor force reductions would be

likely in order for USPS to maintain a breakeven operation without increased public

subsidies.

Should Congress concern itself about this

possibility now? While the market penetration

projections could change somewhat given different assumptions, the only kinds of changes

that could radically alter the projections would

be a growth rate in the underlying mainstream

50 or 100 percent above the historical average,

or a significant delay in the development and

introduction of Generation III EMS and EFT

services. Neither of these seems very likely in

view of aggressive private sector Generation
82 Implications of Electronic Mail and Message Systems for the U.S. Postal Service

III EMS activity and the continuing economic

trends that work in favor of electronic mail

and against paper-based mail, especially for

first-class letter mail.

For an important institution the size of

USPS, 15 or 20 years is not an excessive lead

time for planning an orderly transition. It can

also be argued that changes are taking place

so fast in the so-called “communications revolution” that by the time USPS actually experienced significant mail diversion, it would be

much more difficult to adjust if steps are not

taken in advance to avoid a crisis situation.

For example, while normal attrition may be

able to accommodate any necessary labor force

reductions over the next 10 or 15 years, after

that time necessary reductions may become

rather severe, particularly for volume-sensitive

groups of employees such as mail handlers,

clerks, and part-time employees. Maintaining

good employee morale and career continuity

would be difficult at best under these circumstances.

As another example, significant mail diversion could undermine the ability of USPS to

carry out its primary mandate “to provide

postal services to bind the Nation together

through the personal, educational, literary,

and business correspondence of the people.”26

Reductions in USPS-delivered mail volume

could generate severe financial pressures

which would force service and labor cutbacks.

This could translate, for instance, into reductions in the number of days of delivery, number of collection points, or number of post offices. Such cutbacks could seriously disadvantage some postal customers who may not have

access to satisfactory electronic alternatives,

or whose mailing needs are not amenable to

electronic transmission.

On the other hand, the projections in chap-s

ter 4 indicate that USPS still is likely to have

a significant though reduced volume of conventional nonelectronic mail in 2000—perhaps

70 billion to 75 billion pieces.27 Thus, it would

‘“Public Law 91-375, sec. IOl(a).

~~~ver~ studie9 have concluded that a significant volume

of paper-based mail will continue almost indefinitely. See Henry

B. Freedman, “Paper’s Role in an Electronic World,” The fitur

seem that, with orderly planning, enough of

the basic USPS infrastructure could be maintained to provide adequate conventional mail

services, although at reduced service levels.

Also, new ways might be identified for USPS

to carry out some of the elements of its statutory mandate, such as to “provide prompt,

reliable, and efficient service to (postal)

patrons in all areas and to render postal services to all communities,”28 and to “provide a

maximum degree of effective and regular postal services to rural areas, communities, and

small towns where post offices are not self-sustaining.” 29

Generation II EMS might be able to help

USPS maintain adequate service levels to

rural and less populated areas that would be

unable to sustain cost-effective conventional

mail service at present levels under reduced

mail volume. Indeed, in some rural and very

remote areas where even Generation II EMS

delivery might be cut back, USPS might consider contracting with Generation III EMS

providers to assure regular electronic delivery

to individual homes and offices or, at a minimum, perhaps to provide self-service electronic hardcopy printers in post offices or

other public locations. Of course, Generation

III EMS providers may find it profitable to

provide such services on their own without

any USPS involvement. These possibilities

warrant further research.

Generation II EMS might also help USPS

maintain reduced rates for certain classes of

mail, such as educational and nonprofit mailings, that have been partially subsidized by

the annual revenue forgone appropriation from

public funds. Even if the revenue forgone subsidy is reduced, the cost advantages of Generation II EMS over conventional mail might permit the continuation of a lower rate to those

many nonprofit and educational organizations

that depend on the mail for their livelihood.

is~ October 1981, pp. 11-16; and Robert W. Anthony, et al.,

An Exploratory Amemment of timputer Asskted Makeup and

Imaging $w~ The George Washington University Program

of Policy Studies in Science and Techology, Washington, D. C.,

Jan. 31, 1980. tafiblic Law 91-375, %. lol(a).

“public Law 91-375, Sec. IOl(b).
Ch. 7—Telecommunication and Computer Industries, EMS Privacy and Security, and USPS Long-Term Viability ● 83

It also seems likely that Generation II EMS

service could help to meet the needs of small

mailers of all kinds, even though the service

may be of greatest absolute economic benefit

to large mailers. For example, as of February

1982, over 90 business mailers had applied to

USPS for technical certification to use E-COM

service, including such high volume mailers as

Shell Oil Co., Equitable Life Assurance Co.,

and Merrill Lynch Pierce Fenner & Smith.

However, at least three of the telecommunication carriers that have applied for dedicated

access (ITT World Communications, TRT

Communications Corp., and Netword, Inc.) intend to offer batch mailings from low-volume

mailers to meet the 200-message minimum

volume requirement for E-COM use. A spokesman for ITT World Communications has indicated that “ITT would allow customers to

mail as few as 25 letters per mailing” and then

consolidate orders to meet E-COM volume requirements. 30

In the longer term, it is possible that a

USPS Generation II EMS capability, perhaps

combined with a scaled-down version of the

‘OSelz, “Electronic Mail, ” op. cit.

USPS infrastructure and delivery network,

could be used to provide other Federal Government services. For example, with proper interconnection and technical enhancements, a

Generation II system might be used by USPS

to provide printing and delivery of various

Government forms and documents.31 This kind

of role would, of course, compete to some extent with functions now carried out by the

Government Printing Office, the National

Technical Information Service, and other Federal agencies, but might prove to be more cost

effective in the long run. This role might even

be extended to include provision of abstracts

of and indexes to Government forms, documents, and other kinds of Government information. These possibilities, too, deserve further study.

‘

] See Robert W. Anthony, Lynne Filderman, Henry Freedman, and Henry H. Hitchcock, Strategy for Decisions: APWU

and the Electronic Information Revolution, The George

Washington University Program of Policy Studies in Science

and Technology, Washington, D. C., Mar. 1, 1980; and Alfred

M. Lee and Arnim H. Meyburg, The Impact of Electronic

Message Zhnsferon USPS Operations, Working Paper No. 3,

Cornell University Program on Science, Technology, and Society, September 1980. Also see “Electronic Computer Orginated

Mail, ” Technology Watch vol. 2, No. 2, December 1981, p. 2.
—. —

Chapter 8

Congressional

Policy Considerations
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Provide a Clear Direction for USPS Involvement in EMS . . . . . . . . . . . . . 89

Impact on USPS-Delivered Mail Volume . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Impact on USPS Finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Impact on USPS Labor Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Space in SPOs for Carrier Output Equipment . . . . . . . . . . . . . . . . . . . . . . 90

Electronic Transmission to SPOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Electronic Delivery to Recipient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Interconnection and Standard Interface . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Transmission Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Marketing of EMS Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Performance Standards for EMS Services . . . . . . . . . . . . . . . . . . . . . . . . . 93

Reduce or Eliminate Further Regulatory and Judicial Delay . . . . . . . . . . . 93

Applicability of Private Express Statutes . . . . . . . . . . . . . . . . . . . . . . . . . 93

Regulatory Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

USPS Subdivision for EMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Privacy Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 96

Maintain Oversight and Initiate Planning on USPS Long-Term Viability 97
Chapter 8

Congressional Policy Considerations

Introduction

Congressional authority over the role of the

U.S. Postal Service (USPS) in electronic mail

and message systems (EMS) derives in the

first instance from the U.S. Constitution

which vests in Congress the power to establish

post offices and post roads (sec. 8, clause 7)

and to regulate commerce among the several

States (sec. 8, clause 3).

USPS operates as an independent Federal

agency pursuant to the Postal Reorganization

Act enacted by Congress in 1970. It is subject to policy direction by the USPS Board of

Governors and to regulatory review of mail

rates and classifications by the Postal Rate

Commission (PRC), both established by the

Postal Act. Private EMS firms operate pursuant to the Communications Act of 1934 and

regulations promulgated by the Federal Communications Commission (FCC) under authority granted by the Communications Act.

Historically, technology has been used to

improve and speed up the processing, transportation, and delivery of mail. Thus, the

railroad, plane, truck, and automated sorting

machine have been integrated into postal operations. The Postal Act reiterates and

strengthens the mandate to use new facilities

and equipment to improve the convenience, efficiency, and cost effectiveness of mail service.

Electronic message technology is viewed from

this perspective as one more step in an evolutionary process of keeping the “post offices

and post roads” up to date and competitive.

Over the last three decades, there has been

a continuing revolution in computer and communication technology, a gradual deregulation

of the telecommunication industry (the computer industry being essentially unregulated),

and a proliferation of new and old firms offering or planning to offer EMS services. Congress has generally encouraged this deregulatory process, and continues to work to revise

the 1934 Communications Act to bring it in

line with current technological, economic, and

competitive realities. During the last decade

and a half, there has also been a concerted effort by Congress, exemplified by the 1967

“Brooks Act” amendment to the Federal

Property and Administrative Services Act and

the Paperwork Reduction Act of 1980, to improve the Federal Government’s management

and procurement of data-processing and related telecommunication equipment and services, and to rely on the private sector for provision of such equipment and services on a

competitive basis wherever possible.

In essence, technological advances have

reached the point where these three originally independent congressional policy directions

are increasingly in conflict. USPS stands near

the center of this conflict. Privately offered

EMS services can and ultimately will compete

with and divert a significant portion of the

USPS conventional mainstream, based on the

market penetration analysis in chapters 3 and

4. Absent any USPS participation, this prospect would likely lead to significant rate increases and/or service and labor force reductions by the year 2000. It seems clear that

USPS can benefit from participation in providing EMS services, and indeed it can be

argued (see ch. 7) that USPS has the statutory

authority to participate as long as the final

output is in hardcopy letter form delivered

over postal roads. But even a minimal USPS

role—delivery of EMS hardcopy output—is of

concern to some private firms if such delivery

is considered subject to the Private Express

Statutes (PES). These firms believe that delivery of hardcopy output is ancillary to communication services subject to the Communications Act as well as the Postal Act.

A larger USPS role that involves message

processing and computer-based printing and

87
88 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

enveloping, as well as hardcopy delivery, apparently troubles portions of the computer industry (particularly computer service bureaus)

because of concern over potential competition

from USPS and the belief that the industry

is willing and able to provide such services.

Should the USPS role extend to the telecommunication portions of an EMS service, then

many telecommunication carriers would view

USPS as a direct competitor. Even with respect to E-COM, where the USPS role does not

include telecommunication, some carriers are

concerned that it was designed to accommodate future functions (e.g., magnetic computer tape input) that are not presently authorized. These carriers believe that any USPS

involvement in telecommunication, whether

directly or by resale, would be subject to the

jurisdiction of the Communications as well as

the Postal Act, and would constitute the entry of a Federal agency into competition with

private industry. The computer service bureaus apparently feel the same way with

respect to USPS provision of message processing.

Reaching a consensus on a role for USPS in

EMS has been further complicated by jurisdictional conflicts between PRC and FCC, PRC

and USPS Board of Governors, FCC and

USPS, and the Departments of Commerce and

Justice and USPS. These conflicts have come

to a head over E-COM, resulting in legal actions brought in Federal court by USPS

against FCC and PRC, and by Justice against

USPS. Various parties, especially telecommunication value-added carriers, have filed

briefs in these judicial proceedings, and before

FCC and PRC in regulatory proceedings on

E-COM, raising substantive issues of ratesetting, potential cross-subsidization, and privacy, among others.

On the other hand, many of the private telecommunication and computer firms who have

been adversaries of USPS also believe that full

development of Generation II EMS depends

on a major role for USPS, but they disagree

with USPS on what that role should be. Various mailer organizations, consumer groups,

and postal labor unions see a USPS role in

EMS as essential to USPS long-term viability and to maintaining, or at least minimizing

any reductions in, mail services that are vital

to a large part of the U.S. population. They

point to the critical role of USPS in providing

a universal, low-cost, nondiscriminatory nationwide communication service that is statutorily mandated by Congress.

Based on interviews with many of the stakeholders and USPS, as well as a comprehensive

review of the historical record, OTA has concluded that, absent congressional action, the

controversy over the USPS role in EMS is likely to continue. Although the U.S. District

Court of Appeals has denied a Justice petition

to block E-COM, further regulatory proceedings are anticipated and additional legal actions are possible. With continuing uncertainty over the future of E-COM, and in general

of the USPS role in EMS, the prospects for

a successful USPS entry into domestic EMS

services are uncertain. Some firms have indicated to OTA that they are reluctant to

make any major commitments until they are

certain what role USPS is going to have.

Meanwhile, many of the carriers continue to

put much of their research and development

effort into Generation III EMS, which would

completely bypass USPS. In addition, USPS

is unable to establish effective working relationships with many private carriers and potential Generation II EMS users, given the

continuing adversarial atmosphere.

Should Congress wish to take action, there

are several major possibilities. Congress could:

1) provide a clear direction for USPS involvement in EMS; 2) reduce or eliminate further

regulatory and judicial delay; and 3) maintain

oversight and initiate planning on long-term

USPS viability. These possibilities are discussed below.
Ch. 8—Congressional Policy Considerations ● 8 9

Provide a Clear Direction for USPS

Involvement in EMS

There are essentially nine major alternatives

for a USPS role in EMS. Variations on each

are possible.

1. USPS would deliver the hardcopy printed

output of industry EMS services when desired

and at the discretion of industry. USPS would

not otherwise participate in EMS. This role

would presume that hardcopy output is ancillary to communication services subject to

the Communications Act and outside the

scope of the Postal Act or PES.

2. USPS would deliver the hardcopy printed

output of all industry EMS services when conveyed over postal roads (routes served by

USPS), with exceptions for time sensitive letters. USPS would not otherwise participate in

EMS. This role would be based on current

USPS interpretation of PES.

3. USPS would deliver the hardcopy printed

output as in 2 above, but would also permit

the location of carrier Generation II EMS terminal equipment on USPS premises. This

would be similar to the current role of USPS

in Western Union’s Mailgram service, except

that equipment from several carriers, not just

Western Union, would be located on premises.

These carriers would then be permitted to interconnect with USPS facilities.

4. USPS would deliver the hardcopy output

from industry EMS as in 2 above, and would

also provide printing and enveloping portions

of EMS when desired by and to meet the specifications of industry (within reason). Here,

USPS would offer a range of options with respect to number of pages, paper style and format, envelope logo, and possibly inserts to

meet varied needs of carriers and their customers. All carriers (defined as in E-COM to

include all message-processing companies)

would be permitted to interconnect with USPS

facilities either on a dedicated or dial-up basis.

This would be similar to E-COM, except that

carriers would be able to retain their individual

identity (through use of logo envelopes and

possibly letterhead paper) and meet a wider

range of mailer needs (through variable letter

lengths and possibly inserts).

5. USPS would deliver the hardcopy output

from industry EMS and would provide printing and enveloping portions of EMS on a

standardized basis available to all carriers and

mailers (within reasonable limits). This would

be similar to the current role of USPS in

E-COM. All messages would be no more than

2 pages in length, be printed on identical

paper, and use E-COM logo envelopes. Other

than standardized business reply envelopes,

inserts are not possible. Carriers would be permitted to interconnect as in 4 above.

6. USPS would provide printing, enveloping,

and telecommunication portions of EMS and

physically deliver hardcopy output. USPS

would lease telecommunication facilities from

private industry, and would also provide interconnection for industry carriers. This would

be similar to the USPS role in E-COM if there

is a “demonstrated need” for USPS provision

of telecommunication as well as printing, enveloping, and delivery.

7. USPS would provide printing, enveloping,

the telecommunication portions of EMS, and

physical delivery, as in 6 above, plus electronic

delivery if there is a “demonstrated need” for

certain geographical areas that can no longer

sustain conventional mail service at comparable levels. USPS would lease or contract

for telecommunication and electronic delivery

facilities on a competitive basis from private

industry, and would also provide interconnection for industry telecommunication carriers.

8. Combination of 4 and 6.

9. Combination of 4 and 7.

All of these alternatives are technically

feasible. In evaluating each, Congress may

wish to take into account the following considerations.
90 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Impact on USPS-Delivered

Mail Volume

The market penetration results (ch. 4) indicated that USPS-delivered mail volume (conventional plus Generation II hardcopy output)

is one key consideration. USPS-delivered volume is in part a function of the rate of Generation II EMS growth and the degree of stimulation of the Generation II EMS market. The

faster the rate of growth (and the earlier the

take-off) and the greater the stimulation of

new message traffic, the larger the Generation

II EMS volume (and hence USPS-delivered

volume), assuming that USPS delivers Generation II EMS hardcopy output. There is currently little consensus on the extent to which

the various alternatives would contribute to

Generation II EMS growth and volume.

Impact on USPS Finances

The revenue/cost results (chs. 5 and 6) indicated that EMS cost displacement and contribution to USPS fixed costs are also key

considerations. The greater the EMS cost displacement (avoidance of conventional mailstream costs) and contribution to USPS overhead, the less likely the need for service (and

labor) reductions. Again, there is lack of agreement between the USPS and major stakeholders. While Mailgram apparently provides both

a substantial cost displacement and contribution to fixed costs, it is not clear whether

E-COM would do likewise at current rates and

in its present configuration. All parties, including USPS, agree that the RCA cost estimates prepared for the electronic message

service system (EMSS) in 1977 and the original E-COM cost estimates prepared for PRC

in 1978 are now outdated. A comprehensive

cost review of E-COM is needed.

Impact on USPS Labor Force

Based on the chapter 6 labor requirements

analysis, the size of the USPS labor force is

determined principally from the volume of

USPS-delivered mail and labor productivity.

There is general agreement that USPS participation in EMS would generate only a relatively small number of new jobs. However,

through higher mail volumes it could offset or

at least defer significant labor reductions that

would otherwise be necessary.

There are an estimated 200 persons (125 operations, 50 maintenance, 25 marketing and

administrative) currently working on E-COM,

and a fully deployed service (at 150 serving

post offices (SPOs) compared to the current

25) is estimated to require perhaps 2,000

persons.

In contrast, the additional volume from

USPS delivery of industry hardcopy output

under the baseline assumptions would require

about 38,000 employees more than would

otherwise be necessary. The additional mail

volume from 100-percent Generation II EMS

stimulation and high but plausible Generation

II EMS growth would require 39,000 employees more than otherwise would be needed, for

a total of about 77,000 employees. Put differently, under the baseline assumptions, the

year 2000 USPS total labor force reduction is

projected at 29 percent assuming no USPS

participation in EMS (i.e., industry delivers its

own Generation II EMS hardcopy output), but

at only 17.5 percent for USPS-delivery of

Generation II EMS output coupled with high

but plausible Generation II EMS growth and

100-percent stimulation (see fig. 11 and table

16, ch. 6). Absent the 100-percent stimulation,

the labor force reduction is projected at 23.3

percent.

Space in SPOs for Carrier

Output Equipment

A continuing issue is whether and how

USPS should provide space on USPS premises

for carrier equipment. For the Western Union

Mailgram service, USPS has agreed to locate

and operate Western Union printers in 144

SPOs. Other telecommunication carriers have,

in the past, asked USPS for a similar arrangement. USPS indicates that it is willing to consider any serious proposals along these lines,

but that none have been received. The carriers
Ch. 8—Congressional Policy Considerations ● 9 1

believe that USPS is not receptive to such proposals, and question why Western Union

should receive special accommodation. It is

not clear whether physical constraints and

economies of scale would permit the location

of equipment from a large number of carriers,

or that a large number of carriers would find

such an arrangement to be cost effective. This

question deserves further study.

In E-COM, USPS does not provide space in

SPOs for carrier hardcopy output devices. Instead, USPS owns and operates its own printing equipment and provides access facilities

to enable carriers to interconnect directly with

SPOs. USPS has purchased the interconnection equipment and leases it to carriers desiring dedicated access at a monthly charge.1

Some carriers are not happy with the relatively limited capabilities of the E-COM equipment. According to USPS, the selection of ECOM equipment was made by RCA, and was

judged to be the best technology available off

the shelf that met USPS requirements. Congress could request an independent review of

the technology selected.

Electronic Transmission

to SPOs

The role of USPS in the telecommunication

portion of EMS has proven to be controversial. USPS originally proposed to initiate its

E-COM service using a telecommunication

network leased from Western Union. That is,

USPS would have provided telecommunication as well as printing, enveloping, and

delivery. In December 1979, PRC recommended an alternative plan under which USPS

would not own or operate a telecommunication

network, but all telecommunication carriers

would be permitted to interconnect with

E-COM at the designated SPOs. In April

1980, on remand from the USPS Board of

Governors, the PRC explicitly recognized the

‘The monthly charge per SPO ranges from $102 to $412, depending on the type of equipment. See “Telecommunication

Connection Arrangements for Postal Service Electronic Computer Originated Mail (E-COM) Service and Innovation for

Capacity Planning Cooperation, ” Federal Register, vol. 46, No.

199, Oct. 15, 1981, p. 50882.

authority of USPS to contract with a telecommunication carrier to transmit messages electronically on behalf of USPS.2 However, PRC

conditioned this authority on a showing of

demonstrated need, a term that has not been

clearly defined but presumably implies a situation where the needs of E-COM users could not

be met adequately through the telecommunication services of private carriers. The Governors have accepted this condition.3 However,

some carriers are concerned that the ambiguity of this condition could be used in the future

to, in their opinion, improperly and unjustifiably permit USPS to contract with a carrier

(or carriers) to provide electronic transmission

on behalf of USPS. Congress may wish to clarify the definition of demonstrated need.

Electronic Delivery

to Recipient

USPS has not proposed, nor have the Governors or PRC considered, any EMS service

whereby USPS would provide electronic delivery of mail directly to the recipient. USPS

has stated repeatedly that it “will not provide

‘Generation III’ services which transmit messages all the way through telecommunications.” 4 However, some consumer advocates

and researchers have suggested that electronic

delivery might be justified to maintain USPS

service levels in geographic areas where conventional mail service could no longer be maintained at present levels. Congress may wish

to examine what, if any, conditions would constitute a demonstrated need for USPS involvement in electronic delivery (presumably by

contract with private Generation III EMS

firms). Any USPS role in Generation III would

have to be carefully defined to avoid either the

appearance or reality of competition with

private firms and the substantial controversy and opposition that would likely generate.

‘Further Recommended Decision, docket No. MC78-3, Postal

Rate Commission, Apr. 8, 1980.

‘I bid., pp. 4-9; Decision of the United States Postal Service

Board of Governors, docket No. MC78-3, Feb. 22, 1980,

4Mar. 12, 1981, letter and position paper from Edward E.

Horgan, Jr., of USPS to Sen. Barry Goldwater.
92 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Interconnection and

Standard Interface

For E-COM, USPS provides interconnection

for message input from qualifying telecommunication carriers and users (i.e., mailers) using a standard interface. Mailers may establish an account directly with USPS and prepay

USPS for E-COM delivery, while arranging

separately with a qualified telecommunication

carrier for transmission of messages to SPOs.

Alternatively, mailers may choose to deal only

with a qualified telecommunication carrier

that acts as an agent for E-COM service.

These carriers must establish an account with

USPS and prepay USPS for delivery.5

In E-COM, USPS is offering both dial-up

and dedicated access. As explained by USPS,

“the dial-up access facilities will permit

customers to connect to any SPO by means

of any public telephone network, using whichever telecommunication carriers the customers

choose. . . Dedicated access is designed for

those who wish to have exclusive access to

E-COM.”6 USPS provides two standard interfaces for dial-up access and four standard interfaces for dedicated access.7

At the present time, carriers appear to be

reasonably satisfied with these interfaces from

a technical point of view, and USPS has indicated a willingness to consider other interfaces proposed by carriers. However, some carriers are not happy with the allocation of interconnection lines (or ports) at SPOs between

dedicated and dial-up access, or with the total

number of lines available. The total number

of lines is limited by the present E-COM technology. The allocation between dedicated and

dial-up access is a management decision. Congress may wish to review whether technical

modifications could permit more total lines

(and at what cost), as well as alternative allocation schemes.

“’Telecommunication Connection, ” op. cit., p. 50875.

‘Ibid., p. 50879.

‘Ibid.

Transmission Facilities

USPS has not proposed, nor have the Board

of Governors or PRC considered, any EMS

service whereby USPS would own transmission facilities. USPS originally proposed to

contract for the use of transmission facilities,

as noted above. Given the wide range of privately offered transmission services and the

rapid change in that industry, it seems unlikely, even in the case of demonstrated need to

provide the telecommunication portion of

EMS, that USPS would buy rather than lease

or contract for telecommunication transmission lines.

Marketing of EMS Services

Historically, USPS has been granted the authority (under applicable law and regulation)

to market services filed and approved under

the Domestic Mail Classification Schedule.

While some private firms have objected to

USPS marketing of EMS service, E-COM in

its current form is considered to be a subclass

of first-class mail under the Domestic Mail

Classification Schedule. Accordingly, USPS

has already initiated marketing efforts to identify customers for E-COM.8 Even if USPS

were authorized to provide telecommunications, such EMS service would most likely be

filed and approved as one or more subclasses

of first-class mail (and other classes of mail

where electronic transmission may be appropriate), and thus could be marketed by

USPS.

However, the question of how aggressively

the participating telecommunication carriers

would market their portion of E-COM, or any

other USPS EMS service where the identity

of individual firms is not retained, is an open

one. Some firms have proposed the use of envelopes (and possibly paper) with the company

logo, rather than or in addition to the standardized E-COM envelopes. By maintainingg the

individual identity of participating carriers,

these firms would, in theory, have greater incentive to develop the Generation II market.

‘USPS News Release No. 53, Oct. 19, 1981, p. 3.
Ch. 8—Congressional Policy Considerations ● 9 3

Performance Standards for

EMS Services

The current E-COM service is designed to

achieve guaranteed 2-day delivery. Since 2-day

delivery is already guaranteed for conventional mail deposited within 600 miles of

destination, the time advantage of E-COM is

primarily for cross-country mail where normal

delivery is 3 days. Of course, mailers may

realize benefits other than time; for example,

reduced printing and enveloping or computer

processing costs. Still, some carriers and

mailers have argued that l-day delivery, as is

available with Mailgram, would be preferable.

According to USPS, E-COM could achieve

1-day guaranteed delivery if the number of

SPOs equipped with E-COM facilities were expanded from the current 25 to about 150. The

total capital cost is estimated at about $250

million (roughly six times the current cost of

E-COM system design and implementation),

a substantial investment but considerably less

than the $1.5 billion to $2.0 billion originally

estimated by RCA for a nationwide electronic

mail service system (EMSS). However, it is

questionable whether E-COM volumes would

support this investment.

In 1978, USPS projected a volume of 230

million E-COM messages 5 years out. A more

recent Opinion Research Corp. survey commissioned by USPS projected a market of 500

million messages per year now and 1 billion

messages per year 5 years out. This latter projection falls somewhere between the moderate

and high OTA projections.

Because of the uncertainty of such projections, an incremental approach to expansion

appears to be warranted. For example, E-COM

(or some other alternative) could be expanded

in a small number of selected origin-destination pairs (e.g., Washington, D. C.-San Francisco, New York-Los Angeles) to test the

feasibility of and market for l-day guaranteed

delivery. An incremental approach would appear to require more flexibility in the USPS

decisionmaking process (including regulatory

review) than is presently the case. Congress

may wish to consider some changes in the

Postal Reorganization Act to provide more

flexibility.

Reduce or Eliminate Further Regulatory and

Judicial Delay

The most important action Congress can

take to reduce delay is to provide clear direction for USPS involvement in EMS, as discussed earlier. A note of caution is in order.

If the direction set out is not well understood

and reasonably clear and does not reflect a

substantial consensus, further regulatory

disputes and litigation could result.

Additionally, Congress could: 1) clarify the

applicability of PES to delivery of hardcopy

output; 2) delineate the division of regulatory

jurisdiction between PRC and FCC; 3) mandate a separate USPS entity for any EMS offering; and 4) establish standards for protection of privacy for EMS services involving

USPS.

Applicability of

Private Express Statutes

PES

9 restrict the delivery of letters by

organizations other than USPS. In general,

the private carriage of letters is prohibited.

PES give USPS the exclusive right to carry

“letters” over postal routes, with important

exceptions. One exception is an administrative

suspension for “extremely urgent” letters,

which permits private carriage if at least $3

or twice the applicable postage is charged or,

in certain cases, if delivery is completed within

’39 U. SC. $$601-606; 18 U.S.C. jf 1693-1699, 1724. USPS

regulations implementing PES require that letters to be privately delivered over postal roads must be covered, sealed, dated,

and stamped.
94 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

——

a matter of hours. Many electronic mail services might qualify under this exception.

USPS regulations define a “letter” as a

“message in writing” addressed to a “particular person,” and include electronically

transmitted messages when in hardcopy form

and delivered over postal routes.10 FCC,

among others, has claimed that PES do not

extend to physical delivery of hardcopy output from electronic communications, on the

grounds that such delivery is incidental to

electronic communications as defined in the

Communications Act of 1934 and therefore is

not subject to PES.11 In addition, FCC has

challenged a USPS proposal to redefine a previously granted exemption for telegrams.

USPS had proposed to limit the exemptions

to telegrams “as commonly sent in the past

by other members of the public.” Other forms

of hardcopy output from electronic communications would not be exempt.12 Although this

proposal was subsequently withdrawn, USPS

has taken the general position that its longstanding exemption for telegrams does not

apply to other types of hardcopy output from

electronic transmission.

Some private firms dispute the USPS position, but to date no party has successfully

challenged the legality and applicability of

PES to the delivery of hardcopy output as defined by USPS regulations. On the other hand,

PES do not apply to end-to-end electronic communication of messages, according to recent

statements by USPS officials and USPS interpretation of PES. “The PES will remain applicable only to ‘hardcopy’ letters.”13 “Messages transmitted by wire or wireless or electronically between sender and addressee are

not letters since the PES apply only to corporeal messages physically carried on post

routes." 14 However, as discussed earlier,

“messages so transmitted which are converted

to physical form and carried over a post road

before delivery are letters,”15 and thus are subject to PES.

Nonetheless, some private firms question

not only the applicability of PES to Generation II hardcopy delivery, but are also concerned that USPS may attempt to extend PES

to Generation III EMS. Congressional clarification may be needed.

Regulatory Jurisdiction

Over the last 3 years, the question of which

regulatory bodies have what jurisdiction over

various USPS proposals for offering EMS

service has been considered extensively in

regulatory proceedings. In two court actions,

USPS has challenged the extent of appropriate jurisdiction as asserted by both PRC and

FCC.

By declaratory ruling, FCC asserted authority under section 2(a) of the Communications

Act of 193416 to regulate parts of the original

USPS plan for E-COM. This plan called for

USPS to contract for transmission and other

services on a sole source basis with a single

common carrier (Western Union) .17 FCC apparently based its assertion on the grounds

that Western Union was already subject to

FCC regulation, and furthermore, to the extent that USPS offered electronic communication services, it was a “person” within the

meaning of the Communications Act and was

therefore itself subject to FCC jurisdiction.18

USPS petitioned the U.S. Court of Appeals for

the District of Columbia for a review of the

FCC action arguing that, under the Postal Reorganization Act of 1970, PRC is the appropriate regulatory body and further that

USPS is not a “person” subject to the jurisdiction of FCC. On October 14, 1980, the court

dismissed the USPS appeal and vacated the

FCC ruling as moot for two reasons: 1) “the

contract between Western Union and the

1039 CCFOR. 152 (197o) and USPS order 71-10”

IIMm. 12, 1979, letter to Louis A. Cox, USPS Gener~

Counsel, from Robert R. Bruce, FCC General Counsel, pp. 2-3.

1243 F~.R,ego 60,616 (1978); 45 Fed. Wg. 59,871 (1980)”

l~Horgm letter, Op. cit.

14usps, ~n~~mtatjon of PES, 1973 report, P. 7.

151bid.

1047 U.S.C. $152(a).

l~post~ Rate commission, docket No. MC78-3.

lsFeder~ communications Commission Common Ctl.ITier

Docket No. 79-6; in the matter of request for declaratory ruling and investigation by Graphnet Systems, Inc., concerning

the proposed E-COM service.
Ch. 8—Congressional Policy Considerations ● 9 5

Postal Service . . . that was objectionable to

the FCC has been cancelled, and 2) PRC itself

rejected several features of the Postal Service

electronic mail system proposal found objectionable by the FCC.”19 Thus, the court did not

rule on the merits of the case and the legal

jurisdiction of FCC over USPS involvement

in the telecommunication portion of EMS remains unclear.

USPS also petitioned the court for review

of that part of the PRC Final Recommended

Decision that designates E-COM as an “experimental” subclass of first-class mail

authorized only through October 1, 1984.

Basically, USPS claimed that PRC far exceeded its authority and sought to exercise a

power reserved to the USPS Board of Governors.20 In June 1981, the court ruled for USPS

and remanded the matter back to PRC for further consideration.21

However, two issues were still in dispute.

First, PRC believed it was proper to review

the entire E-COM decision, not just the “experimental” designation which was the subject of the court proceeding. A number of communication carriers and others (including the

Departments of Commerce and Justice) who

filed statements with PRC took the position

that the court, in effect, vacated the PRC

Recommended Decision in toto, and that

USPS was not authorized to proceed with

E-COM on January 4, 1982. USPS maintained

that the court’s remand, and therefore PRC’s

reconsideration, extended only to the question

of “experimental” designation and that USPS

was otherwise authorized to initiate E-COM

service in January. In December 1981, PRC

suspended the proceedings, leaving the legal

status of E-COM uncertain. On January 4,

1982, USPS started E-COM service. In April

1982, the U.S. Court of Appeals for the District of Columbia denied a Department of

Justice petition to block implementation of

E-COM.

Absent clear direction from Congress, it

seems likely that USPS entry into EMS will

precipitate continued regulatory (and related

judicial) conflicts. Congress, through legislation or otherwise, could clarify regulatory

jurisdiction over USPS involvement in EMS.

For example, this might take the form of the

amendment to S. 898 which stipulates that

FCC shall establish costs for the telecommunication portion of any USPS EMS service

and shall assume that any such telecommunication services are offered by a separate

organizational entity within USPS. Apart

from these two provisions, the amendment to

S. 898 states that FCC shall not regulate

USPS.22 As another example, Congress might

clarify-through an amendment to the Postal

Act—the extent of PRC jurisdiction over a

USPS role in EMS.

USPS Subdivision for EMS

As discussed in chapter 7, a number of private firms and other parties have expressed

concern that USPS involvement in EMS

would constitute unfair competition between

an independent Government agency and the

private sector. This concern focuses in part on

the possibility that USPS might use public appropriations or revenues from other USPS

services to cross-subsidize EMS services. In

July 1979, the White House proposed the creation of a separate USPS subdivision for EMS

service in order to make cross-subsidies easier

to detect and prevent. The original White

House proposal suggested “a separate entity

for accounting and ratemaking purposes.”23

H.R. 2813 would require USPS to establish by

regulation “a separate organizational unit . . .

to provide for the management of all electronic

mail service of the USPS.”24 S. 898 would require “a separate organizational entity” for

any telecommunication services offered by

USPS.25

“Oct. 14, 1980, Order, U.S. Court of Appeals.

‘“Decision of the Governors of the U.S. Postal Service, Aug.

15, 1980.

21654 F 2d, 108 D.C. Court of Appeals 1981.

ZZ&n=e9sjona] Record-f% mate, Oct. 7, 1981, p. S.1 1211.

ZSAdministration policy Statement, The White House, JUIY

19, 1979.

Z4H.R. 2813, 97th Cong., 1st sess., Mar. 25, 1981, P. z.

‘Sbgressiomd R.ecord-&ma@ Oct. 7, 1981, S.11211.
.

96 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service ———

USPS has already established a separate Office of E-COM Operations and implemented

detailed cost accounting procedures which, according to USPS, are more stringent than anywhere else in the organization. USPS has initiated a complete review of E-COM costs to

date, recognizing that some costs have been

higher than initially estimated and that rate

adjustments may be necessary so that costs

are fully covered over a given period of operation and projected volume. However, Congress

may wish to consider stronger safeguards (e.g.,

outside audit) and a greater degree of organizational separation to prevent cross-subsidization and allay private sector fears.

Privacy Protection

Privacy protection in a USPS EMS service

is a continuing issue. First raised in the

original PRC consideration of the E-COM proposal, a 1982 National Research Council (NRC)

report26 has amplified the privacy and security concerns discussed in chapter 7. To quote

from the NRC report: “Electronic mail presents potentially serious problems of security and privacy protection. The processing,

storage, and transmission of large amounts of

data, which are functions central to electronic

mail, offer an attractive target for anyone

seeking access to individual and corporate

information. ’27

OTA has not conducted a thorough review

of E-COM security and privacy. However, preliminary discussions with USPS indicate that

while some protections are in place, additional

security measures appear to be necessary. The

E-COM equipment is apparently physically

secure, but the technical configuration makes

it possible for the operator to read the hardcopy printouts before being enveloped. Operators are instructed not to read the contents,

and unauthorized personnel are not permitted

in the E-COM facilities when printers are in

operation. Nonetheless, the potential for security breaches does exist.

A second potential problem is that the user

(carrier or mailer) account numbers are printed

on the outside of E-COM envelopes, thus guar-

‘Nationa.l Research Council, Assembly of Engineering, Committes on Review of U.S. Postal Setice Plannin g for Electronic

Mail Service Systems, Review of Electronic Mail Service

Systems Planning for the U.S. Postal Service, National

Academy Press, Washington, D. C., 1981.

2TIbid., p. xi.

anteeing dissemination in a physically visible

manner of one of the two pieces of information needed to use E-COM. The account number, together with an access code and familiarity with the E-COM technical interconnection

standards, would permit unauthorized use of

E-COM. A third potential problem is that all

incoming messages are stored for 1 week in

computer memory or on magnetic tape in the

E-COM computers. While this archiving may

be necessary in case of errors in message conversion or transmission, it also could present

another target for security violations. This

security risk is heightened by the fact that

computers at each of the 25 E-COM locations

are interconnected electronically to the USPS

management operations center in WilkesBarre, Pa. The purpose of the management information system is to validate account numbers and access codes and keep track of

message volume by account. However, it may

be technically possible to tap the archived

messages via the management information

system which apparently uses dedicated, but

not otherwise secure, leased telephone lines.

Congress may wish to mandate an independent review of E-COM security to ensure that

the necessary security measures are either in

place or implemented shortly. Since it appears

that the postal statutes do not at present extend to the electronic transmission portion of

Generation II EMS, or at least it is not clear

that the statutes apply, Congress may wish

to consider the possibility of amending the

Postal Act and/or Communications Act to provide additional statutory protection, and consider the use of data encryption to provide additional technical protection.
Ch. 8—Congressional Policy Considerations ● 9 7 —

Maintain Oversight and Initiate Planning on

USPS Long-Term Viability

While the immediate focus is on E-COM,

providing a clear direction for USPS involvement in EMS and resolving current regulatory

problems and delays, EMS issues are likely to

be with Congress for many years. Issues will

be driven by the impact of EMS on USPS, the

role of USPS in EMS, and the broader impact

of EMS on American society and the public

at large. For a discussion of these broader impact areas, see the related OTA report on

Computer-Based National Information Systems (1981).

As the historical (and legal) distinctions between conventional and electronic mail are

blurred by technological advances, Congress

will be called on to maintain oversight and initiate planning on the long-term viability of

USPS for all the reasons cited in chapter 7.

At present, it is difficult for USPS to conduct effective long-range planning with respect to EMS, since this requires good working relationships with private telecommunication and computer firms, many of whom have

been and/or are adversaries of USPS. If some

clearer consensus can be reached on the direction and limits of USPS involvement in EMS,

perhaps a more constructive relationship with

the private sector can develop.

USPS reports that the EMSS concept is essentially on hold, and that a new or modified,

and more incremental rather than total systems, approach to planning may be adopted.

Given the dynamic nature of the telecommunication and computer industries, USPS can

hardly be expected to develop the best concept

for its own role without the flexibility to test

and try out various alternatives, on a limited

basis. In most successful private firms, the introduction of any major new product or service is preceded by a long series of research,

development, and market testing of several options to hopefully arrive at the one that is most

competitive and cost effective. At present, regulatory and institutional constraints make it

very difficult for USPS to experiment. In any

realistic sense, E-COM should be viewed as an

experiment, designed to be modified as operating and market experience identifies areas for

improvement or change. In a more supportive

climate, USPS might conduct some joint technical and market tests with various private

firms in different parts of the country. The

results could then help guide the evolution

from Mailgram and E-COM to a long-term

partnership with the private sector that reconciles the statutory mandate of both the Postal

and Communications Acts to the ultimate benefit of the American public.
Appendixes
Appendix A

Supplemental Detail on the

Market Penetration Model

Narrative Discussion funds transfer (EFT) and Generations II and III

electronic mail and message service (EMS). Table

Appendix A includes the following. Figure A-1 A-1 provides complete detail on the baseline mailshows the structure of the model with the diver- stream.

sion parameters (P, CY , to) indicated for electronic

I I

P a

t

t.

SOURCE Office of Technology Assessment.

101

97-918 0 - 82 - 8
102 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Table A-1 —Baseline Mainstream, 1977, Billions of Pieces

franked mail

The major mail segments in table A-1 were

regrouped to combine some of the smallest categories, and to further divide some of the larger categories. For example, household/household correspondence was separated into letters and greeting cards, since the potential for electronic handling of letters maybe significantly greater than

that of greeting cards. Also, nonhousehold/nonhousehold correspondence was separated into intracompany and intercompany categories, since

the potential for electronic handling of intracompany mail maybe developing significantly faster

than for intercompany mail. The miscellaneous

categories, merchandise, and segments with a

volume of less than 1 billion pieces per year were

combined into one expanded miscellaneous category for each class of mail.

The mainstream segments resulting from this regrouping are listed in table A-2, along with the

mail class (first, second, third, fourth, other) and

1977 baseline mail volume for each segment. Those

segments judged to be susceptible to penetration

by EFT and/or EMS are marked by an “X” in

table A-2.

Table A-3 provides further detail on the EFT diversion parameters (P, CY , to) for each mainstream

segment judged to be susceptible to EFT.

Table A-4 provides complete detail on the Generation II and Generation III EMS diversion

parameters. In order to simplify the analysis, the

26 mainstream segments listed in table A-2 were

consolidated into 12 segments shown in table A-4.

For the purposes of table A-4, the analysis focused

on the type of mail content and sender/receiver

pairs, rather than on different classes of mail. The

parameters that determine the growth and timing

of the projected Generation II logistic substitution

curve for each mailstream segment are summarized in the upper half of the cells in table A-4. For

each mainstream segment (column), the values ~

and t. for Generation II are listed in the row opposite the technology that controls growth and

timing for that segment. For example, for Generation II household-household (H-H) greeting cards,

a = 0.2 and to = 1995 is projected, based on the

estimated availability of cost effective advanced

electronic printers. The parameters that determine

the growth and timing of the projected Generation

III logistic substitution curve for each mainstream

segment are shown in the lower half of the cells

in table A-4. Again, the values are shown in the

row opposite the controlling technological development.
App. A—Supplemental Detail on the Market Penetration Model ● 103

Table A-2.—Mailstream Segments

Mail 1977 Penetration by:

Mainstream segment class volumea EFT EMS

H-H letters . . . . . . . . . . . . . . . . . . . . . . . . .

H-H greeting cards . . . . . . . . . . . . . . . . . . .

H-NH correspondence . . . . . . . . . . . . . . . .

NH-H bills . . . . . . . . . . . . . . . . . . . . . . . ... ,

NH-H financial statements. . . . . . . . . . . . .

NH-H other nonadvertising. . . . . . . . . . . . .

NH-H other nonadvertising. . . . . . . . . . . . .

NH-H other nonadvertising. . . . . . . . . . . . .

NH-H correspondence . . . . . . . . . . . . . . . .

NH-H advertising . . . . . . . . . . . . . . . . . . . . .

NH-H advertising . . . . . . . . . . . . . . . . . . . . .

NH-N H advertising . . . . . . . . . . . . . . . . . . .

NH-N H advertising . . . . . . . . . . . . . . . . . . .

NH-NH intracompany correspondence. . .

NH-N H intercompany correspondence. . .

NH-NH other nonadvertising . . . . . . . . . . .

NH-NH bills and statements . . . . . . . . . . .

H-NH negotiable instruments . . . . . . . . . .

NH-H negotiable instruments . . . . . . . . . .

NH-NH negotiable instruments . . . . . . . . .

NH-N H legal/financial instruments . . . . . .

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous . . . . . . . . . . . . . . . . . . . . . . .

1

1

1

1

1

1

2

3

1

1

3

1

3

1

1

3

1

1

1

1

1

1

2

3

4

0

3.4

3.2

2.6

6.0

8.3

9.5

1.5

1.1

7.2

2.3

3.0

3.2

2.0

2.3

8.4

6.5

1.8

1.5

1.9

2.1

1.0

2.5

0.7

0.9

— x — x — x

x x

x x — x — x — x — x — x — x — x — x — x — x — x

x x

x

x

x

abllllons of pieces of mail

H = Household

NH = Nonhousehold

1 = First.class

2 = Second-class

3 = Third-class

4 = Fourth. class

o = Other class

SOURCE. Off Ice of Technology Assessment

Table A-3.—EFT Mail Diversion Parameters

Penetration Growth

1977 volume potential constant Time when 5 percent

Mainstream segment (billions) (P) (a) diversion occurs t.

NH-H bills . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 0.9 0.20 1985

NH-H financial statements. . . . . . . . . . . 2.6 0.9 0.20 1985

NH-NH bills, statements, etc. . . . . . . . . 8.4 0.9 0.20 1985

H-N H negotiable instruments . . . . . . . . 6.5 1.0 0.20 1985

NH-H negotiable instruments . . . . . . . . 1.9 1.0 0.20 1985

NH-NH negotiable instruments . . . . . . . 1.5 1.0 0.20 1985

SOURCE: Office of Technology Assessment; see OTA, selected Hecfrorrlc Funds Transfer Issues: Secur/ty, Privacy, and Equity, OTA-BP-CIT12, March 1982, for further discussion of EFT trends and developments which are generally consistent with the EFT diversion

parameters.
104 . Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Table A-4.—EMS Technology Assumptions and Diversion Parameters by Mail Content and Sender/Receiver Pair

———.

From-to N-N Intra N-N Inter N-N N-N N-N N-H H-H H-H H-N “ N H N-H N-H

Other non- Other non- BiIIs and

Content Corr Corr advertising Bills Advertising Advertising Cards Corr Corr Corr advertising statements

Penetration

Generation II 100% 100 ”/0 70°/0 100% 100 ”/0 100 ”/0 100 ”/0 100 ”/0 100% 100 ”/0 70 ”/0 100 ”/0

Generation Ill 100 ”/0 100 ”/0 70 ”/0 100% 100 ”/0 30% 300/o 100 ”/0 100% 100 ”/0 7 0 % 100 ”/0 —

Early electronic II 30% 1983 30 ”/0 1983 300/o 1983 30% 1983 30% 1983 30 ”/0 1983

printers Ill

Advanced II 20 ”/0 1995 20 ”/0 1995 20 ”/0 1995

EDP and office II

automation Ill 1983 20 ”/0 1984 20 ”/0 1984 20 ”/0 1985 20 ”/0 1987

Home computer II 30% 1987 30% 1987

terminals

--- —

Ill 20 ”/0 1987 41)0

/0 1987 40% 1987 @O/ o 1987

Viewdata/ II

teletext Ill 4 0 % 1985 20 ”/0 1985

.

Inexpensive HC II

receiver

—

Ill 20 ”/0 1990

.

N = Nonhousehold

H = Household a tm

= Initial rate of growth

.,

(r

t o

= Year of 5% diversion Key to Entries: Generation II EMS

SOURCE: Office of Technology Assessment. Generation Ill EMS

Table A-5 shows the actual procedure used by

the computer program to obtain the overall diversion results. The computer program applied an

underlying growth rate to each mainstream segment, and then calculated the portion of each segment diverted to EFT, Generation II EMS, and

Generation III EMS. These diversion estimates

were calculated using the logistic growth curve

(described in app. B) for each mainstream segment,

with the parameters P (penetration potential), ~

(growth constant) and t0 (time of 5-percent penetration), as specified earlier in tables A-3, A-4, and

A-5. The diversion estimates for each mailstream

segment were then added together to give overall

estimates for residual conventional mail volume

and for the volumes of mail diverted to EFT, Generation 11 EMS, and Generation 111 EMS.

Diversion estimates were calculated for the

years 1985, 1990, 1995, and 2000. As explained in

chapter 3, the results of the computer runs were

adjusted upward by 10 percent (multiplied by a

factor of 1.10) to compensate for the difference between the projected and actual growth rate in the

mainstream for the years 1977-81.

Table A-5.—Procedure Used by Computer Program

for Market Penetration Projections

2.

3.

4.

5.

6.

calculated.

Compute a “UG” factor for the underlying growth in the

mainstream relative to 1977. For most runs the assumption was 2 percent compounded growth. Hence the “UG”

factor is 1.02 raised to the power (t-1977).

Compute EFT penetration for each of the segments in

table A-2 which are penetrated by EFT. First compute

the penetration fraction f using the logistic substitution

formula in appendix B, and the values of ~ and t. from

table A-3. Then multiply the 1977 volume x the “UG”

factor x the penetration potential P (from table A-3) x f.

This yields the volume diverted to EFT in year t for each

mainstream segment.

Reduce the 1977 volumes for segments affected by EFT

by the amount of EFT diversion before computing EMS

diversion.

Compute diversion to Generation Ill EMS for each mailstream segment affected by EMS just as in step 3 above

for EFT, except use the reduced 1977 volumes for EFT

impacted segments, and use w tO

, and P for Generation

Ill from table A-4. The penetration potential P is contained in the third row of table A-4 (marked “PENETRATION”). The a and t. values for Generation Ill are in the

lower half of the cells in table A-4.

Compute diversion to Generation II EMS for each segment in the same manner as in step 5 above, using a and

t. from the upper half of each cell in table A-4. Then

reduce the computed Generation II volume by the computed Generation Ill volume. If the Generation III volume

exceeds the Generation II volume, then Generation II

volume is zero.

Add results across mainstream segments for each class

of mail to get diversion totals by class of mail.

7.

—

SOURCE Office of Technology Assessment
Appendix B

Logistic Substitution Process

The logistic substitution process is one mathematical formulation that can be used to describe

the encroachment of one technology on the market

of another. In the field of systems ecology a multitude of models have been used for this purpose.

However, the more complex models require data

that are significantly more detailed than were

available for this analysis, and for all their complexity have no more inherent validity than a simple model such as logistic substitution. The most

important considerations for any model used for

this kind of analysis are that it be based on supportable data and that it make sense.

The logistic substitution curve (fig. B-1) presents

a reasonable macroscopic model of the encroachment of a new technology into the market of an

established, mature technology. When the new

technology becomes available, it penetrates the

market slowly at first due to relatively high cost

and limited consumer acceptance. As time goes on,

cost declines as volume of use builds, leading to

an accelerating growth. Growth remains gradual,

however, since consumer acceptance can be gained

Figure B-1.— Logistic Substitution Growth Process

NOTES P = Maximum penetration potential

f = Market share (fraction of total market) for new technology at

time t

= Growth constant

Time when 5% penetration occurs

t“ = Time when 50°/0 penetration occurs

SOURCE, Off Ice of Technology Assessment and Fred B, Wood, et al , USPS

and the Cornrrrun/caf/ons l?evo/uf/on /rnpacf, Opt/ens arrd /ssues,

George Washington Unwerslty, Mar. 5, 1977.

only with time. As the available market approaches saturation, the rate of growth declines.

In mathematical terms, the key variable is the

market share of the new technology, expressed as

a fraction f of the total potential market. Ultimately, the entire potential market will be penetrated,

and f will equal 1 or the maximum penetration potential P, whichever is less. Initially, the market

share fraction f is very small, but grows with time

at a rate proportional to the market share itself.

Thus, in the early stages of growth, the growth of

f per unit of time is expressed as ~ X f, where CY

is a constant for the particular technology and

market being considered. The factor Q will be

referred to as the “growth constant” for the particular substitution process. It is a measure of how

quickly the technology will penetrate the market.

For example, with CY = 0.4 (per year), the market

share will rise from 5 to 75 percent in 10 years,

whereas with CY = 0.2 such a change in market

share will require 20 years.

The market share at any time can be computed

from the equation in figure B-1 if the growth constant Q and the time of 50-percent market penetration t are specified. Alternatively, some other

point on the curve can be specified along with the

growth constant ~. OTA chose to specify a particular logistic substitution curve by specifying

the growth constant, a , and the time (calendar

year) at which 5-percent penetration of the available market occurs. This 5-percent penetration

time is designated to. The market share f can then

be expressed in terms of a and tO as follows:

The logistic substitution process has been used

once before to model the penetration of mail by

EMS technology.l However, in that 1977 study

the mainstream was considered a single market and

‘Fred B. Wood, et al., USPS and the Communications Revolution:

Impacts, Options and Issues, George Washington University, Mar. 5,

1977.

105
106 ● Implications of Electronic Mail and Message Systems for the U.S. Postal Service

the substitution of EMS a single process. For the

purposes of this study, the mainstream was considered to be many different submarkets with

varying susceptibility to several different EMS

technologies.

The competition between Generation II and

Generation III EMS technologies can be described

as follows. As EMS technology develops, Generation III systems eventually will most likely be less

expensive to use than Generation 11 systems because Generation III employs electronic, rather

than postal carrier, delivery. Also, Generation III

EMS technology will most likely advance to the

point where it will be able to accommodate any format or display capability that can be handled by

Generation II. In other words, any mainstream segment that can be diverted to Generation II EMS

can eventually be diverted to a Generation III

system as well. Furthermore, the switch to Generation III EMS will most likely occur when the

economics (to the user) favor Generation 111 over

Generation II EMS, and at that point Generation

III systems will start to take away market share

from Generation II systems.

Thus, in the market penetration model, penetrations of conventional mail by Generation II EMS

and Generation III EMS were calculated separately using parameters derived from an assessment

of relevant technologies.* The volume resulting for

Generation III was then subtracted from the resulting Generation 11 volume, producing a net

Generation II volume figure. The net Generation

II and Generation 111 volumes were subtracted

from the conventional mail volume to obtain the

residual conventional volume.

Figure B-2 illustrates the relationships involved

in a market segment where a portion of the total

message volume is judged suitable for penetration

by EMS. First, the total market in this segment

is shown as one that grows at a constant percentage rate. The potential market for EMS—the portion of the market which is physically suitable for

● See table A-4.

Time

NOTES: P = Maximum penetration potential

f2 = Fraction of total market for EMS at time t

13 = Fraction of total market for Generation Ill at time t

z - f3 = Fraction of total market for Generation II at time t

SOURCE: Office of Technology Assessment,

eventual transmission by EMS systems—is represented as a constant fraction P of the total

market. Initially, Generation II EMS begins to

penetrate the potential market, capturing a market share f2 of the total market. Later, Generation

III begins to penetrate. At this point, the fraction

f2 represents the total EMS market share, and

Generation III growth comes at the expense of

Generation II. Hence f3, the result of a separate

substitution process, represents the market share

for Generation III, while the market share for

Generation II becomes f2 – f3

. For the assumptions used in this study, total substitution of Generation 111 for Generation II does not occur in any

mainstream market segment within the 20 year

timeframe of the market penetration projections.
Appendix C

Equation Used to Calculate

Labor Requirements

labor requirement in year x expressed as a fraction of labor required in 1980.

mail volume projected for a specified future year x.

mail volume in 1980, the base year.

labor productivity index for future year x, where LP1980 = 1.0.

variable cost component of total labor cost or of total cost for a specific employee

group.

SOURCE: Office of Technology Assessment.

107
—.

Appendix D

E-COM Interconnection

Arrangements

Dial-Up Access Arrangements

1. Binary synchronous, compatible with the

IBM 2780 and 3780 terminals using EBCDIC

character code sets, operating in half-duplex mode

at 2400 bits per second with Bell System 201C

compatible modems and at 4800 bits per second

with Bell 2088 compatible modems.

2. Asynchronous, using the Texas Instruments

700 series convention for data block transmission

and the 96 character ASCII subset as defined by

ANSI Standard X3.4—1977, currently used in a

wide variety of message and data terminals, operating at 300 and 1200 bits per second full-duplex

with Bell System 212A compatible modems.

Dedicated Access

Arrangement s

1. Packet switched X.25, with LAP data link

protocol, binary synchronous framing using the

ASCII character set, and full-duplex operations at

2400, 4800, or 9600 bits per second.

2. DEC (Digital Equipment Corporation)

DDCMP serial synchronous byte oriented line protocol, using the ASCII character set, with fullduplex operation at 2400, 4800, 9600, or 56,000

bits per second.

3. Binary synchronous, compatible with the

IBM 2780 and 3780 terminals using EBCDIC

character code sets, operating in half-duplex mode

at 2400 bits per second with Bell System 201C

compatible modems and at 4800 bits per second

with Bell System 208B compatible modems, and

at 9600 bits per second with Bell System 209A

compatible modems.

4. Asynchronous, using the Texas Instruments

700 series convention for data block transmission

and the 96 character ASCII subset as defined by

ANSI Standard X3.4—1977, currently used in a

wide variety of message and data terminals, operating at 300 and 1200 bits per second full-duplex

with Bell System 212A compatible modems.

‘USPS; see Federal Register, vol. 46, No. 199, Thursday, Oct. 15, 1981,

p. 50879.

108
Index
Index

American Telephone and Telegraph (AT&T), 78

automation, 27, 30

Communications Act (see Communications Act of

1934)

Communications Act of 1934, 3, 11, 16, 17, 76, 77,

80, 87, 88, 89, 94, 96, 97

competition, 17, 18, 91

in data processing and office automation

technologies, 30

in EMS market, 16

impact of private delivery services on USPS, 73

restrictions on USPS, 77

between USPS and private industry, 76, 87-88

computer modeling, 3, 18

equation for labor requirements, 107

limitations of, 19

logistic substitution process, 105-106

market penetration model, 19, 23-24, 101-104

revenue and cost model, 19, 51-52

computers, 4, 16, 27, 30, 31, 32, 42, 44, 79, 87, 88

Congress, 3, 4, 75

concern over USPS role in electronic mail and

message systems, 17-18

House Committee on Energy and Commerce, 17

House Committee on Post Office and Civil

Service, 17

House Government Operations Subcommittee on

Government Information and Individual

Rights, 77

possibilities for action by, 9-11, 87-97

proposed legislation, 17, 18, 77, 95

Senate Committee on Commerce, Science, and

Transportation, 17

Senate Committee on Governmental Affairs, 17

Subcommittee on Government Information and

Individual Rights, 77

Consultative Committee for International Telephone

and Telegraph, 30

cross-subsidization, 18, 75, 88, 95

Datapost, 27

data processing, 17, 18, 27, 30, 87

Department of Commerce, 17, 75, 88, 95

Department of Justice, 9, 17, 62, 74, 75, 88, 95

deregulation

of the telecommunication industry, 87

Dialcom, Inc., 78

Domestic Mail Classification Schedule, 92

E-COM (see electronic computer-originated mail)

EFT (see electronic funds transfer)

electronic computer-originated mail (E-COM), 3, 4, 9,

10, 11, 16, 27, 53, 74, 76, 77, 79, 81, 83, 88, 89,

90, 93, 95, 97

capital cost of, 75

establishment of a separate USPS office for, 96

initiation of service, 17

interconnections with telecommunication

providers, 78, 92, 108

legal challenge to USPS role in, 17

projected growth of, 93

regulation of, 94-95

technical standards of, 78

volume of, 75

electronic funds transfer (EFT), 4, 5, 6, 8, 16

diversion of first-class mail to, 4, 5, 6, 26-27

Generation III systems, 4, 5, 11, 81

electronic mail and message systems (EMS)

alternatives for involvement of USPS in, 9, 10

competition between Generations 11 and III

systems, 77-78

congressional interest in, 17-18

cost displacement by, 9

diversion of first-class mail to, 6

effects on USPS finances, 90

effects on USPS labor requirements, 7-8, 64-70, 90

effects on USPS postal rates, 5-6, 61-63

effects on USPS service levels, 5-8, 63-64

fairness of USPS role in, 73-75

Generation I systems, 77

Generation II growth and timing estimates, 29-30,

32-33, 45-48

Generation II systems, 4, 5, 6, 7, 8, 9, 10, 27, 29,

30, 31, 32, 33, 37, 38, 39, 40, 41, 42, 44, 45, 46,

52, 53, 56, 61, 62, 64, 66, 68, 69, 77, 81, 88,

89, 90, 94

Generation 111 systems, 4, 5, 8, 9, 10, 11, 27, 30,

31, 32, 37, 38, 42, 44, 45, 46, 77, 78, 81, 83,

88, 91, 94

growth of Generation III services, 30-31

legality of USPS role in, 76

marketing of, 92

market penetration analysis of, 37-48

penetration potentials of, 27

performance standards for, 93

policy implications of, 8-11

projected growth of, 4-5

relationship between Generation 11 and III

estimates, 31-32

revenue and cost assumptions, 56

revenue and cost model analysis of, 51-57

stimulation of demand for new messages by, 42

electronic message market, 16

electronic message service system (EMSS), 9, 16, 32,

53, 90, 93, 97

EMS (see electronic mail and message systems)

EMSS (see electronic message service system)

Equitable Life Assurance Co., 83

FCC (see Federal Communications Commission)

Federal Communications Commission (FCC), 10, 16,

77, 78, 87, 88, 93, 94, 95

Computer II decision of, 76

Federal Express, 73

Federal Financing Bank, 74

111
112 Implications of Electronic Mail and Message Systems for the U.S. Postal Service

Federal Property and Administrative Services Act

of 1980, 87

Government Printing Office, 83

Graphnet, 78

greeting cards, 27, 32

GTE Telenet, 78

INTELPOST, 16

international electronic post (see INTELPOST)

International Standard Organization, 30

ITT World Communications, 78, 83

judicial delay, 10

mail (also see mailstream)

advertising, 27, 31

content categories, 24

covers, 80

financial statements, 31, 32

first-class, 6, 56

greeting cards, 31

growth of volume, 33-34

sender/receiver pairs, 24

volume of, 4-5

Mailgram service, 3, 4, 9, 16, 27, 52, 89, 90, 93, 97

mainstream

baseline, 24-25, 101-104

EFT penetration of, 4, 26-27

EMS penetration of, 4-5, 27-33

growth of, 4, 6, 33-34

percent as first-class mail, 6

vulnerability to penetration by electronic mail

systems, 24-25

Merrill Lynch Pierce Fenner & Smith, 83

National Research Council (NRC), 96

National Technical Information Service, 83

Netword, Inc., 83

Office of Management and Budget, 76, 77

Office of Technology Assessment (OTA), 3, 4, 5, 7,

8, 9, 11, 26, 29, 30, 31, 33, 42, 44, 45, 46, 51, 52,

53, 56, 57, 62, 63, 64, 65, 66, 68, 69, 75, 81, 88,

97

Omnibus Budget and Reconciliation Act of 1981,

52, 75

Opinion Research Corporation, 93

Paperwork Reduction Act of 1980, 87

Personal Computer Network, 27

Postal Act (see Postal Reorganization Act of 1970)

Postal Rate Commission (PRC), 9, 10, 17, 45, 52, 62,

76, 78, 87, 88, 90, 91, 92, 93, 94, 95

hearings of, 75

postal rates

implications of Generation II systems growth for,

61-63

Postal Reorganization Act of 1970, 3, 10, 11, 17, 45,

62, 74, 75, 80, 87, 88, 89, 93, 96, 97

as authority for USPS involvement in EMS, 76

Postal Service (see United States Postal Service)

Postmaster General, 16

privacy protection, 10, 88, 93, 96

data encryption, 81

of electronic communication, 80-82

and EMS, 79-81

of sealed mail, 79

Private Express Statutes (PES), 10, 42, 73, 87,

89, 93

Purolator Corp., 73

RCA, 5, 9, 10, 32, 46, 53, 69, 79, 90, 91, 93

regulation, 11, 93-96

Satellite Business Systems, 78

security (see privacy protection)

Shell Oil Co., 83

Supreme Court, 79

Survey Research Center, 18, 24

telecommunication, 17, 18, 77, 80, 87, 89, 91, 92, 95

telecommunication and computer industries, 3

effects of a USPS role in EMS on, 73-80

Telecommunications Deregulation and Competition

Act of 1981, 18

teletext (see viewdata/teletext)

TRT Communications Corp., 83

TRT Telecommunications Corp., 78

Tyme-Gram service, 27

Tymnet, 78

United Parcel Service, 73

United States Postal Service (USPS)

alternatives for involvement of, in EMS, 9, 10

annual appropriations for, 74

constraints on, 97

contribution of first-class mail to fixed costs of,

6, 56

cost and ratesetting process, 75

disputed role of, in EMS and E-COM, 3, 78-79

effects of reducing mail deliveries by, 5-8, 82

innovation stimulated by, 79

introduction of E-COM by, 3

jurisdictional conflicts with other Federal

agencies, 88

labor-intensiveness of, 64

labor requirements of, 7-8, 64-70

legal mandates of, 3, 60, 76, 79, 82, 87

long-term viability of, 11, 81-83

performance of, 15-16

public service subsidy, 75

rates and service levels of, 5-6

role in EMS, 9, 10, 17

service levels of, 63-64

tax-exempt status of, 74
Index 113

United States Treasury viewdata/teletext, 4, 16, 27, 31

loans to USPS, 74

University of Michigan, 18, 24, 33 Western Union, 3, 16, 76, 78, 89, 90, 91, 94

0