Is Amazon really ripping off the US Postal Service?
USPS really does make deals with Amazon. It all starts with how the postal system works: According to Kevin Kosar, vice president of policy for the R Street Institute, a free-market think tank, USPS is basically two separate entities: the monopoly side and the market side.
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But USPS, Kosar explains, also cuts individual deals with companies that mail or ship in bulk — what are called “workshare discounts.”
“The prices that the company pays is going to be haggled and based on how much [the companies] prepare whatever is being shipped before handing it over to the Postal Service,” Kosar said.
That preparation includes making sure goods are packaged in the right size boxes, or parcels are outfitted with a bar code that works with the post office — basically anything that makes the USPS’s job easier and cuts down on some logistical and processing costs.
And a massive company like Amazon, with the infrastructure and resources to do what the Postal Service needs, will probably get a more favorable deal. “Obviously bigger companies are better at doing this, that’s how they eke out nice little margins, but driving those costs down,” Kosar said.
So in some ways, there’s a mutual benefit. Amazon gets a good deal from USPS, which ships millions (but not all) of its packages, and, in return, the postal system gets help streamlining its operations.
Those discounts can be pretty generous. Kosar says that, in hindsight, the Postal Regulatory Commission has sometimes reconsidered its deals as maybe too good, and unions are often critical of these agreements.
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And that’s the bottom line here. Amazon is a giant and, as Kosar calls it, “is in a class of its own” when it comes to shipping.
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“Paper mail is a dying business; the margins are not going to increase,” Kosar said. “They need to move into something that’s more high margin.”
Parcels might be the way to recoup some of those losses, especially if the USPS ups those prices a bit over time — essentially taking early hits for long-term gains.
“That would make perfect business sense in their eyes,” Kosar said. “Amazon was willing to take losses year after year … and it worked. It worked.”
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This is a bit of a testy issue, as Kosar explains that some of the postal system’s competitors believe USPS could use this increased revenue to help keep those parcel prices low — essentially using its monopoly (first-class mail) to underwrite its competitive business.
Either way, federal regulators are seriously putting postage prices under scrutiny. And Congress could also help ease some of the USPS’s financial pressure by reexamining some of its retirement and health obligations. According to CBS News, a 2006 law requires the Postal Service to prefund 75 years’ worth of retiree health benefits — which critics say contributes to its disastrous financial situation.
But even these potential remedies miss the larger points. “What do we want from the Postal Service in the 21st century?” Kosar asks. “And we haven’t had that conversation.”
