Sunday, October 9, 2011

Universal Service

USPS (United State Postal Service) is in (financial) trouble, again! 

Every time, when news broke about the financial woes and possibility of USPS going under, there are plenty of analyses, suggestions, and blames from average citizens, academia, to politicians and pundits, many of whom, for reasons ranging from ignorance to having ulterior motives, look for simple causes and quick fixes to a structural policy problem.

There have been no shortages of data, figures, analysis, and proposals in this continuing saga.  For example, in his June 15, 2011 article, Devin Leonard of Bloomberg Businessweek reported “…43 percent of FedEx’s budget and 61 percent of United Parcel Service’s pay go to employee-related expenses.”  One can point to such a figure and blame the problem on the Postal Union as many had.  One can also point to the data as another example of inefficient and evil big government (yes, USPS is an independent government agency) as many had. Some had also suggested privatization as a solution to monetize its “hidden” assets and values including real estate as if the real problem would go away once the book is cooked right to reflect the “true values” of its asset.

It may not be obvious to everyone but there are many parallels between postal service and telecommunication service since they do share some fundamental characteristics.  While postal service is about transporting physical objects such as letters and parcels from one individual’s hand to another at a distance, telecommunication services is about moving a (stream of) signal such as voice, data, video from one individual’s mouth and devices to another’s.  Further, introductory data communications textbooks would tell you that today’s telecommunication networks including Internet are dominated by the packet-switched technology whereby data packets containing coded user signals with addresses just like letters are routed through switches in the network very much like postal distribution centers . 

For quite some time, the ever increasing use of electronic media transported through Internet has put huge dents on the demands for the physical transport provided by USPS.  First class mail which is the top revenue generator of the USPS has already experienced a decrease in volume of nearly 20% from 98 billion pieces in 2006 to 78 billion pieces in 2010.  Boston Consulting Group has projected the volume will decrease further to 50 billion pieces by 2020.  Meanwhile the postage of first class mail has increased 6 times since 2001 from 34 cents to 44 cents today.  The problem cries for new service ideas to generate demands and revenues which unfortunately don’t seem to be getting enough attention as cost cutting and fear of laying offs dominate the headlines.

Postal system is one of the oldest means of communication of people.  When the parent commanded their kid running down the street to deliver a note or verbal message to a neighbor down the street, a mail had been sent.  There is no fundamental difference in function between such an ad-hoc service and early postal system of empires across the world for more than thousands of years.

Recognizing the critically important role of communications of its citizens, governments across the world have set up postal services early.  For U.S., the Postal Clause - to establish post offices and post roads - in Article One of the United States Constitution, is one of the 18 only explicitly enumerated powers of Congress that includes “to declare war” and “to borrow money”.  Indeed postal service was viewed to be essential in aiding the cohesiveness and holding the states together for the union. Founding father Benjamin Franklin was appointed the first postmaster general in 1775.

The most important advance of modern postal service is the introduction of the concept of Universal Service by Rowland Hill in U.K. in the 1837 reform of the Uniform Penny Post.  It was quickly adopted by other countries including U.S. and has been the standard of the postal service ever since.  The critical tenants of Universal Service as the word universal suggests: availability and affordability to all.  The obvious example is the first class mail service which is delivered at a flat fee of 44 cents regardless who you are and where you live (including the most remote areas of Hawaii and Alaska!).

In the same vein, the all important Communications Act of 1934 by Congress firmly established the telephone service as a regulated service (by the new agency FCC) and had resulted in the recognition of A&T’s monopoly.  And the Title 1 of the Act defined the notion of universal service as applied to wire and wireless communications “… to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges,…

Fast forward to 1960s, the MCI Communications (Microwave Communications, Inc., now a part of Verizon) began offering long distance communication services to urban business customers and resellers in selected markets using low cost microwave relay networks.  It is price competitive to AT&T’s services and highly profitable due in part to the long distance services of AT&T were required to subsidize the local services to achieve uniform pricing for ALL customers. 

As AT&T (or more commonly referred to as the Ma Bell or Bell System) continued to lose grounds to competing long distance services for highly profitable business customers, pressure mounted to settle the antitrust suits which ended with the 1984 breakup of AT&T.  The 1984 divestiture of Bell System stipulated the Bell System be divided into two parts – a deregulated long distance service plus telecom equipment manufacturing company inclusive of R&D (Bell Labs) held by AT&T and seven independent “Baby Bells” that provide regulated and monopolized local telephone services across United States.  The latter would serve as an unbiased interface between end customers and all long distance service carriers. 

The divestiture marked the beginning of the end of the era, topic of my last blog – An Era Has Passed.  Looking back, it was merely one of the more visible parts of a larger economic-political force – deregulation - that had begun gaining momentum in 1970s and permeated through transportation, energy, communications, and climaxed at the financial deregulation and subsequent global financial crisis of 2007-2009 from which we are still trying to dig ourselves out of the hole.

More similarity between telecom and postal service:  FedEx and UPS have been prominent private courier services with global reach in competing with USPS on the lucrative parcel services, not unlike MCI of the late 60’s in competing with AT&T.   One advantage of these private services they do not need to provide ubiquitous coverage of end customers as they are not subject to the requirement of universal service.  FedEx and UPS in fact have been contracting USPS to deliver their packages to a large number of households, not unlike when a long distance call was connected to end users through local Bell’s or cable service.   

This is just one but nevertheless a critical aspect of the postal service that we have been taking for granted for so long.  What is really under siege is the notion of universal service, something noble that defines our society and nation.  What the crises in USPS (and the twists and turns in telecom industry) asked us again and again was not for another budgetary or accounting gimmick.  They are really asking us “what about the universal service?”  As far as I am concern, abandoning the principle of universal service would amount to a declaration of class war and is a non-starter.  What do we do?

Talk to you soon!

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