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Postal Service delivers costly rate increases

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The latest increase in the U.S. Postal Service rates may cause publishers and direct marketers to boost their use of e-mail marketing and seek cheaper alternatives to traditional mail.

The new rate hikes, approved last week by the Postal Service Board of Governors, raises postage rates by 1.6% on average and 2.6% for periodicals. The 2.6% rate is on top of a 9.9% increase in January. More ominously, publishers could face what some observers predict will be up to a 25% rate hike proposal by the Postal Service this summer.

Leaders from the publishing and direct marketing industries argue the decision could prove a serious blow, arriving as both sectors grapple with falling revenue, weak advertising and a slowing overall economy.

Looking ahead in anger

There also is anger over subsidizing what some have called gross mismanagement by the Postal Service, which is facing a $3 billion shortfall this year.

"I am dumfounded that they will raise prices in the face of what’s going on," said H. Robert Wientzen, president-CEO of the Direct Marketing Association. "They’re planning

to raise prices when everyone and their brother-in-law is telling them that it will kill business.

E-mail could benefit

Several direct marketing agency executives said the Postal Service’s move could be a boon for e-mail marketing, which can be much cheaper than traditional mailing, once the software has been put in place.

"We may see a spike in e-mail marketing," said Lee Kroll, president of Kroll Direct Marketing, Plainsboro, N.J. Companies may also take a closer look at other nontraditional mailing initiatives, particularly e-mail newsletter sponsorships, Kroll said.

Jim Hathaway, director-business development at direct marketing company Gráfica Inc., said direct marketers would likely begin planning increased e-mail marketing efforts in the near-term, before the Board of Governors considers yet another rate hike in July. "We can test it now and in July do it in a more intelligent manner," he said.

Direct marketers will also migrate toward cheaper offline mailing venues, including third-class mail, Hathaway said, adding that one of Gráfica’s utility clients recently began doing just that, and saw no slip in response rates from its previous first-class efforts.

Another potential result of the Postal Service’s move will be to boost international initiatives among U.S. direct marketers. That’s because the new postal rate will bring offshore direct marketing, traditionally far more expensive, into price parity with domestic efforts. "It will bring more expansion internationally," Kroll predicted.

However, not all direct marketers worry the Postal Service’s move will have a negative impact on their business. One of the biggest players, American Express Co., has already moved most of its corporate sales efforts away from the Postal Service to salespeople and Web-based marketing.

"We’ve converted most of our corporate reports to the Web," said Melissa Abernathy, spokeswoman at American Express Corporate Services. "And, in so far as prospecting clients, most of our sales force is offline."

Most of the ire about the postal rate hikes was directed at the perceived hubris of the Board of Governors, which approved the increase despite heavy opposition from congressional and business leaders—including Senate Majority Leader Trent Lott (R-Miss.)—and the Postal Rate Commission itself. Representatives from the Postal Service did not return repeated calls.

The magazine industry, both consumer and trade publishers, represent 3% of the Postal Service’s annual revenue, according to the Magazine Publishers of America. Each percentage point increase in postal rates translates into a $20 million hit on the industry’s pocketbook, the MPA said.

Publishers in peril

The latest postal rate increase is salt in the wound for business publishers, whose pages and ad spending were down about 9% this April compared with the same period last year, according to the Business Information Network.

Bill O’Brien, president of operations at Cahners Business Information, said there are two separate issues concerning the rate increases. The 1.6% overall postal increase, he said, will "further fuel" the growth of direct marketers’ and publishers’ interest in e-mail list rentals, while the 2.6% hit on periodicals—with the threat of others down the road—will make it more difficult for publishers to budget their products and services.

"We have a uniformly strong portfolio of products. The margins might be threatened, but not their existence," O’Brien said. "We’ll just have to figure out how to run ourselves more efficiently, since the Postal Service runs so inefficiently."

O’Brien predicted that if postal rate hikes continue publishers would seek to distribute their products via private mail services that are now only generally available in metropolitan areas. "If the rate hikes continue, the Postal Service is going to price itself out of the market," he said.

Gordon Hughes, president-CEO of the American Business Media said, "If the [postal] hikes continue, you’ll see an escalation in shutdowns, magazines will go out of business." The danger is not for top titles in any particular market, but for those that are No. 4 or 5 on the list, "even if you’re owned by a big company," he said.

Hughes said the ABM now has a $500,000 lobbying budget to fight the postal increases, and will work in concert with the MPA and the American Book Publishers Association to present the publishers’ case to lawmakers. Hughes was all but certain the 2.6% increase would go through in July and he expects an uphill battle against further increases. M

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