LOS ANGELES (AP) -- The U.S. Postal Service is proposing to cut its rates for one of the nation's top direct marketing companies, a move that threatens the newspaper industry's biggest money-maker: the Sunday advertising bundle.
The post office expects to generate $15 million in profits over three years by cutting what it charges Valassis Communications Inc. for new mass mailings. Livonia, Mich.-based Valassis sent more than 3 billion pieces of so-called junk mail through the post office last year. Under the proposal, Valassis has promised to send even more bulk mail. On those additional mailings, the Postal Service will give the company a discount of up to 34 percent. Valassis has agreed to pay a penalty if it does not boost its use of the mail service.
The newspaper industry says the deal is unfair and could wipe away $1 billion in annual revenue it gets from Sunday newspaper inserts and the advertising fliers it sends to non-subscribers during the week.
Valassis would be able to cut prices and attract advertisers like The Home Depot, Lowe's and JC Penney away from Sunday newspapers and toward its midweek bundle of fliers, called RedPlum. Valassis reaches 100 million homes every week and its clients include companies ranging from L'Oreal to DirecTV.
The Home Depot said in a statement that it has no plans to change distribution of its weekly advertising inserts away from newspapers, "but we are always evaluating new opportunities and options available in the marketplace."
Ruth Goldway, the Democratic chairman of the Postal Regulatory Commission, says the commission is reviewing the proposal with a critical eye. She acknowledges that the U.S. Postal Service has been "not very good" at predicting the negative consequences of its actions. But she says Congress has encouraged this kind of deal-making with the private sector in order to make the Postal Service "more businesslike."
"Even if we only make $15 million, but we increase the amount of volume in the mail and we get various businesses to think positively about using the mail in the future, then this is something good to do," she says.
The battle over mass mailing rates pits two old-world entities in a struggle for survival in the Internet age. The 237-year-old postal service's mail deliveries are declining as people communicate through e-mail, Facebook and Twitter. Even in the midst of a multibillion-dollar cost-cutting plan that includes the closure of 250 mail processing centers through 2014, the service expects to lose $14.1 billion this year.
"Our financial condition compels us to seek new revenue opportunities," the U.S. Postal Service said in a statement to The Associated Press.
At the same time, newspaper subscriptions and print advertising revenue have plunged as more people get their news online. At its peak in 2005, U.S. newspapers took in $49.4 billion in advertising revenue, both in print and online, according to the Newspaper Association of America. Last year, that figure had fallen to $23.9 billion. In that time, the industry has suffered waves of layoffs and newspaper bankruptcies.
The Associated Press is owned by U.S. newspapers and broadcasters.
Newspapers see the post office's proposed discounts as a direct attack on the Sunday newspaper, which is still delivered to subscriber's doorsteps literally overflowing with ads. Many newspapers would respond to the proposed deal by using cheaper but less reliable third-party firms to deliver fliers instead of the post office.
Many small town newspapers are delivered through the mail, and large metropolitan dailies use the post office to deliver fliers to non-subscribers.
"You're giving our biggest competitor these deep discounts," says Paul Boyle, senior vice president of public policy for the NAA. "We're going to have to respond to those discounts by lowering rates and lowering our costs."
The NAA's estimate for $1 billion in revenue losses is based on its survey of half its 806 member newspapers, including companies such as The New York Times Co., The McClatchy Co. and Gannett Co. Inc. Newspapers estimate that more than a third of the $2.5 billion in annual ad revenue they get from retailers of durable and semi-durable goods such as clothes, furniture and appliances could be siphoned off by a lower-cost alternative.
Some small newspapers would be put at an immediate disadvantage. The Courier-Times, a 7,200-circulation newspaper that publishes twice a week in rural North Carolina, says it could lose a significant chunk of the $100,000 a year it collects from ad inserts. For a newspaper with $1.5 million in annual revenue, that's a big loss.
Publisher Brinn Clayton says the newspaper would have no means of lowering costs to compete with Valassis since it relies on the U.S. Postal Service to deliver about half of its papers.
"There's nowhere else for us to turn. We can't deliver our newspapers as cheaply as (the post office) can," Clayton says. "We're kind of over a barrel."
"At the very least, it would certainly force us to reconsider our decades-long partnership with the post office," said The McClatchy Co. CEO Pat Talamantes, in an email.
The Washington Post says it could lose about 12 percent of its annual print advertising revenue if the post office's plan gets approved. Last year, the Post's print ad revenue was $264.5 million.
"There's no way this passes the test of not causing unreasonable harm to the marketplace," says the Post's vice president and counsel, Eric Lieberman.
Valassis says declining newspaper circulation is precisely why its direct mail services are needed.
"The continued erosion of newspaper subscribers has created a market need for an alternative distribution channel," said Steve Mitzel, senior vice president of shared mail for Valassis, in a statement.
The Postal Service's plan must be approved by the five-member Postal Regulatory Commission, which has been reviewing the deal since early May. A ruling is expected in the next few weeks.
The outlook isn't promising for newspapers. The commission has never in its 42-year history denied an application for a so-called "negotiated service agreement" related to its mail delivery monopoly, according to Postal Regulatory Commission spokeswoman Ann Fisher.
The U.S. Postal Service is allowed to forge such agreements if it believes they can help improve its finances, enhance its operations and not unreasonably harm the marketplace.
Over the last decade, the post office has offered special discounts on mass mailings to companies such as Capital One Services Inc., Bank One Corp., Discover Financial Services Inc., and Bank of America Corp.
However, critics say the discounts don't always produce the intended boost in mail volume and profits. In 2006, the postal service became legally required to report the results of such deals. The eight negotiated service agreements in effect from 2007 to 2011 have lost money instead of generating new income. The total losses: $20.9 million, according to the PRC's Fisher.
The U.S. Postal Service has offered other discounts on delivery of non-monopoly products like small packages, which have mostly been profitable.
Malin Moensch, the public's representative appointed by the Postal Regulatory Commission to analyze the latest proposal, says the U.S. Postal Service fundamentally misunderstands the economics behind its monopoly on mail delivery. Its sole legal authority to put items inside people's mailboxes gives it monopoly pricing power, Moensch says. When it raises prices, customers have no choice but to pay for the service, so revenue goes up. If it offers discounts, revenue will go down. Although there are alternatives, like leaving packages on doorsteps, porches and driveways, there is only one route to the mailbox and that's through the post office.
"If you lower prices for market-dominant products, which are insensitive to price changes, you'll give up more revenue than you will gain in volume," Moensch says. "They're in denial about that."
In his scathing analysis, Moensch called the planned discount for Valassis "lethal to newspapers."
"It's almost like throwing a grenade in this market," Moensch says. "It's really a way for the Postal Service to use Valassis as a proxy to drive the newspapers out of that Sunday circular market."
The U.S. Postal Service disagrees with the public representative's conclusion and says its plan narrowly targets new mailings from large national retailers. It points out that different advertising bundles charged at different rates exist side-by-side today. "The entry of one more competitively priced alternative will not disrupt this market," it said in a response to criticisms.