E-mail, without doubt, is the Internet’s killer app. It is among the first services users get hooked to when they log on to the Internet. During the past few years, as people have started e-mailing everything from letters to greeting cards to colleagues, family and friends, the world has become a smaller place. As this volume of e-mail explodes, the amount of mail being sent through the postal system – or snail mail, as it is derisively called – should decline, right? Well, yes and no. The relationship between the two is more complicated than many people realize. Take America Online, for instance. As the provider of Internet access to some 28 million subscribers around the world, AOL facilitates billions of e-mail exchanges. And yet, the company is also the fastest-growing user of direct mail in the U.S. How did AOL get its 28 million subscribers? In large part, by pooling together direct mail lists and using trusted, reliable snail mail to ship several million CDs containing its free software to potential customers. And each time AOL upgrades its software—it recently launched version 6.0—this deluge of direct mail continues, offering a windfall to the postal service. In fact, the signature message “You’ve got mail,” which AOL e-mail users know well, could apply with complete accuracy to AOL’s snail mail. That insight into the complex relationship between e-mail and paper mail comes from Michael J. Critelli, CEO of
E-mail, without doubt, is the Internet’s killer app. It is among the first services users get hooked to when they log on to the Internet. During the past few years, as people have started e-mailing everything from letters to greeting cards to colleagues, family and friends, the world has become a smaller place. As this volume of e-mail explodes, the amount of mail being sent through the postal system – or snail mail, as it is derisively called – should decline, right? Well, yes and no. The relationship between the two is more complicated than many people realize.
Take America Online, for instance. As the provider of Internet access to some 28 million subscribers around the world, AOL facilitates billions of e-mail exchanges. And yet, the company is also the fastest-growing user of direct mail in the U.S. How did AOL get its 28 million subscribers? In large part, by pooling together direct mail lists and using trusted, reliable snail mail to ship several million CDs containing its free software to potential customers. And each time AOL upgrades its software—it recently launched version 6.0—this deluge of direct mail continues, offering a windfall to the postal service. In fact, the signature message “You’ve got mail,” which AOL e-mail users know well, could apply with complete accuracy to AOL’s snail mail.
That insight into the complex relationship between e-mail and paper mail comes from Michael J. Critelli, CEO ofPitney Bowes, a Stamford, Conn.-based provider of mail and document management services. With $4 billion in revenues derived from activities that include providing postage meters to businesses that churn out massive volumes of mail, Pitney Bowes stands at the turbulent intersection of technologies that threaten to transform the world’s postal services. As such, Critelli has thought hard about the impact of technology—and especially the Internet—on the business of mail. He discussed some of Pitney Bowes’ experiences in this regard at a conference in Philadelphia organized on April 6 by the Reginald H. Jones Center for Management Policy, Strategy and Organization.
A couple of years ago, in the heyday of the dot-com boom, Pitney Bowes looked like an old economy dinosaur that web-enabled upstarts would easily drive to its knees. The Internet, according to Critelli, threatened Pitney Bowes’s business in three ways. First, the company’s core postage meter business was under attack from purveyors of Internet postage. After all, why should anyone rent a clunky meter from Pitney Bowes when stamps could be downloaded much more conveniently over the web? The second threat, more long term in nature, came from the possibility that e-mail would gradually supplant letter mail. And the third threat stemmed from the growing view that the Internet would finally usher in a paperless society.
So have these threats become real dangers for Pitney Bowes or have they proved to be bogeymen? Says Critelli: “Like virtually every major player in the technology sector, Pitney Bowes stock is down about 50% from its all-time high. [It closed at $34.78 on April 10.] But though I clearly have no occasion to celebrate success, we continue to survive despite these apparent threats.” Critelli argues that though the Internet has changed Pitney Bowes’s business, it has certainly not overwhelmed it. That, however, is hardly true of the company’s would-be rivals.
Consider the first threat – web-based postage. When companies such as Stamps.com and e-Stamp came along some years ago, they bragged that they would revolutionize the mail business by allowing users to download postage from the Internet and print stamps on every printer. “Today, e-Stamp has exited the business and Stamps.com is on life support,” says Critelli. “Even our own Internet postage product, Click Stamp Online, has not produced big revenues.”
Why not? Critelli argues that online stamps failed to take off for two reasons. First, its advocates failed to realize how long it takes for change to occur in the heavily regulated postage business. The U.S. Postal Service, like postal authorities around the world, regulates the mail industry closely to ensure the prevention of counterfeit postage. Operating in this highly regulated environment adds considerably to business costs. “Great technology, even if it is affordable and promises real value to consumers, will not succeed if government regulation significantly lowers value or increases its cost,” says Critelli. “The U.S. Postal Service will ultimately find a way to balance its need for revenue security with the need for mailers to have a user-friendly Internet postage product, but that effort will take time and further innovation and may involve deep process changes.” In other words, the market for web-based postage simply did not develop as fast as e-Stamp and Stamp.com had expected.
The second reason, notes Critelli, is that for any business to succeed, the cost of acquiring customers and providing them with services must be lower than the revenues generated from transactions with those customers. In the case of Internet postage, “the cost of acquiring a single customer was very high – it involved tremendous advertising expenditures – and revenues were very low.” Critelli claims that some companies paid as much as $500-600 to acquire a single customer, while the net revenues they got from those customers were in the $3.50 range – clearly not a sustainable business model. “The broader lesson here is that even well-accepted technologies will fail if the cost of getting them to the customers and supporting them is too high,” Critelli says.
Online stamp companies have paid the price for disregarding these principles. E-Stamp announced last November that it was leaving the Internet postage business to focus on supply-chain execution. In February it announced that during 2000 it had lost $112.8 million on revenues of $5.3 million. Stamps.com in 2000 lost $122.7 million on revenues of $15.2 million. The company announced in March that it is liquidating its business-to-business subsidiary, Encryptix. Neopost, a European company active in the same business, has also had its share of problems in its online postage activities.
Critelli points out that the second threat—that e-mail will kill snail mail—has also proved less daunting for Pitney Bowes than it had initially appeared. “Total mail volume is still increasing, although some segments of the mail stream are being affected by e-mail substitution,” he says.
In his presentation, Critelli analyzed the mail market by breaking it up into segments and evaluated the impact of e-mail on each segment.
The household-originated letter mail market, he says, constitutes some 10% of the mail stream in the U.S. This market has been heavily affected by the growth of e-mail, but its decline has had almost no effect on Pitney Bowes, which concentrates on the business market.
Business mail is of two types: It includes transaction mail (bills) and marketing mail (catalogs, brochures, etc.). Transaction mail – which makes up 40% of the U.S. mail stream – has not declined as a result of e-mail. The reasons include the increase in the number of households in the U.S. as well as an increase in transaction activity among consumers. While payment of bills online is growing, this impact has been offset by the increased volume of transaction mail. “The deregulation of energy utilities, telecommunications, and Internet and television service providers are driving a greater number of messages targeted at each customer,” Critelli says.
In addition, while electronic bill payment is growing, its growth has been relatively slow. A major reason for this, notes Critelli, is that when companies send out bills to their customers, they usually include a marketing pitch in the same envelope. “Billers look at billing statements as a part of their customer relationship management.” Critelli points out that companies are unlikely to let intermediaries consolidate the bill payment business unless they can figure out a way not to lose control over their communication with customers.
Marketing-oriented business mail, which accounts for another 40% of the U.S. mail stream, continues to grow despite the proliferation of e-mail, says Critelli. “The Internet and Internet-based customer relationships are actually stimulating growth in direct mail and will continue to do so,” he explains, as the AOL example clearly shows.
The Internet has also spurred an increase in another type of snail mail: Package delivery. Companies such as Amazon are shipping out more packages as e-commerce allows them to serve customers in remote locations. Moreover, some 15% to 20% of goods sold online are returned, which adds to the demand for package delivery. Households, too, are shipping more packages than before, in part because web sites like eBay permit more person-to-person transactions. In all these instances, the coming of the Internet has stimulated the demand for traditional postal services rather than supplanted it.
As for the future of paper and the impending paperless society, Critelli maintains that this is a complex phenomenon. “When I joined Pitney Bowes 22 years ago, people were discussing the paperless society,” he says. “I believe paper has a long future.” The ways in which consumers interact with paper may change as a result of technology. For example, stand-alone fax machines have declined in use – a factor that has affected Pitney Bowes’s fax business – and copier sales have slowed down. Still, printer sales volumes have been growing fast, largely because business users often send documents as e-mail attachments that are printed out from desktops, and because many people print out their e-mail messages to review or file them.
Summing up the ways in which the Internet has had an impact on Pitney Bowes, Critelli says that the web has dramatically transformed “how we communicate internally and externally.” The company uses the web to communicate more and more with its customers. It is a myth, however, that an increase in web-based communications will reduce the need for human contact. “We haven’t seen declines in call-center services,” Critelli says. “On the contrary, as products become more complex, customers want high-tech and high-touch contact.” Charles Schwab, the online brokerage firm, has had the same experience. “When Charles Schwab went online, the company believed that the 1,400 employees in its call centers would eventually go away. Schwab now employs 2,800 people in its call centers to support the volume of customer questions about its new products and services. The broader lesson from all this is that the ‘virtualness’ of an Internet-based or enhanced business model is anything but virtual.”
As Critelli navigates Pitney Bowes through these uncertain times, he often remembers a maxim he heard from Ian Morrison, a consultant and author of books such as The Second Curve – Managing the Velocity of Change. “Morrison told me long ago that in any revolutionary technology, the pace of change is overestimated in the short run, and the magnitude of change is underestimated in the long run. That is absolutely true of the Internet.”