August 12, 2016

Erroneous opinion piece

Many nonprofits publish magazines, so we read with interest and concern a recent opinion piece. It was written by Kevin Kosar and published by the R Street Institute and the Brookings Institution. By its title, we know it is wrong right away: “The federal government’s $500 million subsidy to magazine publishers.”

If it were a college term paper, it probably would get a ‘D’ because it looks only at a one-dimensional solution to a perceived problem: raise the postage rates to cover the measured costs. The paper fails to address the cost side of the equation and does not consider the strategic importance of magazines to the United States Postal Service.

MPA response

Linda Thomas Brooks, the president and CEO of MPA—The Magazine Media Association, wrote an excellent critique of the Kosar paper that we reproduce below. She points out, for example, what an obvious mischaracterization “federal subsidy” is. And Kosar’s main villain, excessive workshare discounts, is belied by actual USPS and Postal Regulatory Commission data showing that magazines receive only 60 percent of the value of the work-sharing they provide.

Some thoughts on cost

There are two parts to the cost coverage equation. Kosar flippantly dismisses the cost half of the equation as follows: “Magazine representatives often blame the Postal Service for having too much overhead, or for misallocating costs. Their arguments would be more believable were it not for the fact that the publishing industry continually fights increased postage rates.”  

Yet postal costs are the big story here. A major printer and distributor of magazines recently reported: “While postal prices have been capped at CPI [Consumer Price Index] for Market Dominant Products over the last 10 years, postage as a percent of the total cost to produce and distribute magazines and catalogs has still increased from about 35% to 60%.”

Why is the USPS failing to match the relative efficiencies of the rest of the magazine industry? Let’s look at three reasons.

Failure of a large investment in automation

USPS invested over $1.4 billion of ratepayer money in a Flats Sequencing System (FSS) that was supposed to automate the processing of magazines and other flats. It has failed to reach the predicted levels of automation and cost savings that would have move cost coverage closer to 100 percent. A significant portion of magazines are still subject to much more expensive manual processing.

Failure of “network rationalization”

The latest round of plant consolidations in January 2015 has failed to make even close to its cost savings goals and disrupted service to many customers. Implemented during winter in combination with the largest rescheduling of mail processing employees, the failure of the latest rationalization led to further consolidation being put on hold for the foreseeable future.

Irrational labor arbitration

You can’t talk about cost coverage with talking about cost. And 70 percent of postal costs are labor. These human capital costs are largely determined by a public sector collective bargaining process that lacks the motivators of possible strikes or lockouts. The only alternative to an agreement is binding arbitration that is decided by one person for each contract negotiation—the neutral arbitrator.

The most recent arbitration decision issued on July 8 for the American Postal Workers Union is telling. The neutral arbitrator, an emeritus law professor, acknowledged that USPS is in financial trouble and that postal workers are compensated much better than comparable private sector workers. Yet he set aside reality and gave the union a great 40-month deal, with guaranteed raises, COLAs, and no layoffs.

The arbitrator said this about postal compensation: “Initially, I am persuaded, as the Postal Service asserts, that the package of economic benefits received by bargaining unit employees – retirement benefits, retiree health care, paid leave, low employee health care contributions, and a no-layoff provision – are superior to those typically available to private sector employees. Another factor which stands out are the quit rate data, which show that career Postal Service employees voluntarily leave their jobs at a rate far lower than do private sector employees.”

The arbitrator said he was giving this union the same deal that USPS management had recently agreed to earlier with a smaller union, the National Rural Letter Carriers Association. Here’s what he said: “While this Arbitration Panel is not bound to adopt the USPS-NRLCA wage and benefits agreement, and while I recognize that the USPS-NRLCA Agreement applies to a smaller, more homogenous unit of employees doing different work from APWU represented employees, I nonetheless assign considerable weight to the USPS-NRLCA Agreement in determining the content of a wage and benefit package for the employees here involved. Interest arbitrators often look favorably at recent voluntary agreements, especially with the same employer, as evidence of what the parties would have agreed to if their negotiations had been successful.”

We do not know why USPS management agreed to such a generous settlement with NRLCA, but it clearly set the bar for the other postal unions, some of which are still bargaining.

Does it make sense that 70 percent of postal costs are determined by a closed process that is based on precedent rather than current reality, and determined by a single individual accountable only to himself?

The anchor of the mailbox—content is king

USPS doesn’t just have problems with volume, revenue and costs; it also has a crisis of relevance. Postal management recognizes that households going to their mailboxes and reading what’s inside is critical to mail’s continuing relevance.

One response by USPS is to introduce in 2017 a nationwide free service (“Informed Delivery”) for households to sign up for daily digital images of everything in their mailbox. Their pilot tests indicate strong consumer response to this offer, although early adopters are usually more enthusiastic than the general public.

Bill Gates declared “content is king” in 1996, and not many people disagree 20 years later. Soon afterwards, former Postmaster General Bill Henderson emphasized the importance of the “mail moment” when people open their mailbox and peruse the contents. He also declared that magazines are the “anchor of the mailbox.”

We agree with both Bills. Critically important to USPS relevance and survival is the content of the mailbox. And there are few things that people look forward to more in the mailbox than the magazines they subscribe to and pay for.

Keeping magazines in the mailbox in volume has to be a major part of postal strategy. And addressing the cost coverage issue has to start with the cost side of the equation, where all of today’s successful business focus. Not many in the private sector can paper over inefficiencies and rising costs with above-inflation price increases.

MPA Response to Misleading Article on Postal Rates

As the President and CEO of MPA – The Association of Magazine Media, I’m writing to respond to the recent article on an alleged “subsidy” from the Federal Government to the magazine industry.

More than 90% of adults in America are avid magazine readers.  And we agree that magazines provide incredible value.  It is our desire to keep print magazines affordable for subscribers that has caused us to keep a close eye on postage expenses, which are a very significant portion of magazine subscription prices.

I would like to point out several inaccuracies and omissions in the article.  While it is correct that as measured by the Postal Service, Periodicals costs currently exceed Periodicals revenue, I would be remiss if I did not point to the Postal Service’s utter failure to control its overhead and expenses as the cause of this shortfall.  Unit Periodicals costs as measured by the Postal Service have increased 70% more than inflation over the last three decades.  If USPS had held costs to inflation during that period, revenues would easily exceed costs today.  Keeping costs in line with inflation should have been easy for the Postal Service, given all of its investments in automation and massive increases in publishers’ worksharing over this period. For example, magazines presented to USPS are now 50% more densely sorted than 20 years ago and the percentage of magazines entered at destination more than doubled over the same period.  Both the PRC and Periodicals mailers have questioned for years why USPS has been unable to remove excess capacity and improve productivity for Periodicals. The Postal Service has failed to provide a satisfactory response.

Calling the difference between measured Periodicals costs and revenues a “subsidy” is an unfair characterization.  No entity—not the federal government nor any other class of mailers—is asked to make up that difference.  There is no subsidy from the federal government to the Postal Service for Periodicals rates.  All market-dominant products are covered by a CPI cap by class that constrains rate increases to inflation.  The Postal Service cannot add any “shortfall” from one class to another.  The only effect of the difference between Periodicals revenues and costs is on the Postal Service’s bottom line. That certainly seems appropriate given that the Postal Service is the entity that can and should fix its excess cost problem.  For the record, it should be noted that the Postal Service’s FY 2016 year-to-date controllable income exceeds $1 billion.

The article offers two explanations for the “subsidy.”  It is not accurate to say that one cause is excessive workshare discounts.  In fact, for the most densely sorted magazines, those presorted by carrier route, the Postal Service only gives mailers about 60 percent of the savings our worksharing efforts produce for USPS.  So the 50 percent increase in carrier route presort over the past 20 years has saved USPS money, not cost it money.

The “subsidy” is also not due to the Educational, Cultural, Scientific, and Informational value of magazines and newspapers.  The ECSI “discount,” which has been contained in postal law for decades, has not changed in the years since USPS handling costs have exploded.  Periodicals rates have not gone down; in fact they have gone up more than any other market-dominant class over the past 20 years. It is USPS’ costs that have grown out of control.

Finally, we disagree that the Educational, Cultural, Scientific, and Informational value of newspapers and print magazines is no longer of importance. This value remains as relevant today as it has ever been.  While there has obviously been an explosion of media content, there is still a key and differentiated role in society for professionally researched, written, edited, produced and curated content.  If the Postal Service finally gets serious about improving the efficiency with which it processes magazines, we can have a win-win for publishers and our devoted readers.  Affordable postage rates will allow us to continue to deliver the knowledge and pleasure millions of Americans enjoy.

Linda Thomas Brooks
President and CEO | MPA – The Association of Magazine Media