MAILING ONLINE EXPERIMENT)Docket No. MC2000-2
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
)
MAILING ONLINE EXPERIMENT)Docket No. MC2000-2
)
INITIAL BRIEF OF
MAIL ADVERTISING SERVICE ASSOCIATION INTERNATIONAL
AND PRINTIMAGE INTERNATIONAL
Graeme W. Bush
Martin S. Himeles, Jr.
Zuckerman, Spaeder, Goldstein, Taylor
& Kolker, L.L.P.
1201 Connecticut Avenue, N.W.
Washington, D.C. 20036
(202) 778-1800
Attorneys for Mail Advertising Service
Association International and
PrintImage International
March 15, 2000
1
TABLE OF CONTENTS
TABLE OF AUTHORITIES...... iii
INTRODUCTION......
I.THE ANTICOMPETITIVE EFFECT OF THE POSTAL SERVICE’S PROPOSED MAILING ONLINE EXPERIMENT REQUIRES SPECIAL SCRUTINY OF ITS COSTS AND PRICING
A.MASA’s Prima Facie Showing Requires the Commission to......
B.The Postal Service’s Proposed Vertical Integration of the Production and
Delivery of Mail Runs Afoul of Settled Antitrust Principles......
1.Foreclosure of competitors from an otherwise available market
segment...... 10
2.Nature of vertical arrangement...... 11
a.Exemption from Minimum Quantity Requirements...... 12
b.Postal Service Control of Competing Services...... 13
c.Free Address List Cleansing and Fast Forward...... 15
d.Postal Service Cost and Resource Advantages...... 16
e.Postal Service Institutional Advantages...... 17
3.Actual and Reasonably Likely Adverse Effects on Small Businesses...18
4.The Ease of Overcoming Barriers to Entry and Effective Competition..19
C.Mailing Online Creates an Unlawful Bottleneck...... 21
D.Mailing Online Creates a Price Squeeze for its Competitors...... 24
II.THE POSTAL SERVICE HAS IMPROPERLY CALCULATED ATTRIBUTABLE COSTS OF MAILING ONLINE. 27
A.The Postal Service Ignores Accepted Principles Of Cost Attribution...... 29
B.All Start-Up Expenses Incurred On Behalf Of MOL Are Attributable And
Should Be Recovered As Part Of The Internal Cost Component Of
MOL Pricing...... 30
C.The Postal Service Has Underestimated And Misallocated Help Desk Costs...34
D.Advertising And Marketing Costs Are Attributable To MOL...... 36
E.The Postal Service Has Failed To Attribute Other Costs To MOL...... 38
III.THE COMMISSION SHOULD SET A COST COVERAGE THAT
RECOGNIZES THE POTENTIAL FOR COMPETITVE HARM TO PRIVATE BUSINESSES. 39
CONCLUSION...... 41
1
TABLE OF AUTHORITIES
CASES
Bonjorno v. Kaiser Aluminum & Chemical Corp., 752 F.2d 802 (3rd Cir. 1984), cert. denied, 477 U.S. 908 (1986) 25
Brown Shoe Co. v. United States, 370 U.S. 294 (1962)...... 8
City of Anaheim v. Southern California Edison Co., 955 F.2d 1373
(9th Cir. 1992)...... 24
Conway Corp. v. FPC, 510 F.2d 1264 (D.C. Cir. 1975),
aff’d, 426 U.S. 271 (1976)...... 25
Delaware & Hudson Railway Corp. v. Consolidated Rail Corp.,
902 F.2d 174 (2d Cir. 1990), cert. denied, 500 U.S. 928 (1991)...... 22, 23
Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359 (1927)...... 24
Fishmanv. Estate of Wirtz, 807 F.2d at 540...... 22
Ford Motor Co. v. U.S., 405 U.S. 562 (1972)...... 9
Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co.,
476 F.2d 687 (2d Cir. 1973)...... 9
International Telephone and Telegraph Corp. v. General Telephone &
Electronics Corp., 449 F. Supp. 1158 (D. Hawaii 1978)...... 9-10
MCI Communications Corp. v. American Telephone and Telegraph Corp.
708 F.2d 1081 (7th Cir. 1982), cert. denied, 464 U.S. 891 (1983)...... 22
United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945)...... 24, 25
United States v. Terminal Railroad Ass’n, 224 U.S. 383 (1912)...... 21, 23
United States Steel Corp. v. Federal Trade Commission,
426 F.2d 592 (6th Cir. 1970)...... 9, 10
STATUTES
Postal Reorganization Act, 39 U.S.C. §101, etseq...... 3, 13-14, 26
iii
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
)
MAILING ONLINE EXPERIMENT)Docket No. MC2000-2
)
INTRODUCTION
Mail Advertising Service Association International (“MASA”), and PrintImage International (“PII”) file this initial brief setting forth their opposition to the Postal Service’s renewed request in this docket for a recommended decision approving the experimental offering of Mailing Online (“MOL”).
As the Commission is aware, the Postal Service originally filed a combined request for a market test and a two-year experimental Mailing Online service in docket MC98-1. The Commission issued a recommended decision approving a market test of MOL and the market test commenced in the fall of 1998. After seven months of discovery and hearings, the Postal Service withdrew the request for the experimental service shortly before initial briefs were due. The Postal Service was facing massive delays due to an overall structural redesign that was transferring MOL from the Post Office Online platform to the USPS.com platform. Eventually, the Market Test was terminated on October 29, 1999, after a long period when the Postal Service was not seeking to promote usage of MOL, but was instead focused on the system redesign.
The request for recommended decision approving a three-year experimental offering of MOL was filed in this docket on November 16, 1999, amidst predictions that system development was on course to an April start and promises that many of the technical problems faced during the Market Test had been solved. As discussed below, while the Postal Service request has attempted to duck some of the issues it faced in MC98-1, the new filing has not resolved the fundamental problems with the MOL request. Foremost among these is the anticompetitive impact of MOL on businesses that will be forced to compete with the Postal Service (i) upon which they depend upon to provide the ultimate delivery services to their customers, (ii) which is improperly extending its statutory mail delivery monopoly to compete for the provision of non-monopoly mail preparation and printing services, and (iii) which proposes to charge MOL customers automation rates while exempting itself from the qualification criteria for those rates.
In addition to the fundamental issue of competitive injury, the Postal Service filing raises other costing and pricing issues. While reliance on the experimental rules and waivers from the Commission has relieved the Postal Service from meeting the normal requirements for a classification filing, the Postal Service has taken advantage of the information dearth to underestimate costs, argue for special exceptions from the Commission’s well-established principles of cost attribution, and propose a cost coverage that is anticompetitively low.
MASA and PII urge the Commission to heed the competition concerns they have raised. The competition debate during the proceedings, as posed by the Postal Service and certain of the other parties, has focused on the question whether “functionally equivalent” services would be permitted to obtain similar waivers of the automation requirements. While the functional equivalence stipulation agreed to by certain of the parties to these proceedings may or may not help private businesses that seek to offer an online service similar to MOL, it is of no help to the letter shops and mail preparation houses that are MASA members and which compete for the same SOHO customers that MOL is targeting. Likewise, it is of no help to all the printers who will not get one of the 25 exclusive contracts to provide printing services for the billions of pieces of mail projected to be entered through MOL.
The competition concerns should guide the Commission in several respects in deciding on the Postal Service request. First, the Commission should ensure that all costs caused by MOL are properly captured and attributed to MOL. This means taking account of the Postal Service’s refusal to provide complete information about so-called “shared costs” like advertising, rejecting efforts to avoid attribution of historical, start-up or “product specific” costs, and ensuring that the Postal Service’s gross underestimation of Help Desk costs and advertising costs during the experiment are not uncritically accepted. Second, it means that a proper markup in the 50% range should be applied to all attributable costs. Only in this way can the Commission minimize the risk that competitive harm will be done during the MOL experiment to many private businesses that depend on the Postal Service for their livelihood.
I.THE ANTICOMPETITIVE EFFECT OF THE POSTAL SERVICE’S PROPOSED MAILING ONLINE EXPERIMENT REQUIRES SPECIAL SCRUTINY OF ITS COSTS AND PRICING
A.MASA’s PrimaFacie Showing Requires the Commission to
Consider the Anticompetitive Effect of Mailing Online
As the Commission observed in its opinion concerning the Market Test, its pro-competitive mandate is embodied in § 3623(c)(1) of the Postal Reorganization Act, 39 U.S.C. § 101 etseq., which requires that classifications be fair and equitable, and § 403(b)(1) of the Act, which requires that the Postal Service provide “an efficient system of collection, sorting, and delivery of the mail.” Market Test Op. at 21. Consequently, in evaluating the Postal Service’s proposed Mailing Online service, the Commission is required to promote competition so far as consistent with regulatory requirements. PRC Op. MC-78-3 (“E-COM I”) at 51.[1]
The Commission’s obligation to consider the impact of rates and classification proposals on competition is typical of regulatory agencies required to pursue the public interest. E-COM I at 57. Two fundamental considerations support such a requirement. First, the pervasiveness of antitrust principles suggests that an action that violates them is contrary to accepted notions of the public interest. Id. at 55. Second, antitrust enforcement and regulatory decision-making share the common objective of increasing the efficiency of the national economy through optimal allocation of resources and stimulation of innovation and cost efficiency. Id.
Of course, the Commission, like other regulatory agencies, does not enforce the antitrust laws and is not strictly bound by their dictates. Id. at 55-56. Rather, antitrust considerations are among a number of relevant policies to be weighed in the Commission’s evaluation of classification and rate proposals. A “rule of reason” governs the Commission’s consideration of antitrust policy. Id. at 212.
A party objecting to the anti-competitive impact of a Postal Service proposal must make a two-part prima facie showing. First, it must show that it participates in the same properly-defined market as the Postal Service offering. Second, it must establish that there is “an economically reasonable apprehension of material competitive injury from the challenged proposal.” PRC Op. R83-1 (“E-COM II”) at 22. The Commission applies a more flexible standard than would a court in determining whether the requisite showing has been made; the Commission must render a recommended decision whether or not competitive harm is alleged, and that decision would be incomplete if it did not give sufficient regard to the potential for future competitive injury. Id. at 23. Thus, a “reasonably apprehended material harm to a protected competitive interest” within the relevant period of time, along with a suitable definition of the competitive market, will constitute a prima facie case. Id. at 24. Applying this standard in E-COM II, the Commission found that testimony of the president of a direct mail firm that belonged to MASA was sufficient to establish a prima facie case of competitive injury with respect to the Postal Service’s first attempt to marry electronic technology with mail delivery.
Here, MASA has presented abundant evidence of both factors required to establish a prima facie case. First, it has shown beyond question that its members participate in the same market as that targeted by Mailing Online. The Postal Service itself has defined that market as short-run direct mail advertising and solicitations, generally under 5,000 pieces, generated for the most part by small businesses, home offices and individuals – so-called “SOHO” (small office/home office) users. Tr. 1275. Witnesses Schuh and Jurgena, both presidents of direct mail production companies that belong to MASA, each testified that mailings under 5,000 pieces represent a very substantial part of their businesses – 65% in the case of Jurgena and 60% in the case of Schuh. Tr. 825-26; 850-851. Moreover, witness Schuh gathered information from 14 other MASA members concerning the percentage of their mailings that were under 5,000 pieces, and for the group as a whole an average of 58% of their jobs accounting for 35% of their total revenues were mailings under 5,000 pieces. Tr. 826.
Second, the evidence abundantly establishes that Witnesses Schuh, Jurgena and other MASA members reasonably apprehend material harm to their competitive interests. Of course, Mailing Online has not yet been launched and there has not yet been an opportunity for it to cause competitive harm, aside from the Market Test. But the evidence that it will cause future competitive harm is substantial.
Witness Schuh observed that if 62% of Mailing Online’s business comes from existing users of direct mail, as the Postal Service projects, he and other MASA members servicing this market will lose a substantial part of their current and potential business. Tr. 825-826. In addition, the Postal Service has accrued substantial funds from its monopoly over mail delivery, and those funds are available to promote Mailing Online on a scale far beyond the small-scale advertising Schuh’s company can support. Tr. 826-827. Schuh described the valuable competitive information to which the USPS has access, which it has denied to him. In particular, even as an active participant in his local Postal Customer Council chapter he has been unable to obtain from the Postal Service the chapter’s mailing list. The Postal Service, on the other hand, not only has access to these lists but maintains a proprietary database of the end users serviced by direct mail companies, as well as detailed information concerning every mailing. Tr. 827-828.[2] Schuh compared the Mailing Online pricing of a sample job to the pricing he would be able to provide and found that his own cost for the job was 65% greater than the Postal Service’s price for a 5,000 piece mailing, and 2½ times the Postal Service’s price for a 1,000 piece mailing. Tr. 829-30; 835. And Schuh described other unfair competitive advantages of Mailing Online, including its proposed exemption from minimum quantity requirements for automation discounts and its exemption from state sales tax. Tr. 828, 830; 889-90.
Similarly, Witness Jurgena testified that Mailing Online’s postage rate advantage alone would cause his company to lose a significant portion of its business. Tr. 851. He described his own company’s limited funds for advertising as compared with the Postal Services far greater resources. Tr. 852. He testified to the importance of business referrals from the Postal Service, which would be curtailed by the advent of competition between Mailing Online and direct mail production companies. Tr. 854-855. And he explained that even if Mailing Online were unable to provide a minimally acceptable level of service and therefore failed, it would cause the very potential users of direct mail that the Postal Service claims it will bring into the marketplace to turn to other forms of advertising as a result of their bad experiences with Mailing Online. Tr. 855-586.
These two MASA members, along with many others that similarly rely on the small mailings targeted by Mailing Online, are well within the zone of competitive injury from Mailing Online – indeed, the heart of their business is the very target of Mailing Online. Even Postal Service Witness Garvey testified that he could not dispute the testimony that a substantial portion of their business was comprised of the small mailings targeted by Mailing Online. Tr. 1246. The record leaves no doubt that MASA has established a primafacie case, and consequently the Commission must evaluate the competitive impact of the proposed Mailing Online experiment.
B.The Postal Service’s Proposed Vertical Integration of the Production and Delivery of Mail Runs Afoul of Settled Antitrust Principles
The vertical foreclosure doctrine in antitrust law provides the most directly applicable framework for analyzing Mailing Online. The proposed Mailing Online experiment, if approved, would join the Postal Service’s monopoly in mail delivery service with the previously separate activity of mail production. This extension of the Postal Service’s activities to a second stage of the mail production and delivery process is a classic example of vertical integration. Tr. 884-86.
Vertical arrangements have been challenged, under both § 7 of the Clayton Act and § 1 of the Sherman Act, on the basis of the vertical foreclosure doctrine. In the seminal case on vertical foreclosure, Brown Shoe Co. v. United States, 370 U.S. 294 (1962), the Supreme Court held that a merger of two companies, each involved in manufacturing and retailing shoes, was proscribed by the Clayton Act. The Court recognized that “the primary vice of a vertical merger or other arrangement tying a customer to a supplier is that, by foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a clog on competition, which deprives rivals of a fair opportunity to compete.” Id. at 323-24.
Vertical foreclosure analysis requires a determination whether the effect of the arrangement “may be substantially to lessen competition, or to tend to create a monopoly, in this market.” Brown Shoe, 370 U.S. at 328. The threshold inquiry is the share of the market foreclosed by the arrangement. If the share of the market foreclosed is so large as to approach monopoly proportions, the antitrust laws have been violated; on the other hand, foreclosure of a deminimis share of the market does not tend to substantially lessen competition. Where the foreclosure falls between monopoly and deminimis proportions, the percentage of the market foreclosed is not by itself decisive. Rather, it then “becomes necessary to undertake an examination of various economic and historical factors to determine whether the arrangement under review is of the type Congress sought to proscribe.” Id. at 329.
The courts have considered a number of factors in examining such vertical arrangements. These factors include (1) whether the vertical integration forecloses the competitors of either party from a segment of the market otherwise open to them; (2) the nature and purpose of the vertical arrangement; (3) the actual and reasonably likely adverse effects upon local industries and small businesses; and (4) the ease with which potential entrants may readily overcome barriers to full entry and compete effectively with existing companies. SeeUnited States Steel Corp. v. Federal Trade Commission, 426 F.2d 592, 599 (6th Cir. 1970). Seealso, e.g., Ford Motor Co. v. U.S., 405 U.S. 562, 568 (1972) (finding antitrust violation based on factors including barriers to entry); Gulf & Western Industries, Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687, 695 (2d Cir. 1973) (finding likelihood of success on antitrust claim based on factors including nature and purpose of the arrangement).
Vertical arrangements involving an entity which, like the Postal Service, is a statutorily authorized monopolist require no less scrutiny. In finding unlawful one such arrangement, the court in International Telephone and Telegraph Corp. v. General Telephone & Electronics Corp., 449 F. Supp. 1158, 1183 (D. Hawaii 1978), observed: