U.K. agency seeks greater competition in Britain’s postal services market
A FUNNY THING HAPPENED on the way to the market. Just when everyone in the United Kingdom thought deregulation of postal services would begin and end with giving Britain’s Post Office greater commercial freedom, along came somebody with much bigger ideas. That somebody is the Postal Services Commission (known as Postcomm), under chief executive Martin Stanley.
As part of the reform of the British postal services market, Postcomm acts as a regulator, working out ways to introduce competition. It also will license those new rival providers. The combination of these two aspects could produce a more radical solution than has been anticipated.
As Postcomm chief economic adviser Richard Moriarty sees it, “We have the scope to license competition to the post office – we don’t need legislation to do that.” That means the current monopoly service provider could soon be facing a new set of rivals, even in its historically reserved area. Up to now this has covered all items weighing less than 12 ounces or costing less than 70 cents to send.
For direct mailers, this has meant there was no choice about which provider to use, since mail packages rarely exceed those weight or price limits. All this could soon change. At the end of October, Postcomm was granted its statutory powers, meaning it now has the legal authority to issue licenses, regulate the market and fine any company that breaches the terms of its license.
Before March 2001, the regulator has to decide how that competition will be created. While it’s certain there will soon be new options for postal service users, what’s not clear is whether these will solely or even largely benefit DMers. Much depends on where the boundaries for competition are drawn.
Postcomm is beginning a review of the effect of competition on the universal service obligation (USO). This requires the post office to offer the same services throughout the United Kingdom at a uniform rate. “The primary brake on licensing is that we have to be confident the USO will be maintained,” warns Moriarty.
The post office has been arguing strongly that it should retain a monopoly over a reduced, but still considerably reserved, area of all items weighing less than 5 ounces. That might give the direct mail industry some options for larger mail packages, but bulk mailings would still have to go through just one service provider.
DMers have been arguing for full deregulation of direct mail as a distinct area of activity. They believe the production of direct mail is an industrialized process involving presorting of items that could be readily split from other types of business mail and opened up to competition.
Surprisingly, Postcomm doesn’t agree. Its policy director Gregor McGregor says, “The debate has been channeled down some odd routes – for example, looking at the letter’s content. That’s an absurd way of going about it, because you shouldn’t know what the content is. That’s a private matter between the sender and the receiver.”
Instead, Postcomm is taking the view that postal services consist of a sequence of actions from collection through delivery, each of which could be considered for opening up to competition. That might allow competing firms to organize collection of direct mail from mail production houses, for example, to be delivered to local postal sorting centers (so-called “downstream access”). While this gives DMers some freedom of choice, this is far from the end-to-end competition they really want.
At the U.K. Direct Marketing Association, business development director David Robottom says, “I’m not a great fan of Postcomm’s approach.” He points out that the regulator hasn’t taken account of the bigger picture, particularly the second European Commission directive on postal services. Should this be adopted as law across the European Union, all countries will have to deregulate DM services for items over 1.8 ounces by 2003.
“The case for liberalization of direct mail has been made already. There’s also evidence from EC studies that this will have a minimal effect on monopoly operators. The liberalization of the communications market that’s already in place has had no effect on employment,” Robottom notes.
It’s these arguments that Postcomm must balance out over the next few months. Its legal mandate is clear – to introduce competition, but also to protect the USO. The EC directive has exactly the same goal. It’s not certain whether providing universal service is actually a cost or a benefit to whichever postal services operator has to provide it. But it’s certain the post office will probably continue in this role.
According to the post office’s chief executive John Roberts, “If implemented, the proposal will give a green light for cream skimmers and will destroy our ability to provide a service to every household at a uniform and affordable price.” He’ll likely be arguing to Postcomm that there’s a high cost attached to delivering universal service.
But McGregor makes the telling comment that “our role is to protect universal service, not to protect Royal Mail [the letters business of Britain’s post office].” He expects to hear strong arguments from the post office in favor of retaining the maximum reserved area, but these might not necessarily hold sway.
Instead of seeing a heavy overhead to be carried, McGregor believes the incumbent service provider has the advantage of a strong brand and high recognition. Indeed, he points to studies carried out in the telecommunications sector – which deregulated 10 years ago but where a universal service obligation also exists – showing that the USO provider makes a net gain.
The U.K. DMA’s Robottom says, “The whole thing depends on the cost of providing the universal service. Postcomm has to have complete access to information on those costs. Then it will be in a position to see the extent of the reserved area necessary to provide it.”
For direct mailers, a major question mark hangs over the extent to which the prices they pay for services will be realigned with the cost of providing those services. The post office has long argued that it wants to adopt cost-based pricing for bulk mail, but has been hampered from doing so because it couldn’t move away from the uniform rate. With liberalization, its hand will be forced and it will have to reveal what its overheads are.
To some extent, the precedents are not good. The only other country to have deregulated in Europe so far is Sweden. The letter-carrying monopoly previously enjoyed by Sweden Post was abolished in 1993. Since then, competitors have sprung up, the largest of which is CityMail. It specializes in presorted bulk mail, but only to Sweden’s largest cities and their surrounding areas. This gives it coverage of just a third of the population.
Other rivals operate locally, arranging for collection and delivery of mail from their own mailboxes within very small geographical areas. There is no real national competitor, leaving Sweden Post with 95% of the total market for letters. Despite a price cap imposed in 1994, it managed to exploit a loophole in 1997 that allowed it to raise the price for a single letter around 30%. Sweden Post argued at the time that it had to adjust prices to cover costs.
Meanwhile, Royal Mail has already put through some price increases of its own. International direct mail has seen two rises of 30% and 38% over a six-month period. Ominously, the company also has reduced the amount of notice it will give domestic mail users of any price increases from three months to just one.
“There’s an element of Royal Mail trying to get its revenue against costs in order. Any company facing a regulatory challenge would be trying to do that. But there are still problems in terms of it justifying those rises – I haven’t seen any,” says Robottom. He’s looking to Postcomm to examine these increases as part of its study of the organization’s cost base.
Prices will be high on Postcomm’s agenda, but perhaps not as high as DMers’ expectations of a new, competitive market. This ultimately will depend on two key factors: where Postcomm sets the reserved area, and who else wants to compete with the post office.
On this last point, McGregor says, “we genuinely don’t know who else might be interested in applying.”
What is certain is that the regulator is looking to competition to stimulate the postal services market. Once it’s done the first job of intervening to remove the monopoly, it aims to become a “light touch” regulator. Direct marketers have to hope that Moriarty is right when he says, “if you get competition right, regulation comes second.”
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