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posted: 12/8/2013 6:55 AM

Amazon, Postal Service may want to think about a merger

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The Washington Post

The news that Amazon had essentially hired the U.S. Postal Service to deliver on Sundays was both surprising and completely sensible.

The partnership of a floundering, old-world institution and perhaps the nation's most future-oriented tech company -- Amazon's strategy is to take losses today in the service of profits down the road -- would at first seem incongruous. As my colleague Brian Fung outlined, though, teaming up for Sunday delivery gives both an edge over the competition that could force the rest of the industry to adapt.

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So why stop there? Amazon and the USPS have lots more to gain from each other -- and an outright merger might maximize the best qualities of both.

Let's look at USPS first. The Postal Service has that the economics of the shipping industry were changing such that it would have to make dramatic changes to stay afloat. A Boston Consulting Group study in 2009 mapped declining mail volumes through the year 2020, when it calculated that the USPS would lose $15 billion in a single year.

And yet, the Postal Service has improved. Even as overall revenue falls, it's served more delivery points and increased income from "negotiated service agreements" with private companies. It's proven to be a decent innovator, keeping up with technology to move mail more efficiently. It has shed more than 200,000 employees over 10 years and is in a position to lose more, as about half are eligible for retirement. That should bring down labor costs, which now make up 80 percent of its budget, compared to 61 percent at UPS and 43 percent at FedEx.

The biggest challenges for the Postal Service are the overhang of pension and retiree health benefit obligations, which totaled $96 billion at the end of 2012, and endless congressional wrangling over how it should operate. Although it's managed to reduce 21,000 routes and consolidate some mail processing facilities, pleas to close unprofitable post offices and cut Saturday delivery always run into a wall of "no," and changes to the business model -- like the ability to offer "non-postal" services -- are subject to legislative approval. That's led to a persistent drumbeat of calls for its privatization.

Now, Amazon. The company has invested heavily in ways to deliver more products faster, cheaper and farther than the competition, including dozens of U.S. warehouses, a fleet of trucks and even "lockers" for people to pick up their goods at local convenience stores. It's expensive: Fulfillment costs amounted to $1.96 billion, or 11.5 percent of revenue, last quarter alone. Amazon considers it an investment in the future, as part of its strategy to provide anything customers might need as fast as they could possibly get it (as well as a tax strategy, since it knows it'll lose the benefits of lacking a physical presence in states soon anyway). The embodiment of this gambit is AmazonFresh, which is supposed to ease the transition toward delivering more and more goods.

Owning the Postal Service would get Amazon the rest of the way there. It has 31,000 post offices and 461 mail processing centers, which represent significant excess capacity. The USPS is still the best last-mile mail delivery service provider, and Amazon is perhaps the most aggressive warehousing logistics innovator, which could enable a partnership that would leverage the strengths of both.

Of course, there are important questions about the public role of the USPS in delivering the mail to everyone, wherever they might be, even if doing so costs more than it's able to charge.

Also: Wouldn't it be problematic to hand a monopoly to a private company? Well, the new Amazon Postal Service could also be required to offer its services to other companies at competitive rates, as it does with its rapidly expanding network of data centers. Meanwhile, competition is shaping up: eBay has partnered with FedEx. It's not hard to imagine Wal-Mart doing the same with UPS.

Sure, there are a lot of details to work out; the Postal Service isn't Amazon's typical rinky-dink acquisition, and the financials could be challenging even for chief executive Jeff Bezos's ever-permissive investors. But with no obvious fix in sight, it's worth keeping all options on the table.

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