[House Hearing, 113 Congress] [From the U.S. Government Publishing Office] EXAMINING INNOVATIVE POSTAL PRODUCTS FOR THE 21ST CENTURY ======================================================================= HEARING before the SUBCOMMITTEE ON FEDERAL WORKFORCE, US POSTAL SERVICE AND THE CENSUS of the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION __________ MAY 22, 2014 __________ Serial No. 113-118 __________ Printed for the use of the Committee on Oversight and Government Reform Available via the World Wide Web: http://www.fdsys.gov http://www.house.gov/reform ______ U.S. GOVERNMENT PRINTING OFFICE 88-825 WASHINGTON : 2014 ____________________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM DARRELL E. ISSA, California, Chairman JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland, MICHAEL R. TURNER, Ohio Ranking Minority Member JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of JIM JORDAN, Ohio Columbia JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts TIM WALBERG, Michigan WM. LACY CLAY, Missouri JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts JUSTIN AMASH, Michigan JIM COOPER, Tennessee PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT, TREY GOWDY, South Carolina Pennsylvania BLAKE FARENTHOLD, Texas TAMMY DUCKWORTH, Illinois DOC HASTINGS, Washington ROBIN L. KELLY, Illinois CYNTHIA M. LUMMIS, Wyoming DANNY K. DAVIS, Illinois ROB WOODALL, Georgia TONY CARDENAS, California THOMAS MASSIE, Kentucky STEVEN A. HORSFORD, Nevada DOUG COLLINS, Georgia MICHELLE LUJAN GRISHAM, New Mexico MARK MEADOWS, North Carolina Vacancy KERRY L. BENTIVOLIO, Michigan RON DeSANTIS, Florida Lawrence J. Brady, Staff Director John D. Cuaderes, Deputy Staff Director Stephen Castor, General Counsel Linda A. Good, Chief Clerk David Rapallo, Minority Staff Director Subcommittee on Federal Workforce, U.S. Postal Service and the Census BLAKE FARENTHOLD, Texas, Chairman TIM WALBERG, Michigan STEPHEN F. LYNCH, Massachusetts, TREY GOWDY, South Carolina Ranking Minority Member DOUG COLLINS, Georgia ELEANOR HOLMES NORTON, District of RON DeSANTIS, Florida Columbia WM. LACY CLAY, Missouri C O N T E N T S ---------- Page Hearing held on May 22, 2014..................................... 1 WITNESSES Mr. James P. Cochrane, Chief Information Officer and Executive Vice President, U.S. Postal Service Oral Statement............................................... 4 Written Statement............................................ 7 Mr. David C. Williams, Inspector General, U.S. Postal Service Oral Statement............................................... 18 Written Statement............................................ 20 Mr. Will Davis, Chief Executive Officer, Outbox, Inc. Oral Statement............................................... 24 Written Statement............................................ 25 Mr. Seth Weisberg, Chief Legal Officer, Stamps.Com Oral Statement............................................... 30 Written Statement............................................ 32 Mr. Patrick Eidenmiller, Director of Engineering and Technology, M-Pack Systems Oral Statement............................................... 40 Written Statement............................................ 42 Mr. Todd Everett, Chief Operating Officer, Newgistics, Inc. Oral Statement............................................... 53 Written Statement............................................ 55 APPENDIX May 8, 2014 Heritage Foundation Article, ``Why the Postal Service Was Right to Side With Junk Mail Over Outbox.'' Submitted by Rep. Clay...................................................... 76 Exhibits from Patrick Eidemiller, M-Pack Systems................. 81 EXAMINING INNOVATIVE POSTAL PRODUCTS FOR THE 21ST CENTURY ---------- Wednesday, May 22, 2014, House of Representatives, Subcommittee on Federal Workforce, Committee on Oversight and Government Reform, Washington, D.C. The subcommittee met, pursuant to notice, at 9:00 a.m. in room 2154, Rayburn House Office Building, the Honorable Blake Farenthold [chairman of the subcommittee], presiding. Present: Representatives Farenthold, Lynch, Norton, Clay, Neugebauer, and Issa. Staff Present: Molly Boyl, Majority Deputy General Counsel and Parliamentarian; Adam P. Fromm, Majority Director of Member Services and Committee Operations; Mark D. Marin, Majority Deputy Staff Director for Oversight; Jeffrey Post; Majority Senior Professional Staff Member; Sarah Vance, Majority Assistant Clerk; Peter Warren, Majority Legislative Policy Director; Kevin Corbin, Minority Professional Staff Member; Julia Krieger, Minority New Media Press Secretary; Juan McCullum, Minority Clerk; and Mark Stephenson, Minority Director of Legislation. Mr. Farenthold. Good morning. The committee will come to order. As is traditional within the Oversight Committee, I would like to start by reading our mission statement. The Oversight Committee exists to secure two fundamental principles. First, Americans have the right to know that the money Washington takes from them is well spent. Second, Americans deserve an efficient and effective government that works for them. Our duty on the Oversight and Government Reform Committee is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know what they are getting from the government. Our job is to work tirelessly in partnership with citizen watchdogs to deliver the facts to the American people and bring genuine reform to the Federal bureaucracy. This is the mission of the Oversight and Government Reform Committee. At this point, I would like to recognize myself for an opening statement. Today, we examine recent efforts by a number of private sector companies and startups to develop innovative postal products. While the Internet has been a boon for the national and local economies, it has been a mixed blessing for the Postal Service. First class mail volume is down more than 33 percent from its peak in 2001 and continues to drop. Our package volume is growing rapidly thanks to e-commerce. Americans are rapidly changing how they communicate with one another and the Postal Service has struggled to adapt. However, that does not mean we are living in a post-U.S. Postal Service world. The Postal Service still has a vital role in our economy in our Nation affordably connecting even the most remote parts of the country. That is why innovation in the Postal Service is so important. We need an infrastructure in this country for moving matter, not just bits of data. The Postal Service and private sector companies have begun efforts to create new innovative postal products to preserve existing mail volume and create new demand for mail and possibly streamline the way mail is handled. Every aspect of the current operations of the Postal Service is targeted and includes innovations in design, online purchasing, e-commerce and greater consumer targeting for advertising. Today, I am looking forward to hearing from private sector companies and discussing with them their efforts to develop new postal products and services. Specifically, what problems, if any, have they encountered along the way in working with the Postal Service to develop and implement these innovative products. Now, if ever, is the time for the Postal Service to embrace innovations presented by private sector companies. Private sector companies are more than willing to spend billions of dollars to implement new products and designs that can help bring future revenue to the Postal Service. The tech community often uses the word disruptive. Disruptive is not necessarily a bad thing. It is a change. When my wife was in her Junior League days, she used to refer to that is the way we have always done it. We have to be very wary of falling into the trap of that is the way we have always done it. If companies continue to be shut down or steam-rolled by the Postal Service bureaucratic red tape before they have a chance to get off the ground, future innovators will look elsewhere to present their fresh ideas. In addition, I hope to hear success stories from private sector companies that work with the Postal Service and how future and how future entrepreneurs and innovators can create more marketable and open environments in the Postal Service. There is need for innovation, whether it is clusterboxes for secure package delivery or better access to postal databases like changes of address, there are many areas ripe for innovation. My fear is as a government watchdog and taxpayer, without reform and innovative new postal products, the American people are going to be left footing the bill for a taxpayer bale out of the Postal Service. That is the last thing we need right now. I look forward to hearing from our panel and believe there really are smart ways the Postal Service can lower its costs and improve its service through innovation and private partnerships. I hope we can bring them to light today and find a way to move the Postal Service closer to Internet speed. Mr. Farenthold. Before I recognize Mr. Lynch for his opening statement, I ask unanimous consent that our colleague from Texas, Mr. Neugebauer, be allowed to participate in the hearing. Without objection, so ordered. Mr. Lynch, your opening statement, please, sir. Mr. Lynch. Thank you very much, Mr. Chairman. I want to thank you, first of all, for holding this hearing to examine the development of innovative postal products and services by the United States Postal Service. I would also like to thank our panel of witnesses, some very innovative individuals, for helping us with this work. In November 2013, the Postal Service entered into a strategic partnership with online retailer, Amazon.com to test Sunday package delivery in select markets, otherwise known as seven day delivery. The Amazon pilot program has proven widely successful and is the primary reason why the Postal Service has recently demonstrated the ability to grow revenue in the face of its most difficult financial position. In its quarterly financial report released on May 9, 2014, the agency reported a revenue increase of $379 million over the same reporting period last year, its third straight quarter of revenue growth due in large part to $252 million or eight percent increase in shipping and package revenue. In light of these results, Sunday package service has now expanded to several other cities across the country and the agency is working to establish similar partnerships with other companies. This serves to illustrate that the agency can experience positive financial results when it capitalizes and builds upon what it already does best, utilizing an unparalleled and universal mail network that is driven by a hard working, dedicated workforce to deliver the mail now seven days a week. It is an example of innovation rather than degradation of existing postal products and services. We would be well served to take a similar approach as we continue to undertake the critical task of reforming today's Postal Service. As evidenced by the markup yesterday in the full committee, Chairman Issa continues to put forth a variety of misguided proposals that presume we can enhance the financial viability of the Postal Service by degrading the very services that have come to define the agency in the eyes of the American people. I simply do not agree that we can reform the Postal Service for the better by eliminating the current six day mail delivery, by mandating a wholesale conversion of door delivery addresses to curbside, clusterbox or sidewalk delivery or by asking postal customers to pay a so called legacy fee in order to retain their door delivery service. Such proposals would only place the Postal Service at a greater business disadvantage and severely damage its long term viability. Instead, we can encourage the Postal Service to build upon its existing postal products and services in order to further set itself apart in the mailing industry. I commend Ranking Member Cummings for his strong and continued leadership in this area and I am proud to co-sponsor his legislation, H.R. 2690, the Innovate Delivery Act. This thoughtful and alternative approach to postal reform would establish a chief innovation officer within the Postal Service to lead the development of innovative postal products and services that fall in line with emerging information technology and changing market trends. It would also require the chief innovation officer to ensure that such products maximize revenue for the Postal Service. Postal innovation will be a key and necessary component to meaningful postal reform package and mail delivery. I understand there are a variety of perspectives on how best to facilitate that innovation in a matter that will place the Postal Service on more solid financial footing. Accordingly, I very much look forward to discussing the issues with our witnesses. I look forward to your input. I yield back the balance of my time. Mr. Farenthold. Thank you, Mr. Lynch. Members will have seven days to submit opening statements for the record. We will now recognize our panel. Mr. James P. Cochrane is the Chief Information Officer and Executive Vice President of the United States Postal Service. Mr. David C. Williams is the Inspector General for the United States Postal Service. Mr. Will Davis is Chief Executive Officer of Outbox, Inc. Mr. Seth Weisberg is Chief Legal Officer of Stamps.com. Mr. Patrick Eidenmiller is Director of Engineering and Technology at M-pack Systems. Mr. Todd Everett is Chief Operating Officer of Newgistics, Inc. Pursuant to committee rules, all witnesses will be sworn before they testify. Please rise and raise your right hand. Do you solemnly swear or affirm that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth? [Witnesses respond in the affirmative.] Mr. Farenthold. It is my understanding the House will have votes around 10:40 and it will be a rather long series of votes. I want to get everything covered. If we can get it done by 10:40, you all do not have to sit around here for over a hour while we go vote and I might be able to make an earlier flight back to Texas. It would be a win-win if you abided by the timer that gives you five minutes for your testimony. We will then ask questions. Your entire written statement is placed in the record and available for this committee and others to review. Mr. Cochrane, you are recognized for five minutes. WITNESS STATEMENTS STATEMENT OF JAMES P. COCHRANE Mr. Cochrane. Good morning, Chairman Farenthold, Ranking Member Lynch and members of the subcommittee. Thank you for calling this hearing on examining innovative postal products for the 21st century. My name is Jim Cochrane and I serve as Chief Information Officer and Executive Vice President of the United States Postal Service. I oversee the integration of technology innovation in all aspects of our business. During my 39 years with the Postal Service, I have developed a broad perspective on the business, how we serve the marketplace and our customers. This business acumen is essential as technology now plays a foundational role in virtually every postal product and service. Emerging technologies, while exciting, oftentimes also challenge us with their potentially disruptive effects. Effectively traversing this emerging disruptive continuum is my responsibility and a matter of survival for the Postal Service. The Postal Service operates one of the largest technology infrastructures in the world. It is supported and co-developed by some of the most respected technology companies, as well as many small businesses that bring fresh insights. Our goals are simple. Every day we focus on how we can innovate with technology and new partnerships to generate revenue, reduce expenses, deliver consistent and reliable service, and a world class customer experience. Though our goals are simple, our business model is both complex and diverse. For nearly 40 years the Postal Service workshare programs have shared the responsibility for efficiency and innovation with business partners. This collaborative model is guided by the premise that our profits and brand are in hand when our partners are profitable and our joint customers receive an increased value proposition. Printers, software vendors, mail service providers, transportation companies and parcel integrators, all play a vital role and together, we have built an industry around the market needs. Disruption in the highly competitive package market is an excellent example of how customer's demand evolved and we adapted. Driven by e-commerce and in particular, free shipping, there has been a dramatic shift to more ground-based solutions. Parcel select is an innovative product developed to answer that market demand. It is a workshare program that leverages the world class processing and transportation network of consolidators such as Newgistics with the unmatched reach of our delivery network providing a great customer solution. Parcel select also enabled the concept of coopetition where UPS and FedEx are traditional competitors, provide network logistics and the Postal Service provides the last mile service, creating a win-win for shippers and consumers. The package market is continuing to change. The new norm involves same day delivery, Sunday delivery, parcel lockers, delivery customization and constant real time tracking. Consumers are demanding these new services without an increase in costs, requiring that we adapt or face irrelevance. The Postal Service is helping businesses make mail more valuable, engaging and interactive through intelligent mail barcodes and financial incentives for mobile optimized mail for creating both the digital reflection for hard copy and a digital action for response. We are building new digital products that will leverage our brand of privacy, security and trust. We welcome creative ideas from individuals, companies and entrepreneurs regarding new business concepts and technologies. Our unsolicited proposal program provides the public a venue to submit new technologies and ideas to advance the mailing industry. In order to be adopted, these ideas must align with the Postal Service mission, have a clear path to profitability and generate postal revenue. They must not damage our respected brand or conflict with existing products or services. The Postal Service receives ideas from a variety of sources. Some of these ideas are not new concepts, some are already being pursued internally and some cannot be adopted because of restrictive laws. The role of the Postal Service in American life and business is changing at a rapid pace. More than ever, systems are using a wide range of technologies to communicate, transact business and shop. Ever changing technology presents the Postal Service with opportunities. But our success is dependent in part on how fast we can evolve. We remain guided by our charter to bind the Nation together and our commitment to provide the value and service upon which American businesses and consumers depend. The Postal Service continues to make great strides in adapting to the changing mailing and shipping needs of the country. However, our efforts are severely limited by an outdated, legally restrictive business model. We have the responsibility to provide and fund universal service for our Nation but we do not have sufficient authority or flexibility to efficiently carry out that mandate. We therefore absolutely need comprehensive postal reform legislation to return us to financial viability. Such legislation should provide us with clear authority to offer new products and services that allow us to take full advantage of our current infrastructure and competencies. Further, we urge Congress not to make the Postal Service task even more difficult by placing further restriction on our ability to innovate and compete. The Postal Service competes vigorously but we also compete fairly consistent with our legal obligations. Mr. Chairman, we look forward to continuing to work with you and the subcommittee to accomplish meaningful postal reform legislation and continue to deliver innovation to the American public. I would be pleased to answer any questions you might have. Thank you. [Prepared statement of Mr. Cochrane follows:] [GRAPHIC] [TIFF OMITTED] T8825.001 [GRAPHIC] [TIFF OMITTED] T8825.002 [GRAPHIC] [TIFF OMITTED] T8825.003 [GRAPHIC] [TIFF OMITTED] T8825.004 [GRAPHIC] [TIFF OMITTED] T8825.005 [GRAPHIC] [TIFF OMITTED] T8825.006 [GRAPHIC] [TIFF OMITTED] T8825.007 [GRAPHIC] [TIFF OMITTED] T8825.008 [GRAPHIC] [TIFF OMITTED] T8825.009 [GRAPHIC] [TIFF OMITTED] T8825.010 [GRAPHIC] [TIFF OMITTED] T8825.011 Mr. Farenthold. Thank you. Mr. Williams. STATEMENT OF DAVID C. WILLIAMS Mr. Williams. Mr. Chairman, Mr. Lynch and members of the subcommittee, the postal industry has a long history of working with the private sector and others to spur innovation. Historically, mail transport fueled the fledgling railroad and airline industries. Postal applications also stimulated advances in handwriting recognition technologies. They acted as a platform for the private sector innovators in the electronic postage, presorting and mail order industries; and the Postal Service imposed the overlay of the Zip Code across the country to the benefit of businesses and researchers. Innovation is even more important in todays age of digital globalism of today. The ungovernable Internet has changed the world, but great opportunities and enhanced capabilities exist alongside awkward new systems and unfamiliar risks. Lastly, the forces of creative destruction have ravaged traditional communications and logistics systems. In this environment, the job of an infrastructure like the Postal Service is to support citizens and businesses as they try to compete and position themselves, while it also takes care to assure that efficient market forces prevail and are not undermined. To continue in this role, understanding the changing world and rapid adaptation are increasingly critical endeavors. The Postal Service faces the tricky challenge of modernizing traditional products as it provides support services for emerging technologies. Success will largely depend on its ability to innovate and embrace the innovations of others. As a result, the continual strengthening of the Postal Service's processes for innovation will be needed that include: seeking to understand the frustrations and supporting emerging needs of people and commerce; developing a comprehensive innovation strategy; clarifying the entry point for innovators and providing staff to join innovators in navigating the huge postal structure and remain with them until the proposal is resolved; strengthening its skills in assessing the financial viability of proposals; developing the ability to engage in rapid proto-typing of new products and operational innovations; and protecting its intellectual property and respecting that of others. When pursuing innovation, partnerships with the private sector and the government are important in bringing in new ideas and specialized competencies, for sharing risks and for leveraging the costs of research and development investments. There are several areas where innovation opportunities seem particularly rich. One is support for e-commerce, e-health and e-government transactions, at the front end by providing a portal for identity verification for individuals and e- businesses and providing access to digital currency exchange instruments and at the back end, by assisting with packaging and shipment of parcels. Second is using micro-warehousing, virtual post office boxes and e-platform services to help small businesses and innovators with logistics and shipping solutions. Third is providing seamless physical and digital access to Postal Service network for the public and commerce by linking together its website, post offices and digitally-enabled carriers. Fourth is conducting digital analysis of the vast data now generated throughout the network for operational efficiencies, new revenue ideas and business intelligence. Together, these opportunities can tighten the integration of data streams and their supporting matter streams. The Internet, smart devices, search engines and cloud storage have laid the foundations for a changing world. An aspect of what will come next, atop this foundation, will likely be an ecosphere that continues to be ungovernable and chaotic with endless challenges, learning curves, and substantial creative destruction. The ability of society to propel rather than retard progress in these areas will depend in part on the competency of the postal infrastructure to support American commerce and citizens through the coming era that will combine and deploy major new technologies that include: additive manufacturing, also known as 3-D printing; the Internet of things, linking ubiquitous sensor nets; augmented realities and smart devices; big data analytics; advanced robotics that incorporates machine learning; and nanotechnology. The world posts were slow to grasp and adapt their role in the early phases of the digital age and were partially constrained from doing so legally. The next phases of this age of technology will likely be more disruptive than we have seen to date. The Postal Service must be highly agile and develop an intuitive sense of its changing role and the new challenges facing American businesses and citizens. A key aspect of the ability of the Postal Service to transform must include stronger competencies for embracing and implementing innovation. Thank you, Mr. Chairman. [Prepared statement of Mr. Williams follows:] [GRAPHIC] [TIFF OMITTED] T8825.012 [GRAPHIC] [TIFF OMITTED] T8825.013 [GRAPHIC] [TIFF OMITTED] T8825.014 [GRAPHIC] [TIFF OMITTED] T8825.015 Mr. Farenthold. Thank you. We will now move to some of our private sector folks, Mr. Davis with Outbox. STATEMENT OF WILL DAVIS Mr. Davis. Thank you, Mr. Chairman. Innovation is in the title of the hearing today, heard of, and spoken about at least a dozen times in earlier testimony. I feel the need to go a bit off script. A movie is the only thing that comes to mind. A favorite of my daughter is the Princess Bride. There is a scene in there where Inigo Montoya is caught up with a band of criminals and there is a criminal mastermind that keeps using the word inconceivable, inconceivable when all his plans don't go as planned. Montoya looks at him and says, You keep using that word. I do not think it means what you think it means. That is a bit how I feel today about the word innovation. I do not think it means what you think it means. The reason for this is because innovation, at its heart, is disruptive. It destroys things. It kills jobs. If you think that is too bold a statement consider this fact. In 1926, the S&P Index was formed. The average ten year at that time of companies on the Index was 60 years. Today, it is less than 15. In fact, since its inception, there is only one company that remains on the S&P Index and that is General Electric one single company. All those other companies are gone or destroyed. But for all of its destructive capabilities, there is almost a salvific effect of pursing innovation. It is an even, narrow road; it is the narrow path of putting off old business models and secure cash flows and grasping for something that is uncertain. The promise of innovation comes in the form of new jobs, new marketplaces for every job, every company. For every market that is destroyed through embracing innovation, two more pop up in its place in markets, ideas, new concepts and new workforces that simply could not have been fathomed. What happens in that disruptive process is incumbents usually fail. They usually die off and go the way of all those other companies on the S&P 500. So as we talk about innovation of the Postal Service, we have to understand that truly embracing it means a fundamentally different Postal Service. It means that in 10 years, it looks almost unrecognizable from the Postal Service today but that does not mean it is worse off. In fact, it does not mean that jobs have to be destroyed within the Postal Service. It means that new ones can be created. Make no mistake, innovation will come, disruption will come. In that regard, it is a bit like junk mail, it is coming whether you like it or not. As we talk about innovation and embracing it, we need to understand it means hard, fundamental core changes to the business model, embracing it means destruction but it also means new markets, new jobs and new opportunities. Thank you. [Prepared statement of Mr. Davis follows:] [GRAPHIC] [TIFF OMITTED] T8825.016 [GRAPHIC] [TIFF OMITTED] T8825.017 [GRAPHIC] [TIFF OMITTED] T8825.018 [GRAPHIC] [TIFF OMITTED] T8825.019 [GRAPHIC] [TIFF OMITTED] T8825.020 Mr. Farenthold. Thank you. Mr. Weisberg. STATEMENT OF SETH WEISBERG Mr. Weisberg. Thank you, Mr. Chairman. I am from Stamps.com, a leading PC postage company. PC postage is Internet-based software that allows customers to print their own postage using their existing computer and printer. Stamps.com serves over 500,000 registered customers primarily small businesses. In 1999, we became the first company to offer a software only PC postage solution, enabling customers for the first time ever to print real postage from any Internet-connected PC and standard printer. Just seven years ago, PC postage accounted for $250 million in annual postage sale. Last year, it accounted for over $3.25 billion in postage sold. Stamps.com postage growth alone was more than 35 percent year over year. That is consistent double digit growth every year, even through the heart of the recession. Virtually all the Priority and Express growth surge in recent years is generated through the PC postage industry channel. A recent study shows revenue through the industry PC postage channel costs two cents per $1.00 of revenue compared to 47 cents per $1.00 through a USPS-owned retail outlet. PC postage produces secure, sender-identifiable mail which is important for security against biological or other attacks. PC postage provides customers with cutting edge technology without the Postal Service having to pay for research, development, support or maintenance. Stamps.com has launched an enterprise service targeted to organizations with multiple geographic locations. It features enhanced reporting that allows a central location such as a corporate headquarters greater visibility and control over postage expenditure across their entire network of locations. An e-commerce merchant with multiple stores can use Stamps.com to consolidate all their orders so they can ship them out with one click, they can directly import all their order data from the most popular online marketplaces and shopping cart software and then automatically print the shipping label. All the shipping data, including the USPS tracking, automatically posts back to their web store. Stamps.com also automatically keeps the buyer informed, orders the carrier pick up, sends an electronic manifest to the Postal Service and generates a scan form so all the carrier does is scan the form once and all the packages are automatically in the Postal Service's computer system. PC postage is based on a public-private partnership with the Postal Service regulating industry participants. Our products must complete extensive USPS testing and evaluation in the areas of operational reliability, financial integrity and security. The Postal Service also partners with the industry to achieve mutual win-win goals of improving the customer experience, increasing revenue and minimizing costs. For PMG, the CIO sitting on this panel and so many of the dedicated Postal veterans who have ably worked with us for many years deserve much credit for the success story that is the partnership between the Postal Service and the PC postage industry. We believe public-private partnerships are the best path forward as technology innovation becomes increasingly important for the future. Having the Postal Service create its own technology is not the best approach. Instead, it should provide incentives for industry innovation. This allows customers to pick the best technology solutions for their needs. PC postage provides jobs for the industry and the Postal Service. Every package produced is ultimately delivered by a city or rural letter carrier. Growth in PC postage means more packages to deliver, more letters to deliver and more volume to service. Thank you for the invitation to testify today. [Prepared statement of Mr. Weisberg follows:] [GRAPHIC] [TIFF OMITTED] T8825.021 [GRAPHIC] [TIFF OMITTED] T8825.022 [GRAPHIC] [TIFF OMITTED] T8825.023 [GRAPHIC] [TIFF OMITTED] T8825.024 [GRAPHIC] [TIFF OMITTED] T8825.025 [GRAPHIC] [TIFF OMITTED] T8825.026 [GRAPHIC] [TIFF OMITTED] T8825.027 [GRAPHIC] [TIFF OMITTED] T8825.028 Mr. Farenthold. Thank you, Mr. Weisberg. Mr. Eidemiller. STATEMENT OF PATRICK EIDEMILLER Mr. Eidemiller. Good morning, Mr. Chairman and members of the subcommittee. My name is Patrick Eidemiller and I am Director of Engineering and Technology for M-pack Systems. We are a small startup company that produces a better pharmacy package called m-pack, the future of prescription packaging. M-pack was invented by 71 year old navy vet named Dick Lee. This is m-pack, the flat pharmacy box. This is a traditional ground box. M-pack has many advantages but most important are this vial is tamper evident, this bottle is not. This bottle of water is tamper evident; this prescription is not. Our entire drug supply chain has more security in this than we do in this. We also have a lot more label space so it is much easier to read. Lastly, it is much more space efficient and much more compact. M-pack is made in the United States in Erie PA. We are adament about U.S. production. We have another advantage and that is the reason I am here today. The USPS provides a favorable rate for what is called a machinable flat. This is a machinable flat; this is a parcel. The over the counter rate for this parcel is $2.20. The over the counter rate for the machinable flat is $1.56, so there is a 29 percent savings to the taxpayer for every prescription medication mailed in the United States if it is classified as a machinable flat. Realizing what we had with the flat vial and considering the U.S. Government is one of the largest users of prescriptions by mail, we saw an opportunity really to save the taxpayers' money and provide a better and safer vial through the mail and through the post office. Working with the Henrietta manufacturer in New York, we developed this envelope which meets all mechanical requirements of a machinable flat. We tested it on test equipment in Ft. Worth, verified that it worked and received our approval on June 17, 2011 that our flat mail piece had been approved. Over the next 18 months, we continued to improve and refine our product to look like this, smaller, lighter, and cheaper. More weight is more costly, we took two ounces out of this envelope. We put together a package that we could 50 a second; this one was 15 per minute. We put in 18 months of work to go from this to this. We resubmitted our package plus some of the internal improvements that occurred to us. We also wanted to retest. Our packages were rejected, not only this new package but the existing one as well. We were shocked. This had been approved once. It was for a completely different reason. It was not the fact that it doesn't meet the mechanical requirements of a machinable flat which is bent like this, bent like this. It was that a box in an envelope was not a machinable flat. That is why we were rejected. We were shocked. We had already been approved. We went back, I sent a letter to Gary Reblin. I love the flat rate box and use them all the time and we thought we had a sympathetic ear. We were referred back to Mail Standards and got a very curt response that basically said, ``Thank you especially for your persistence. Unfortunately, this piece with its current content qualifies as a parcel. If you change the contents, please contact us again.'' If we change the contents from this to this, please contact us again. The entire point, I'm sorry, is not this; the point is this. This is a better, safer vial but because of the shape it is 29 percent cheaper. We felt frustrated by our entire experience with the post office. We went to the post office for a reason. The post office provides value, the post office is the only agency that can legally place prescription drugs through a mail slot or in the mailbox and not leave it on our doorstep. That is an important factor. We want to work with the post office. We asked, we begged, we pleaded. We will change our package, we will test it at our expense. We want to use the post office and it fell on deaf ears. We went to the private sector, UPS and they said, you know what, we will take it, no questions asked, because we know how many of these we can put on an airplane, it is very safe, a second day service at a dollar apiece. That is why I am here. Thank you, members of the committee. [Prepared statement of Mr. Eidemiller follows:] [GRAPHIC] [TIFF OMITTED] T8825.029 [GRAPHIC] [TIFF OMITTED] T8825.030 [GRAPHIC] [TIFF OMITTED] T8825.031 [GRAPHIC] [TIFF OMITTED] T8825.032 [GRAPHIC] [TIFF OMITTED] T8825.033 [GRAPHIC] [TIFF OMITTED] T8825.034 [GRAPHIC] [TIFF OMITTED] T8825.035 [GRAPHIC] [TIFF OMITTED] T8825.036 [GRAPHIC] [TIFF OMITTED] T8825.037 [GRAPHIC] [TIFF OMITTED] T8825.038 [GRAPHIC] [TIFF OMITTED] T8825.039 Mr. Farenthold. Thank you very much. Mr. Everett. STATEMENT OF TODD EVERETT Mr. Everett. Good morning. Today, I will describe to the subcommittee how the U.S. Postal Service has partnered with and helped make it possible for my company, Newgistics, to develop innovative products responsive to the needs of the direct-to-consumer retailers, manufacturers, distributors and logistics service provides. Thank you, Mr. Chairman and members of the subcommittee, for allowing me to speak on behalf of Newgistics at today's hearing. My name is Todd Everett. I am the Chief Operating Officer of Newgistics. Newgistics is a privately held company based in Austin, Texas, with more than 400 people on our payroll. We were formed in 1999 on the premise that we could develop a better way for consumers to return merchandise to retailers. Today, we are a leading provider of technology-enabled solutions for direct-to-consumer retailers, manufacturers, distributors and logistics service providers. Our success is due in no small part to the Postal Service and its willingness to listen and work with private entities like Newgistics to develop innovative solutions. More specifically, we offer a national, integrated parcel delivery and return service for our customers. We are able to provide cost-effective, reliable and convenient shipping solutions by working with the Postal Service to provide last- mile delivery and first-mile pickup. When Newgistics was founded, we viewed ourselves as a technology company that would provide information to retailers regarding returned packages. Soon, however, we evolved into a ``returns'' logistics company, handling returns for retailers, making use of innovative technologies. We concluded that customers wanted to be able to return packages easily and retailers wanted to make their returns more efficient and cost-effective. Therefore, we developed a proprietary intelligent returns solution, making use of bar codes embedded in our Newgistics smartlabel. These intelligent bar codes provide us and our customers with detailed information that quickly enables our customers to manage their transportation and returns-processing resources. As we evolved, we discussed with the Postal Service the possibility of creating a new, convenient process for handling returns for large shippers of merchandise that made use of Newgistics smartlabel. Based upon our collaboration with the Postal Service, the USPS developed one of its most innovative products, the Parcel Return Service, also known as PRS. PRS is a Postal Service program under which approved providers like Newgistics are allowed to retrieve returned parcels directly from designated postal service facilities. Such early retrieval of returned parcels enables us to provide advanced data and customized return services to retailers. We found that the Postal Service was very receptive to working with us. Beginning in late November 2001, we had numerous meetings with the Postal Service. Following those meetings, in May 2003, the Postal Service sought permission from the Postal Rate Commission to test PRS. Approval was granted in September 2003 and testing began in October 2003. After two years of successful testing, in October 2005, the Postal Service sought permission for PRS to become a permanent class of mail. The Post Rate Commission approved PRS on or about March 3, 2006. From that point, we were able to implement our returns solution, including Newgistics smartlabel in conjunction with the PRS program. Our intelligent parcel return solution developed in collaboration with the Postal Service simplifies the return process by offering consumers pre-paid return via Postal Service pickup at their home, workplace or drop-off at any mailbox or post office. That is, via our solution, packages enter into our system through the Postal Service's vast retail and collections network. Our solution also gives consumers returning their product confidence that their return will be handled expeditiously. In addition, our parcel return solution has enabled Newgistics to expand its product offerings to include parcel delivery, fulfillment and e-commerce solutions to our customers. Put simply, the Postal Service has been and continues to be a willing and important partner in our efforts to develop innovative solutions that bring significant value to our customers and their consumers. Likewise, we understand that PRS also has been successful from the Postal Service's perspective. Based on the most recent available data, the Postal Service's parcel return service continues to grow. In the USPS' fiscal year 2013, the Postal Service handled more than 50 million PRS packages, generating more than $120 million in postal revenue. Mr. Chairman and members of the subcommittee, thank you for the opportunity to testify at the hearing today. [Prepared statement of Mr. Everett follows:] [GRAPHIC] [TIFF OMITTED] T8825.040 [GRAPHIC] [TIFF OMITTED] T8825.041 [GRAPHIC] [TIFF OMITTED] T8825.042 Mr. Farenthold. Thank you very much, Mr. Everett. We are going to break with tradition a little bit here. Normally, I would ask the first round of questions. Mr. Lynch has to go to another committee, so I am going to allow him to ask his questions. Mr. Lynch. Thank you, Mr. Chairman, for your indulgence. I appreciate that. I thank the members of the panel for their help. It has been a very interesting discourse thus far. When I think about the future, the next generation of the U.S. Postal Service, I tend to think about what they have going on in Switzerland. Pitney Bowes, one of our companies, has a system over there that they have rolled out. It is called a digital mail scan where I can pull up my mail. As it arrives at the regional mail facility, I can go on my secure website and see my mail before it is delivered. If I don't like what is there, I can click on it and say, do not deliver. Mr. Davis when you say junk mail is coming but not necessarily. It is not as inevitable as you think. You can click on it and then tell it not to deliver it. That is a new iteration for the Postal Service that is out there. I think that will be coming to the United States at some point. It would be a great thing for the environment because of the huge drop in mail volume because people won't be getting mail they don't want in their mailbox. At my apartment in D.C., that is 90 percent of what I get, circulars and stuff like that. If my wife and girs didn't get the sale information they get every day, I would probably save a ton of money. The volume will drop and that will be good for the environment. It will be a terrible thing for the Postal Service national letter carriers, it will drop the volume, but that is really constructive change. That is what we will have to deal with at some point. What the Chairman of the full committee has in mind is putting out about 1.5 million of these steel boxes in neighborhoods all over America, in urban areas, in towns that you must change 50 million door delivery addresses to clusterboxes so even if there are 100 addresses in a box, it comes to 1.5 million. If you make them bigger, put 200 in there, you can drop that to maybe 750,000. That is a huge, huge expense, even where it is feasible. Once we have 750,000 or 1.5 million steel boxes out there all over America, how much flexibility do you have in light of technological changes coming. Putting a steel box in the middle of the neighborhood and telling senior citizens, you can walk a quarter of a mile to get your mail, it is disruptive in a way but that is not innovation. That is going backward in time. Come on out and walk down to a steel box and get your mail. That is not creative. That is extremely costly and inefficient and it reduces our flexibility, I believe, in terms of what we are doing next. Mr. Issa. Would the gentleman yield so I could respond? Mr. Lynch. No, I am going to have to leave. You can talk about me while I am gone. Mr. Issa. My pleasure. Mr. Lynch. I am sure it is, Mr. Chairman. When I think about the idea, as well, of going to five day delivery, another bad idea but popular around here, the President supports it, the Chairman supports it, I oppose it. Most innovation tries to tie in with what society is doing. It tries to answer a need that is out there. Where I live, which is common in America today, we operate on a seven day schedule. All the stores that used to be open five days, long ago they went to seven days and now the post office, in the spirit of innovation, is going to close for two days every week. I think that is the wrong direction. Mr. Davis? Mr. Davis. You had a fabulous example of citizens in Switzerland being able to unsubscribe from junk mail. In fact, that technology existed in the United States for two years We brought that technology to the States with Outbox. In fact, we unsubscribed over 1 million pieces of junk mail for our users and were able to do it through the digital delivery and presentment of postal mail. We found even though they unsubscribed from volume, we can measure intent and intent is the holy grail for advertising. When we measured intent, we could know exactly what they wanted, what they preferred or not. That type of information is missing. That is why it is so unfortunate. Mr. Lynch. Reclaiming my time, all I am saying is want to empower the customer. The taxpayer is not involved. This is the postal customer that is picking up the tab. We don't give tax money to the Postal Service. They survive on the money they get from stamps. I want to empower the customer so they don't have to go to any company, they can see their mail when it arrives at the regional postal center and click off on it if they don't want it delivered. That I think is constructive change, it is innovative change and will take us to a whole new world. I think that would lower the cost and make it more efficient and improve the Postal Service. I am beyond my time. Thank you for your indulgence, Mr. Chairman. Mr. Farenthold. Thank you very much. Mr. Clay, did you have votes as well coming up? Mr. Issa. The gentleman from Missouri is always welcome to speak in this committee. Mr. Clay. Thank you, Mr. Chairman and Chairman Issa, I appreciate that. In 2011, the Inspector General for the Postal Service released a two part report on the Postal Service's role in the digital age. Included in part two of the report was the idea that the Postal Service expanding into hybrid and diverse hybrid mail services. Mr. Williams, can you briefly explain what the services and elaborate on why it may be beneficial for the Postal Service to expand into these areas? Mr. Williams. We believe that the ability to print the letter at the point of delivery would keep a lot of the mail out of the system--the idea of sitting on transports and fuel and crowding through the sorting plants would be a very good idea. It allows variation also among the regions where you could print different letters for different zip codes. Mr. Clay. In your opinion, has the Postal Service put the cart before the horse by closing the distribution centers before they have a real plan to go forward to lessen the volume of mail? Mr. Williams. I do. I think there is excess capacity inside those sorting centers but I don't believe it should, as you said, spring out in advance of seeing what the effect and impact of this. Picking the timing for innovation is devilishly difficult and if we present something that isn't immediately embraced and we have burned the ships behind us and closed off the possibility of using the other network, it would be a very serious mistake. Mr. Clay. The hybrid and reverse hybrid mail service sound similar to the business model of one of our witnesses here today. Mr. Davis, your company, Outbox, was a fee-based service that gave customers a choice to bypass physical mail, correct? Mr. Davis. Correct. Mr. Clay. If I am correct, your business model was dependent on the participation of the Postal Service, its infrastructure and customer participation, correct? Mr. Davis. Correct. Mr. Clay. This year, Outbox announced that it would terminate its digital mail operation through a bar code. You informed customers why Outbox was shutting down its service. In the post signed by you and your business partner, you mentioned that initial tests with the Postal Service showed positive signs of success and operational simplicity but the deal didn't work out. Is that correct? Mr. Davis. Absolutely. Mr. Clay. Additionally, you described your visit with the Postal Service's senior leadership as a Mr. Smith goes to Washington moment where senior leadership made it clear they would never participate in any project that would limit junk mail and that they were immediately shutting down your partnership. Is that correct? Mr. Davis. Correct. Mr. Clay. Mr. Davis, in developing your business plan, were you aware that advertising mail represented a significant portion of the Postal Service's volume and revenue? Mr. Davis. Yes. Mr. Clay. As a self sustaining entity, that has to generate revenue, were you aware that the Postal Service has a right to choose who it works with it based on its bottom line? Mr. Davis. Absolutely. Mr. Clay. Mr. Cochrane, the Postal Service has been quiet on this issue. Is there anything you would like to add? Mr. Cochrane. The concept of people collecting mail and digitizing has been out there for almost ten years. There are other companies in that space. The approach is one where people sign up and go to what we call commercial mail receiving agencies. It is very common and happens in buildings all over town here. It is very common in the business arena in New York and Washington. I think the challenge was that Outbox approached it a bit differently. They didn't want to have a commercial mail receiving agency, so that required them to go to the mailbox and pick it up. There are companies out there sustaining that business model and providing a digital image of mail pieces for their clients on a day to day basis. Mr. Clay. Thank you. Mr. Chairman, although I commend Mr. Davis and his company for the innovative solution, I think it is unfair to use this hearing to criticize the Postal Service for not being innovative and at the same time insist that it operate with a business mind set which is what it was doing in this case. In addition, I ask for unanimous consent to enter into the record an article dated May 8, 2014 from the Heritage Foundation, the Foundry Blog, entitled, Why the Postal Service was right to side with junk mail over Outbox. Mr. Farenthold. Without objection, so ordered. Mr. Issa. Would the gentleman yield? Mr. Clay. Yes. Mr. Issa. I would like to side with you in this case, surprisingly, that although it is a shame to see a for profit entity close because they are not making a profit, I do agree with you that when this is an innovation that should be on the list of innovations to the Postal Service because it falls squarely within their basic requirements, just as Stamps.com is an innovation the Post Office ignored, to their peril, one of the strange things you and I agree on is at a minimum, the Post Office ought to do all of its core jobs of revenue and revenue saving first, that the most important innovation in the company is to do the job they are paid to do well and innovatively. I think we have two witnesses here today from two for profit companies, one that is still thriving and one that isn't in this space, but they both are core functions of the Post Office that suffer from neglect. I share with you that in the Comprehensive Postal Reform Bill, we increase the innovation fund specifically because we hope the Post Office will innovate within its core in addition to outside its core. Mr. Clay. In your opinion, does it cry out for a public- private partnership? Mr. Issa. I believe there are some core businesses the Post Office can and should own. They may use private enterprises as their contractors but I will say on the record here today that the job that Outbox proposed, if embraced by the Post Office as a core function, could far exceed the benefit. I think Mr. Lynch, although he disagrees with everything I stand for apparently in postal reform, including I have become a Luddite from the electronics industry, that is a first for my colleagues, but the fact is that when he talks about digital delivery in Switzerland being inevitable, he talks about a version of Mr. Davis' business plan that Switzerland has gotten ahead of us on. He seemed to muse that it would be bad for the base that he so much often cares about, but the fact is he is right. He is absolutely right that these innovations are either going to happen within the postal system or the postal system is going to miss it altogether and then be fighting for, as you said, its core right to decide not to participate for the business that may already have gone a long way. I couldn't agree with you more that your point was right on. Mr. Clay. Mr. Chairman, I think I may be having an out of body experience by agreeing with you so much lately. I see my time is up. I yield back. Mr. Farenthold. Thank you very much. We will kind of get back to the regular order here. I will go ahead and start with some of my questions. Mr. Davis, I think most of us up here know the story of Outbox. You took your time to give a very passionate speech about innovation which I enjoyed listening to. Can you in roughly a minute or so tell us what Outbox did and what happened? Mr. Davis. Absolutely. Outbox enabled our users to view their postal mail from anywhere, whether it is their I-phone or I-pad and they could tell us exactly what they wanted and what they did not want physically. It is a hybrid approach in that regard. Mr. Issa is correct in that. This is a fabulous idea, it should be adopted by the Postal Service. We started testing it in Austin, Texas with the idea that we would ask forgiveness, so to speak, before we asked permission because the rules and regulations are so onerous. We did so with great fanfare and we were shut down in that meeting with the Postmaster General and the senior team. In that meeting, we had a fundamental misunderstanding of who the customer is of the Postal Service. He said, your customer is not my customer. I said, Mr. General, what do you mean? He goes, my customer is the sender of mail that essentially pays me to place mail on the kitchen tables of every American every day. While true, that is not where the inherent value of the Postal Service lies. The value lies with its connection with every single American. It is my belief that large organizations and government of which the Postal Service is in part both, do not naturally tend to adopt innovation because it does disrupt them. It was my hope and my business partner's hope that we could test this on a small scale within the Postal Service but we were not allowed to. The only way we can do this is that we have a safe harbor, something within the Postal Service that allows it to be disrupted on a small scale in localities around the country to test new ideas. As I mentioned, our ability to give customers choice led to higher value, led to increased understanding of who the real customer is, the American people, and led to value opportunities that were beneficial for the end user and beneficial for our company and ultimately, the Postal Service. Mr. Farenthold. Thank you very much. Mr. Eidemiller, you mentioned that you were unable to get your product classified as a machinable flat and it actually became a parcel? Mr. Eidemiller. Yes, it was unclassified as a machinable flat and magically became a parcel. Mr. Farenthold. That is more of a competitive service for the Post Office. I think you mentioned the amount of postage a flat would take? Mr. Eidemiller. Yes. As an example, these are over the counter rates. This is a parcel rate for about four prescription vials, $2.22. This is the over the counter rate for a machinable flat which is $1.56. Mr. Farenthold. You went to UPS with your new redesign and you said they are delivering them for $1.00? Mr. Eidemiller. They made an offer and put it on the table of roughly $1.00. The challenge we have, when I brought them up, is we are a young startup and we are investing our effort where we have opportunities to generate revenue. While we think this is a great and wonderful idea, and year ago put a lot of emphasis in this, our business has pivoted slightly from that. After getting stonewalled by the Post Office a year ago, we got a lot of interest in bringing this to market and have had discussions with potential customers. UPS won't officially put a contract on the table until they have volumes, units and costs. They say, yes, we believe in the package, we know we can do it for about $1.00. I asked them to submit something for the record; they declined to submit something for the record. We have it orally. Mr. Farenthold. I get the impression you would rather use the Postal Service? Mr. Eidemiller. I would much rather use the Post Office. The Post Office has the infrastructure, the Post Office has the trucks, the Post Office can print this envelope into every mailbox in the United States, legally, safely, securely. UPS cannot do that; they put it on the doorstep. The volume is there, the business is there. This is a regular standard business sized envelope. As a machinable flat, this is 90 cents over the counter, drugs by mail for 90 cents--$2.22. There are hundreds of millions of dollars on the table. The only plausible reason I can see the Post Office has that we want it classified as this versus this is top line revenue because the top line revenue of a parcel is higher than a flat. In last year's strategic plan in 2013, I got this online, it says the Post Office makes three times more money on a flat than a parcel, three to one. The Post Office actually makes more money, if these numbers are correct, doing this at lower cost than doing this, three times more revenue. Why? It is very simple. It is easy to automate. We have proven we can automate this. Their only case is that a square box in an envelope is not a machinable flat. It meets every mechanical requirement of a machinable flat. We have tested it. We volunteered to work with the Post Office to prove it. Mr. Farenthold. I appreciate it. I am not going to draw you into the debate of whether or not it is a secure delivery location for your parcel would be of benefit to your company or not. Ms. Norton, we took two on your side of the aisle first, so if you don't mind, we will recognize Chairman Issa and then come back to you. Mr. Chairman? Mr. Issa. Thank you. This is an interesting and I won't use out of body as Mr. Clay did but it is an interesting turn of events when Mr. Lynch called me a Luddite and says there is an inevitability that we are going to do what Switzerland has done. Mr. Williams, I was madder than hell at your proposal. The idea that you are trying to be the Chief Innovation Officer and promoting banking within the IG's office is reprehensible. I am shocked that an Inspector General would go from the waste, fraud and abuse and inefficiency to promoting a specific agenda. I am disappointed. Notwithstanding that, the Post Office has every right to propose innovative activities, including postal money orders and other items, some of which are historic within postal systems here and around the world. However, I would hope that in the future you would be much more of an advocate, including people like Mr. Lynch who seem to find everything that reduces cost and allows the Post Office to break even and be more efficient for its customers, which as stated earlier, are the shippers. Mr. Lynch is not here and he proudly said I would talk about him after he left. Mr. Lynch is never going to be my partner in anything that reforms the Post Office and makes it more efficient because that is going to reduce labor. I am sorry to say but I think he is a lost cause on that. Mr. Clay and others are not. Let's go through the numbers quickly. Anyone can weigh in but Mr. Williams, you are a little bit in the hot spot here. The fact is six day to five day is in the shippers' best interest because it avoids another three cents per letter price increase and similar cost across the board, doesn't it? Mr. Williams. I am uncertain as to the three cents but I understand the principle. Mr. Issa. Looking at about $2 billion versus what the exigent price increase did, I am just using those, but even if it only saved two cents or one cent, isn't it true that in fact a reduction in cost that allows you not to have an increase in price is more likely to avoid a reduction in volume because the shipper ultimately, although sensitive to how often you deliver, is most sensitive to price, isn't that true? Mr. Williams. I think that is a very good proposition. We would need to find out what happens in reality but I certainly follow the train of thought. Mr. Issa. That is why the President has proposed that. Mr. Lynch spent a lot of time bashing steel containers. From a factual standpoint, isn't it true that 91 million homes do not receive in the door delivery, while 37.8 plus or minus a million do? That is the curb-cluster including apartment and condo owners all over America, rural delivery and so on, that 91 million plus or minus do not get it to their door while only 37.8 do? Mr. Williams. Yes, I agree that is the ratio. Mr. Issa. It is amazing for that ratio of more than two out of every three who were already part of the savings of not having to walk all the way to the door, simply less labor and that has been proven and calculated both by the Post Office and CBO, that labor savings for less than one third of Americans is billions of dollars and ultimately, question for you, those billions of dollars per year, a modest 15 million less than half of those being converted, is scored at over $20 billion in savings in cost to the Post Office. Let's go through the numbers. Your customer is the shipper, you all agree to that, whether you like it or not. The shipper gets a value both in secure storage and in avoiding cost increases? Mr. Williams. Correct. Mr. Issa. Where is the negative side, assuming it is a reasonable distance to go, that in fact these are secure storage and that individuals under the Americans Disability Act and the like will always be able to still get to the door delivery which is already based in law. If I am out in rural America but I am a shut-in, I can with no cost have the Post Office deliver to my door today, isn't that true? Mr. Williams. It is true. We did a study as well on this topic. We saw that the amount of savings was enormous depending on whether you picked an extreme model or one that was very moderate, there was a huge amount of savings Your proposal, as I understand it, is on the moderate side. Mr. Issa. We toned it down a lot so that we could say that more than half of all Americans who now get it to the door, if they don't believe it is feasible for them, would not see a change in the first ten years. We believe that communities will over time rush to have secure storage, not necessarily clusterboxes of a dozen or more. Often there would be two or four in a cluster, just practically at your front door. In fact, the ones we showed yesterday during our hearing, we specifically chose ones that ganged and a little larger because we want to be fair. In neighborhoods where it is hard to place a box, you will tend to have larger boxes while in suburban neighborhoods, it is pretty easy to do two or four at the curb between your neighbors. Mr. Williams. Both for places where the model is difficult to fit and for people with special needs, we saw there were considerations for a waiver. We think that is important to do. We think it could be a real game changer and save an enormous amount of money. We also want to know that those 37 million you pointed out aren't designed for people with special needs or special requirements or in places that are difficult to deliver. It is a historic accident. We like the fact that this imposes a comprehensive plan for the placement of those and the facilitation for people with special needs and neighborhoods where the model can't work in the classic. Eleanor, can I have your indulgence for about two more minutes? Thank you. Mr. Farenthold. Without objection. Mr. Issa. Thank you, Mr. Chairman. A couple of quick things. Mr. Cochrane, I think from your end the fact is that the Post Office, in my opinion, is uniquely positioned to provide a postal digital delivery system as an additional feature for a fee to the shipper. In other words, you may not know where they live but if I can pay half as much for a digital delivery only system and then the digital deliverer can choose to have a paper copy delivered and I only pay if that paper copy is delivered, that is a feature that is a variation of Mr. Davis. Technologically, from your experience, that is completely doable, isn't it? Mr. Cochrane. Yes, it is and we have a test right now in northern Virginia where all of our letter and flat sorting equipment involve cameras and we can take pictures of mail pieces. In our active test, you can get an email each day with an image of the actual pieces that we saw in our sorters that are going to arrive in your mailbox that day. That doesn't get into opening envelopes and opening but it is a first step towards giving people a digital image of what is going to come to their box. The risk side of that is what was discussed earlier. You have catalog mailers that are paying to get into the mailbox. If you are disrupting that to use the term, it does threaten a very extensive revenue stream for us. Mr. Issa. For example, these are hypotheticals, Mr. Williams, you have looked at a lot of the efficiencies. If a shipper says, I am going to give you x amount of these things and if a person declines, I am going to pay half as much. If the person accepts it, I am happy to pay the full fee. It could be a win-win. I could deliver you two-thirds as many pieces of printed material, it would be visible and usable by somebody digitally for half the price, while if delivered, let's say I want the coupon or whatever, I pay the full price. Actually to your customer shipper, you are expanding his options. You could also have a no delete option that it must be delivered and he would pay full price. Those options aren't available today. I am not in northern Virginia in my local home when I am in the District, it is in the District but I would love to know digitally everything that is proposed to be sent to me so that I know to expect it and if it doesn't come, and it is an invoice or something, I would be prepared to say, I have a lost piece of mail. There is a huge advantage to that. I happen to be a to-the-door delivery in the District and I often get my next door neighbor's mail. I don't know what causes it but it happens pretty regularly. I take the mail and walk over and put it in my neighbor's chute. The reality is my neighbor doesn't know that she is missing her mail until it shows up and I am gone, as you know, for weeks at a time because I don't actually live here. They lose three or four weeks sometimes of mail. If they had a digital picture, they would know they didn't get it. All of these and more are what this hearing is about, Mr. Chairman. I want you to continue pushing for this innovation. Our broad proposal has additional innovation dollars. I would like to close, Delegate Norton, with one thing. I was in business for more than two decades exclusively and then I have been in business very modestly by comparison over the last 14 years. The one thing I know about business is the top and bottom lines are not uniquely different. You can increase top line but if it doesn't flow to the bottom line, it is of no value. You can make cuts and never get to a profit but it is a combination of the two. The Post Office has its current volume, billions of dollars of excess inefficiency that we all know can cut. Innovation, in the case of your product and others, depends on efficient delivery and the more efficient it is, the more promising it will be for innovative products. It amazes me that brown trucks go to any rural or suburban areas. I think they go there because they can't quite get as good a deal as they will be able to get from the Post Office if these innovations happen. Ms. Norton, I appreciate the extra time. There is nothing more important to me than to try to have all of you be a part of it. Mr. Davis, I appreciate your showing the way. My hope is even if they don't take it from you, they will in fact see the direction you gave as having value in some derivative product. Thank you, Mr. Chairman. Mr. Farenthold. Thank you very much. We now recognize the gentlelady from the District of Columbia. Ms. Norton. Thank you very much, Mr. Chairman. I must say I welcome this hearing on innovation in the Postal Service. I particularly welcome the private businesses who work with the Postal Service. I have often wondered about the perpetual identity crisis we keep the Postal Service in. It is a little bit private or maybe mostly private, chained to the Federal Government whereas the essence of being a private business where the government doesn't give you anything and you can go out and build for yourself all arise. Most of the downsizing that has been done in the Postal Service has been done by cuts. I would much prefer, as the Chairman just indicated, innovation to be the role to the future of the Postal Service. I don't believe there is any way out of that. Frequently, I see on television an innovative tool that the Postal Service is using, and I say, wow. I hadn't become used to that as a kid growing up and yet I do see those. I would like to ask about some of those, the new products in particular, since some of you have been involved with those products. One of the success stories has been the every door direct mail. I was interested that it apparently has helped the Post Office generate more than a billion dollars. Mr. Cochrane, is that correct? Mr. Cochrane. That is correct. Ms. Norton. Apparently this product has been a great success with the business community. I would like to know how the Postal Service understood that this was a product that would catch on with the business community and why it has caught on with the business community, and what they are doing to enhance a product that has had this success? Mr. Cochrane, are you the person who can best answer that? Mr. Cochrane. I am. Thank you for the opportunity to talk about a product that we are certainly very pleased with. It is an innovative product that was created to really leverage technology in some way. Though it is a hard copy piece of mail, what we have done is facilitate the ability for a customer to go to our website and literally pick a neighborhood. If you are a dry cleaner or restaurant, you can actually pick the neighborhood and the routes you want to see your piece of mail delivered to so you don't have to deliver it to an entire zip code. You can pick the neighborhood you know your customers live in. It has mapping that allows you to click on the routes, look at the streets and highlight the streets you want the mail to be created. There is a commercial version and a version that you can walk into a post office and pay right there at the point of service terminal, drop off the mail and we will deliver it in the next day or two. Ms. Norton. I take it you have a competitive advantage over your competitors with this particular service because of your own infrastructure? Do you have any competition with this service? Mr. Cochrane. With mail going into the mailbox, no, but there are maybe more sophisticated mailings, direct mail in particular, that place. I think that was some of the initial concern of our business partners, that this EDDM would force people to buy down from a more traditional mail piece. Our findings are actually the opposite. It has created an on ramp where someone begins with the very simple EDDM product and morph themselves up into more sophisticated mailers and start seeing the value of mail. They get a creative agency, start working with the commercial printer and expand where they are sending mail. It is really like a first step into mail in a very easy way that actually in many cases has helped mailers move into a much broader mail stream. Ms. Norton. Do they contract also where they send mail based on what they learn by going online? Mr. Cochrane. I think that is the issue, that they can pick where they want it to go to. It is a saturation type mailing when they pick a carrier route with 500 deliveries in that route will receive it. Ms. Norton. So it saves business money as well? Mr. Cochrane. Absolutely. Sometimes you will get a mail piece and it is from a dry cleaner three towns over, you might drive by five dry cleaners to get to the person that sent you the mail piece. This becomes a lot more targeted. Neighborhood mail is a good way to describe it. It really focuses on the area you are trying to reach. Ms. Norton. The Post Office has had fair success collaborating with others. Mr. Everett, Newgistics developed a product with the Postal Service, correct? Mr. Everett. We have worked extensively with the Postal Service. Ms. Norton. Did they reach out to you? Mr. Everett. I wasn't with Newgistics when the initial meetings were held but my understanding is we had an idea, reached out to them and it was aligned with some of the product ideas they had as well. Ms. Norton. Mr. Weisberg, your company has successfully collaborated with the Postal Service, I understand? Mr. Weisberg. Yes, we have. Ms. Norton. Who reached out to whom in that one? Mr. Weisberg. We reached out to the Postal Service initially? Ms. Norton. Mr. Cochrane, do you find you are pursued by businesses like Mr. Weisberg's? Mr. Cochrane. It is very flattering and I think it is just recognition of the presence we have, the fact that we are at 153 million doors today. I was part of the early conversations with Newgistics and they did reach out to us and say, we want to do something with returns. They shared their business model with us and we were thinking of something in the same vein, so we went to a pilot, created a product over at the regulator, a temporary product and went for a regular full time product as parcel return service which at the time, ten years ago, was really when e- commerce was starting to take off. One of the real barriers to e-commerce was ease of returns and the studies in market research were showing that was the thing holding people back. It was in everyone's best interest, the Postal Service, the retailers, to help facilitate a more easy return. We were proud to partner with them and I think it is a great success story. Ms. Norton. Could I just ask Mr. Eidemiller? Mr. Farenthold. Sure. Ms. Norton. As I came in, you were describing difficulties with the Postal Service. Is it the case that you went to UPS instead? Mr. Eidemiller. We spent over two years really believing the Post Office was the best solution. We still believe the Post Office is the best solution. They offer service that nobody else offers. At a certain point, being a fairly self funded business with limited amount of runway, you put your resources in areas that you believe in. After reaching a dead end with the Post Office, we approached UPS and they said, great, we love the package, we know how many we can put on our plane, we will give you a great rate for it. They are talking about $1.00 from origin to destination, second day service at worse. Ms. Norton. Mr. Cochrane, do you have a response to that? Mr. Cochrane. I'd like to weigh in on it. Thank you for the opportunity. The fact is that we have different automation. We have over 10,000 pieces of automation in our network. It is a very complex network as I said in my opening. We do delineate and differentiate letters from flat type mail, catalogs, magazines in particular, and parcels. It is important that they go into the distinct streams they are supposed to so that it is not creating problems on our machines. That the boxes are inside an envelope doesn't necessarily make them a flat; it is a parcel and that is the reason why they were turned down to mail at flat rate because of the rigidity of the pieces and the need for these pieces to stay in the appropriate mail stream which is the parcel mail stream. We would welcome customers shipping those packages as designed. I think it is an innovative design. The whole concept that it secures the bottle and it is tamper resistant I think is a nice value set for pharmaceutical companies. We deliver well over hundreds of millions of pharmacy items on an annual basis. The issue is it is a parcel. At the end of the day, it has to be mailed as a parcel. Mr. Eidemiller. May I speak? Mr. Farenthold. It is Ms. Norton's time. Ms. Norton. I think this dialogue is informative. Mr. Eidemiller. May I offer rebuttal to his testimony? Ms. Norton. Yes, please. Mr. Eidemiller. My background is material handling and automation. Our two partners came out of Electric Com which was purchased by Siemens. The entire genesis around mpack was initially around their frustration with doing drugs by mail in a round bottle. They one day said, why don't we do it square. At the time they had done industrial automation at Columbia Records, BMG, the Record of the Month Club, cassettes. They were handling those 25 years ago at 300 pieces per minute, yet they couldn't automate around a vial through the mail. We had a long term professional relationship with the folks at Siemens so when we started this process and came up with this mailer, the first thing we did because all of us come from an industrial automation background, we know what non-debatable means, we know what machinable means. I have built a hundred distribution centers in my life. The first thing we did was to prove this with run through flats. We ran this through flats. We had a video we submitted with our application showing this running through the Siemens optum sorters in Ft. Worth before we ever submitted our package. We provided this with our submittal. It passes every mechanical test of a machinable flat. It bends this way, it bends this access, it follows every mechanical test in the DML. It sorts on the equipment at 300 pieces per minute. We offered to retest at our expense, we have offered to change the mail piece at our expense. We want to partner with the Post Office. Hello, we have volume you can make money. Please work with us. I don't know what to do. Mr. Farenthold. Thank you very much. We have gotten to everyone. I have a few more questions so we will do a quick second round of questions and give Ms. Norton some more time if she wants it. Mr. Farenthold. Mr. Williams, in some of the innovations you talked about, you mentioned a virtual PO box. Can you tell me what a virtual PO box is? At first blush, it sounds like what Mr. Davis was offering. Mr. Williams. Perhaps they are related to one another. Let me explain what it is. Today the Postal Service is limited in the number of post office boxes they can offer to our users. It is a small box and rigid so it is also limited in the number of things you could put in there. The idea we examined for the virtual post office box would allow people to--we can talk about classes of customers--it allows the customer to open a box that has no dimensions. It could be delivered to an address in the United States that people apply for. There are a lot of foreign customers that would love to buy U.S. goods but can't because they don't have a U.S. address. The virtual post office box would allow it to go there and that post office could combine it with other things going to that country and send it at a discounted rate. We think that would be good for commerce. It would also provide for small businesses and small innovators the ability to almost operate their business out of that virtual PO box. It would be temporarily stored, the items could then be sent out as directed by that business. Mr. Farenthold. You also talked about print at the destination of mail in response to an earlier question. Didn't we try that with mail grams and didn't FedEx try it with a fax type service? Mr. Williams. This is not something we have strongly advocated. We have followed its path more. It remains alive. It strikes me as a good idea and there are takers for it but this is also something I mentioned earlier in the meeting, picking the moment at which demand exists in this environment is very, very difficult. I would say it hasn't come in a strong compelling way to hybrid mail. Mr. Farenthold. I want to go to Mr. Weisberg for a second. You all are kind of a success story in working with the Post Office. Was UPS supportive when you started out and came with the product? Mr. Weisberg. When we initially started, it took a process of years of speaking with the Postal Service by us and other companies that wanted to do PC postage to convince the Postal Service to approve it and allow it to exist. There were people within the Postal Service who were encouraging and there were others who were discouraging. Mr. Farenthold. Do you have any suggestions for how we could change the process of getting innovative products like Stamps.com to be adopted by the Post Office? Mr. Weisberg. We do think it would make sense to add some protections to companies that come with new innovations to the Postal Service to make sure the Postal Service doesn't unfairly compete and launch its own products compared to what those companies do. We do very much support the concept of using public-private partnerships and having private industry players be able to come up with the best solutions that work. Mr. Farenthold. The Postal Service is actually kind of competing with you with their quick to ship product. That has to be a bit awkward in that they are your regulator and your competitor. Mr. Weisberg. It is a very difficult position to be in when you invest a lot of time and effort in an industry into launching products and you are regulated by the Postal Service. You have to provide the Postal Service detailed information about how your products work and then they launch a directly competitive product. That is difficult. Mr. Farenthold. With respect to Outbox, Mr. Davis, one of the things a service like Outbox has the potential to offer is targeted ads. I am an avid Internet user and I will shop for some dress shirts online. All of a sudden just about every site I visit has an ad for dress shirts on it. Highly targeted advertising is valued by advertisers. The Postal Service talks about advertisers not getting their product delivered but wouldn't a service like Outbox actually have more value to advertisers? A random catalog, your best hope is something on the cover strikes somebody's interest in the few seconds between mailbox and recycle bin? Mr. Davis. Absolutely. As I said earlier, intent spending, intent on brand affinity is the holy grail of all advertising so you can imagine a digital ad piece that is actually free to present so it is free to show that on a digital device to an end user and they can decide if they want to engage with that or not. We did some interesting tests with Kind Bar and with Starbucks Via packets, small sample sized products where we would present digitally an offer, would you like to try this new flavor of Kind Bar. In some of our tests, we had as much as 50 percent engagement which is astounding for any digital advertising piece. People would say yes, send this piece to me, I want to engage Kind Bar and I want to try this new product. We would deliver it to their front door the next day. To give you an idea how much that is worth to a CPG, they average about $20 per sample product given to a new user of their product. There is an enormous amount of money currently being spent on sampling products. Right now they are untargeted. You see someone out in front of a grocery store or on the side of the road, here is a very powerful target tool. Mr. Farenthold. That advertising would be revenue to Outbox and not the Postal Service? Is there a model for something like this where the third party does it or is it something you develop the technology and sell it to the Postal Service and they do it? Was that kind of the feeling you got in your negotiations? Mr. Davis. Right. Well it is hard to unpack such a complicated web of interested politics and business models and mandates. At the end of the day, there could be winners and winners. It does not have to be winners and losers. It was our hope that if the Postal Service could not create this on their own or was too slow to do that, an outside third party company could develop it, spend private dollars to develop it and then either white label it or be a third party contractor with the USPS. Mr. Farenthold. Thank you very much. They have called our vote series. We have a little bit of time before we have to leave if Ms. Norton has some more questions. Ms. Norton. Just briefly. I am interested in what keeps the Postal Service from developing new and innovative products as a matter of course. We have spun them off as a private business and not always allowed them to act as a private business. Are there any issues or impediments that stand in the way of the Post Office doing the usual work of seeking innovations, particularly given its unique infrastructure, Mr. Cochrane? Mr. Cochrane. I think part of the challenge is the current law that we operate under. It is restrictive. Ms. Norton. Speak a bit about that law. What about that law? Mr. Cochrane. As an example, it says the products we are allowed to enter are postal products and it kind of put a bit of a box around things we can do. If we are approached by somebody with an innovative idea, some of these things are against the law, as I stated in my opening comments. Some of the things we are working on don't fit our model and some are just not legal in the current sense. As an example, we have very restrictive privacy rules. We have a lot of data on what goes into the American household with things like IMB and for good reasons, there are privacy statutes that exist. Unlike a lot of other private sector companies, we are not allowed to data mine that information. That is a restriction on our ability to market. Ms. Norton. That is a restriction that wouldn't be as controversial I think here. The Chairman seemed to buy into this restriction to postal products when he admonished I suppose Mr. Williams for daring to suggest that non-banking products might be suitable. I disagree with the Chairman on that. It seems to me we have information that if you look historically for the first 60 years of the 20th Century, the Postal Service actually had a banking service used mostly by immigrants. There were savings accounts, limits on the amount of the savings accounts. There are postal facilities where there are no banks. In fact, banks have pulled out of many neighborhoods because they do much more digital than the Postal Service does. I don't see what is wrong with non-banking services. This is what I meant when I opened my last question with it is a little bit private. It is like a little bit pregnant. You just cannot do it in a market economy. Let me invite Mr. Cochrane and Mr. Williams to elaborate on some non-postal services that you think the Postal Service could enter into, thrive and fully compete with the private sector. Mr. Williams. With regard to the financial services, you are correct that the Postal Service was in the banking business for a large number of years worldwide. Many rural posts provide financial services. It provides about 14.5 percent of their income which helps them to continue to provide universal access and reduces the overhead for the post offices that are out there. We currently do provide financial services with money orders and other kinds of information services we do in remote areas for the customers. This idea was to update the money order into the digital age. We don't think it is good for citizens or for e-commerce to be cut off from one another. You can't use money orders to engage in e-commerce. As a result, as many as 68 million adults are cut off from commerce and commerce is cut off from them. It did look at what would happen if the U.S. Postal Service did as it used to do and as many other nations do today. Mr. Cochran. I would just say not on the financial sector but the Postal Service is in a period of significant change in our business model. I think that is well documented. As mail declines, particularly single piece, first class, we have shifted to do more and more parcel delivery. In the course of innovation, we have to take a look at ourselves and our network. We have a ubiquitous retail network. How do we use that in many ways to help us generate top line revenue. The last mile we have discussed a lot today but there are more things we can deliver. Think about the fact we have 217,000 people out there today driving the streets of the United States, working hard and delivering product for mailers and shippers. There is a robust network of processing centers and transportation that I think you need to further leverage. Maybe the future grail is the one we talked about a lot today, the digital space. There are going to be places where the Postal Service needs to step forward and have a strong footprint in the digital space. In the information I sent in, we talked a bit about what we are doing with the government with FCCX to help authenticate. There is a lot of opportunity for the Postal Service to continue to leverage the brand, the trust, the security and the world class network that we have. That is where our innovation is focused, to use that infrastructure to generate revenue and keep providing great service to the American people. Mr. Williams. I do think it is probably important to add the law may be too restrictive and it might be good that you are looking at it, the 2006 law, but that law wasn't put in there to be mean spirited or hurt anyone. It was put in there to make sure the Postal Service doesn't drive the small businessman or innovator out of business. The challenge today is enormous and it is from horizon to horizon. The Postal Service doesn't need to go in where it is going to harm private enterprise. Ms. Norton. I would certainly agree when it comes to small business but I do not agree that the Postal Service shouldn't harm competitors in the same business or in a live business. I think that is the whole point of competition in a market economy. Mr. Farenthold. Maybe that is a topic for a future hearing in this subcommittee as to where we can go and find the right balance allowing the Postal Service to increase revenue without using some of their advantages I guess would be the right word as a government entity to harm the private sector. That would be a great hearing. We may do that in the future. I would like to thank our witnesses for being here. We were able to cover a very complex topic in a timely manner. I think we all have food for thought as to how we can move forward with modernizing and bringing new technologies to the Postal Service that are good for America. Thank you all very much for your time. We stand adjourned. 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