Why the E-mail Explosion Has Yet to Leave Snail Mail in the Dust

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E-mail, without doubt, is the Internet' s killer app. It is among the first services users get hooked to when they log on to the Internet. During the past few years, as people have started e-mailing everything from letters to greeting cards to colleagues, family and friends, the world has become a smaller place. As this volume of e-mail explodes, the amount of mail being sent through the postal system - or snail mail, as it is derisively called - should decline, right? Well, yes and no. The relationship between the two is more complicated than many people realize.

Take America Online, for instance. As the provider of Internet access to some 28 million subscribers around the world, AOL facilitates billions of e-mail exchanges. And yet, the company is also the fastest-growing user of direct mail in the U.S. How did AOL get its 28 million subscribers? In large part, by pooling together direct mail lists and using trusted, reliable snail mail to ship several million CDs containing its free software to potential customers. And each time AOL upgrades its software - it recently launched version 6.0 - this deluge of direct mail continues, offering a windfall to the postal service. In fact, the signature message "You' ve got mail," which AOL e-mail users know well, could apply with complete accuracy to AOL' s snail mail.

That insight into the complex relationship between e-mail and paper mail comes from Michael J. Critelli, CEO of Pitney Bowes, a Stamford, Conn.-based provider of mail and document management services. With $4 billion in revenues derived from activities that include providing postage meters to businesses that churn out massive volumes of mail, Pitney Bowes stands at the turbulent intersection of technologies that threaten to transform the world' s postal services. As such, Critelli has thought hard about the impact of technology - and especially the Internet - on the business of mail. He discussed some of Pitney Bowes' experiences in this regard at a conference in Philadelphia organized on April 6 by the Reginald H. Jones Center for Management Policy, Strategy and Organization.

A couple of years ago, in the heyday of the dot-com boom, Pitney Bowes looked like an old economy dinosaur that web-enabled upstarts would easily drive to its knees. The Internet, according to Critelli, threatened Pitney Bowes' s business in three ways. First, the company' s core postage meter business was under attack from purveyors of Internet postage. After all, why should anyone rent a clunky meter from Pitney Bowes when stamps could be downloaded much more conveniently over the web? The second threat, more long term in nature, came from the possibility that e-mail would gradually supplant letter mail. And the third threat stemmed from the growing view that the Internet would finally usher in a paperless society.

So have these threats become real dangers for Pitney Bowes or have they proved to be bogeymen? Says Critelli: "Like virtually every major player in the technology sector, Pitney Bowes stock is down about 50% from its all-time high. [ It closed at $34.78 on April 10.] But though I clearly have no occasion to celebrate success, we continue to survive despite these apparent threats." Critelli argues that though the Internet has changed Pitney Bowes' s business, it has certainly not overwhelmed it. That, however, is hardly true of the company' s would-be rivals.

Consider the first threat - web-based postage. When companies such as Stamps.com and e-Stamp came along some years ago, they bragged that they would revolutionize the mail business by allowing users to download postage from the Internet and print stamps on every printer. "Today, e-Stamp has exited the business and Stamps.com is on life support," says Critelli. "Even our own Internet postage product, Click Stamp Online, has not produced big revenues."

Why not? Critelli argues that online stamps failed to take off for two reasons. First, its advocates failed to realize how long it takes for change to occur in the heavily regulated postage business. The U.S. Postal Service, like postal authorities around the world, regulates the mail industry closely to ensure the prevention of counterfeit postage. Operating in this highly regulated environment adds considerably to business costs. "Great technology, even if it is affordable and promises real value to consumers, will not succeed if government regulation significantly lowers value or increases its cost," says Critelli. "The U.S. Postal Service will ultimately find a way to balance its need for revenue security with the need for mailers to have a user-friendly Internet postage product, but that effort will take time and further innovation and may involve deep process changes." In other words, the market for web-based postage simply did not develop as fast as e-Stamp and Stamp.com had expected.

The second reason, notes Critelli, is that for any business to succeed, the cost of acquiring customers and providing them with services must be lower than the revenues generated from transactions with those customers. In the case of Internet postage, "the cost of acquiring a single customer was very high - it involved tremendous advertising expenditures - and revenues were very low." Critelli claims that some companies paid as much as $500-600 to acquire a single customer, while the net revenues they got from those customers were in the $3.50 range - clearly not a sustainable business model. "The broader lesson here is that even well-accepted technologies will fail if the cost of getting them to the customers and supporting them is too high," Critelli says.

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