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Why it makes economic sense to send a letter for $0.49

Answers to the big questions behind small, simple, ubiquitous things in the world of business.

Every other week we try to answer some of the questions that you've submitted for our series, I’ve Always Wondered. This week, we are going to answer a question from listener Mark Robbins: "How is it possible that for less than the price of a cup of coffee, you can send a letter halfway across the globe to a remote island in the South Pacific?" 

Marketplace reporter David Weinberg wanted to know, too. And thus his week-long experiment began: 

Monday: The Post Office's spectacular scale.

Tuesday: How postage gets divided among nations (spoiler: not evenly).

Wednesday: Until the 1960s, it didn't matter if the Postal Service made money.

Thursday: Why the USPS doesn't do email

Friday: How else could we get a message to the people of Tanna? (serious question)


Monday: The Post Office's spectacular scale.

Listener Mark Robbins sent us his question via email. He chose, for his example, the island of Tanna, about a thousand miles west of Australia. I found an address for a bar on the island, and before I sent the letter, I called Robbins to ask if he had anything he'd like to say to the people of Tanna.

“Hello from chilly northeastern Pennsylvania. Wish I were there.”

“Hello from chilly northeastern Pennsylvania. Wish I were there.”

I dropped the letter in the mailbox with a $1.15 global forever stamp. From there, it was taken to the main Los Angeles sorting facility, a 1 million square foot building  where I met Ken Starks, the acting manager of plant support operations.

And herein lies the answer to Mark’s question: The reason you can send a letter across the ocean for less than the price of a cup of coffee is because of the staggering economy of scale of the USPS.

Take, for example this one machine:

This delivery bar code sorting machine processes 30,000-40,000 pieces of mail per hour. The minimum amount of postage required to send a letter is $0.49. So nearly every day, this one machine processes at least $20,000 in postage revenue per hour. And this is just one of several machines in a single sorting facility.

The USPS handles half of all the mail in the world. In 2013 the postal service generated $65.2 billion in revenue. It has more retail locations in the U.S. than McDonald's, Starbucks, and Wal-Mart combined. It's the second largest employer in the U.S. behind Wal-Mart, and the median salary of a U.S. postal worker is about $53,000.

So for every letter that travels across the globe, there are millions that travel much shorter distances. They subsidize the cost of international letters.


Tuesday: How postage gets divided among nations (spoiler: not evenly).

To send our letter to the island of Tanna, I purchased a global forever stamp for $1.15. By the time it arrives it will have traveled on multiple on-the-ground vehicles and airplanes in multiple countries.

This is what the inside of a postal truck looks like.

This is what the inside of a postal truck looks like.

So how does that $1.15 get divided among all nations? Here are the steps:

Step 1: Receive Payment for Postage

The origin country of the letter gets to keep 100 percent of the postage revenue. For now…

Step 2: Weight it

The island of Tanna is in the country of Vanuatu, which is one of the 192 member countries of the Universal Postal Union. At the end of the year, every member of the UPU adds up the weight of all the mail it delivered for other countries.

Step 3: Pay Your Dues

The UPU has established a complicated system of terminal dues that countries pay each other for mail delivered outside its borders. So if the USPS delivered 2,000 kilograms of mail from Vanautu in 2013, and Vanautu only delivered 1,000 kilograms U.S. mail from the U.S., then Vanautu will have to pay terminal dues to the U.S. How does that money get divided up among the multiple countries that handle the letter? 

Short answer: It doesn’t get divided for each individual piece of mail. Instead, countries pay terminal dues based on the overall weight of mail shipped between them.

These rates are decided by The Universal Postal Union.


Wednesday: Until the 1960s, it didn't matter if the Postal Service made money.

And now our letter to Vanuatu takes a moment to ask itself the question: "Why am I not an email?"

The Postal Service is, as they know all too well, losing money

Historian Richard John says, this isn't a new story -- it just didn't matter as much in the country's early days. When the Postal Service was established in 1775 -- with Ben Franklin as the country's first Postmaster -- it functioned as a government agency, with no real mandate to break even.

And as the country expanded, the Postal Service did too. They were often at the forefront of new transportation technologies -- think: stagecoaches, motorcycles, railroads, airplanes, and even missiles.

"The Flying Merkel"

A city carrier in Washington, D.C., gathers mail from a post-mounted collection box using \"The Flying Merkel,\" a belt-driven, two-cylinder V-twin motorcycle, circa 1911. The use of motorcycles for mail collection and delivery in cities peaked in the 1920s. Four-wheeled automobiles and trucks, with their larger capacities, soon became the vehicles of choice. 

"The Post Office was very quick to give contracts to flyers. Charles Lindbergh. And the airlines got an absolutely essential boost from that postal funding in 1920s and 30s," John says. "In more recent period, the 50s, 60s and 70s, optical scaning recognition are technologies the Post Office [supported]."

How'd they manage to pay for all this innovation?

"Congress used to foot the bill when the institution was running a deficit," John says. "Coroporate money doesn't become important til 1900."

And even then, John says, these external funds competed with "a thought experient about how our nineteenth century forbearers believed politics should be conducted with major federal subsidies to make it possible to spread the news, which remained a central mandate. Newspapers and magazines -- LIFE Magazine was a famously important magazine in 1960s -- was more or less destroyed by changes in postal rates. It got more expensive to mail, and it was no longer economical. So it's a remarkable odyssey for an institution a lot of peope cared about." 

Today's assumption that the postal service should break even took root in the early 1970s. Postal worker strikes prompted then-President Richard Nixon to pass the Postal Reorganization Act in 1971, which turned the agency into a semi-independent business -- and as a semi-independent business, money started to matter. The Postal Service hasn't used taxpayer money since 1982, with a few exceptions, such as sending absentee ballots to Americans overseas. Today, the USPS relies on the costs of postage and sales for almost all of their expenses.

First international mail flight, 1919

Eddie Hubbard (left) and William E. Boeing stand in front of a Boeing C-700 seaplane near Seattle, Washington, after returning from a survey flight to Vancouver, British Columbia, on March 3, 1919. They brought with them a pouch with 60 letters, making this the first international mail flight.

Some say the Postal Service stopped innovating because its business model changed, and the funds simply weren't there.

Tomorrow, we'll talk with someone who thinks the story isn't so simple. 


Thursday: Why the USPS doesn't do email

Why isn’t there an @usps.gov email address available to the public -- one that carries with it the same privacy laws that apply to postal mail?

Shiva Ayyadurai asked USPS management that same question in 1997, the year he calls "The Crossover," when email volume exceeded postal mail volume. At the time, Ayyadurai says the USPS did not see email as a threat to first-class mail. And in 1997, there really was no reason to be concerned -- during the three years leading up to 1997, the USPS posted cumulative earnings of $4.6 billion and, First-Class mail was up by 13 percentage points.

Ayyadurai calls himself the inventor of email, a claim that has been widely disputed, says he has a vested interest in the answer. It would take 15 years of criticism, but in 2012 Shiva Ayyadurai  produced a report, funded by the USPS, outlined several ways for the USPS could integrate email into its business model. Ayyadurai says the USPS did respond after he submitted his research.

 


Friday: How else could we get a message to the people of Tanna? (serious question)

 

In all probability, our letter is still on its way to Tanna. 

Which raises the question: How else could we convey Mark's message to this small island nation? What are your ideas, Internet?

Send them to us via Facebook or in the comments below. Or, you know, via snail mail. 

About the author

David Weinberg is a general assignment reporter at Marketplace.

Answers to the big questions behind small, simple, ubiquitous things in the world of business.

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