Odds are you’re reading these words on a computer screen, but not so long ago, the dominant medium of our industry was paper.  In fact, in my early years in this business, our big expenses were always the “The Four Ps,” paper, printing, postage and people.

The people are still around (and better than ever) but thanks to the Internet, the other three big expenses have shrunk dramatically … which is good for those of us trying to cut expenses, but bad for those who see their revenue shrink.

Newspapers are at the top of this list today, as advertising dollars have fled to the Internet.  Also suffering from the long-term trend are paper companies, ink companies and advertising companies, to name a few.  And the current economic crisis has compounded the damage.

In fact, just last week, one of our local printers (we’ve historically used two, mainly to foster competition) dropped off a job and then stopped by my desk to chat … or more specifically, to grumble.  He says he’s reduced staff to the absolute minimum, and now he’s working “just to keep the lights on.”

I sympathized.  And then I saw the story about the United States Postal Service, which lost $2.8 billion last year, and is on track to lose even more this year, in part because the volume of first class mail, which has been declining since 2002 thanks to the Internet, has now fallen off a cliff.  Says Postmaster General John Potter, “We are facing losses of historic proportion.  Our situation is critical.”

This affects us all, because we’re all accustomed to receiving mail deliveries six days a week.  And while we complain about the rising cost of stamps, the fact is the postal service has done a great job.  But if there’s anything that last year’s giant domino tumble should have taught us, it’s that when a big institution starts losing money, things can go from bad to worse in a hurry.

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Note: The phrase, “Neither snow, nor rain, nor heat, nor gloom of night stays these courageous couriers from the swift completion of their appointed rounds” has long been identified with the USPS but it is not, in fact, the organization’s official motto.  It has none.  The phrase originated with the Greek historian Herodotus during the war between the Greeks and Persians about 500 B.C. and it was in reference to the Persian horsemen who carried messages.

But it’s become identified with the USPS because back in 1896-97, when the New York City General Post Office was being designed, Mitchell Kendal, an employee for the architectural firm McKim, Mead and White, came up with the idea of engraving Herodotus’ saying all around the outside of the building.  And it’s still there today.

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So what’s the solution for the United States Postal Service?  Or more precisely, since disruptive technologies have eroded the core letter-carrying business of the USPS, what’s the most cost-effective way for Americans to send and receive mail in the years and decades ahead?

Let’s start with a little history.

The United States Postal Service was created in Philadelphia in 1775 under the direction of Benjamin Franklin.  Its Railway Mail Service was inaugurated in 1869, making great use of rail cars as on-the-move sorting stations. In 1896, Rural Free Delivery was instituted.  In 1912, delivery was reduced to six days a week at the behest of religious leaders.  1913 brought the beginning of parcel post.  And 1918 saw the debut of the Air Mail Service.

Then in 1970, Richard Nixon signed the order that turned the institution into an independent agency of the U.S. government, which means basically that it’s supposed to be self-sustaining … and when it’s not, we learn about the losses.

Today, the USPS is the third-largest employer in the United States, after the Department of Defense and Wal-Mart.  It’s also the largest civilian operator of motor vehicles.  Considering its great size, it’s done a very good job of adapting to changing times.  But the growing operating losses (just as at GM) warn us that if bigger changes are not made, the USPS will be next in line for a government bailout.  And I think Americans have had enough of bailouts.

Now, it’s easy to say that USPS pensions are too cushy or that political patronage is the problem, and while those may be true, I think the two big issues in the institution’s business equation are these:

One: The Universal Service Obligation mandates that the USPS provide delivery to every address in the U.S., six days a week, at the same rate.

Two: The Postal Monopoly provides funding for the obligation by mandating that only the USPS can deliver letters in this country and only the USPS can access your mailbox.

Long-accepted logic says that rural delivery is expensive, and is thus subsidized by urban deliveries, and removing the monopoly would enable competitors to target profitable urban locations, leaving the USPS with the more expensive rural routes.

However, an analysis of the quality of delivery proves otherwise.  The rural customer often provides the “last mile” of delivery service by picking up his or her mail from a cluster box, or from the end of a driveway, while urban customers often receive mail directly at their doors, and the result is that urban mail does not subsidize rural mail.

Thus the monopoly serves not to protect “profits” but only to prevent competition.  And what happens without competition?  There’s no incentive to compete by pushing costs down!

Yes, the USPS has worked diligently to keep costs under control, and I applaud them for their achievements.  I shudder to think what the institution would look like if Richard Nixon hadn’t signed the order making it stand alone.

Nevertheless, it is still a monopoly, and independent economists have concluded that the costs of the monopoly exceed its benefits.  In short, the USPS is still overpaying its work force, and those workers account for roughly 80% of the institution’s costs.

Again, the institution is working to address the issue.  Just 10 days ago, the USPS announced that it would slash more than 3,000 jobs, and would offer more than 150,000 employees–nearly half its workforce–early retirement.

And now it’s talking about reducing mail delivery to five days a week from six.  Sure, that saves money, but it’s certainly not what the customers want!

So, after analyzing the facts, I can only conclude that the best course is to open up the business to competition … slowly.

The USPS has already proven it can compete in the priority mail business, where it has a 15% share.

And since the end of 2006, when it was first allowed to offer volume-related price discounts on some of its shipping services, it has gained market share there, too.  In 2008, the USPS generated 11% of its $75 billion in revenue from shipping services.

Its main competitors, of course, are United Parcel Service and FedEx.  (German carrier DHL dropped out of the market last year after a six-year effort.)  And United Parcel Service and FedEx would no doubt be among the top competitors should Washington allow true competition for letter delivery as well.

But the real opportunities for growth would lie in the digital realm … should true competition be allowed, and I’ll get to that below,

In any case, gearing up to serve this huge market will take time, so winding down the monopoly should be done slowly.  I have no doubt it will be a very difficult job.  But I have even less doubt that the longer it is delayed, the greater the eventual pain, for all of us.

Bottom line: Postal reform appears to be one of the last things on President Barack Obama’s list … it may not even be on his list.  But it should be.

Tomorrow … Find out the contenders for USPS competititors and one that may even be a good investment!