The New York Times - February 18, 1999

Getting In on the Ground Floor in the Cyberpostage Market

By ANDREA ADELSON
A contemporary proviso could soon be tacked onto the famous pledge of the United States Postal Service: Neither rain, nor sleet, nor snow nor a slow modem will be able to stop the mail from getting through.



Kim Kulish for The New York Times
John M. Payne, president of Stamps.com, with a sample of his online postage.
Since September, when the Postal Service started testing a way to allow consumers to buy postage online, a few hundred small-business owners in San Francisco and in the Washington area have forsaken their postage meters or their trips to the local post office. Instead, they buy postage by registering financial information online, then downloading and printing encrypted, bar-code-like stamps, as part of a test of the security and reliability of electronic postage systems offered by two start-up companies, Stamps.com and the E-Stamp Corporation. Pitney Bowes started testing its online system in November.

"It's more productive to have it done in the office than to send someone to the post office," said one of the testers, Olivier D. Long, a lawyer in Fairfax, Va., who gladly turned in his office postal meter.

Aside from efficiency, Long likes his Internet stamps for the way they look. "It's so professional looking to have the address and postage all laser-printed," he said. "It's impressive."

Such tests are a major step for the Postal Service. Not since 1920, when the post office first permitted the red markings of a postage meter, has any other means for providing "evidence of postage" been permitted.

The race to provide stamps-by-mouse is shaping up to be a classic Internet battle: the two start-ups are sprinting to be the first cyberspace stamp seller. Along the way, both are striking up high-profile alliances, and both are months ahead of two old-line postage meter companies, Pitney Bowes and one of its major competitors, Neopost, based outside Paris.

The business model for selling stamps in cyberspace is familiar: add convenience to a commodity and charge for that convenience.

The commodity in this case is owned by the United States Postal Service, which had revenue of $56 billion in 1996, the most recent year for which figures are available. Meters, used mostly by large companies, accounted for $21 billion of the total, while $12 billion came from the lick or peel variety of postage. The rest of the revenue came from express mail, parcel post, certified letters and so on.

Several analysts said the first company to sell stamps online nationwide was likely to be Stamps.com, a come-from-nowhere company based in Santa Monica, Calif., that was founded in 1996 by three business school students.

In 1996, as part of an effort to go digital and improve technology at all levels, the Postal Service invited proposals for the digital delivery of postage; the proposals were supposed to require that the customer have a desktop device to keep transactions secure. The invitation was based loosely on a white paper presented to the service by the E-Stamp Corporation, based in Palo Alto, Calif. E-Stamp, then the only player in the digital market besides Pitney Bowes and Neopost, was founded by Salim Kara, who ran a Canadian refrigeration business.

The E-Stamp plan would require the purchaser to spend $99 on a tamperproof desktop device to store postal information. It would work essentially like a postage meter, authorization would be made online.

Despite the Postal Service's specifications, Stamps.com audaciously proposed a system with no special hardware; the system's designers assume that even without special equipment, online transactions can be made secure. Authorization is made on line, and the customer's own printer is used. Last August, Stamps.com persuaded the post office to accept its concept. Since then, it has attracted $36 million in venture capital.

Two start-up companies are testing their systems for online selling of postage stamps that look like bar codes.


"We've learned there is a lot of pent-up demand by small business that is tired of being under the iron grip of a monopoly," said John M. Payne, 43, chief executive of Stamps.com. Marvin Runyon, the recently retired Postmaster General, has signed on as a Stamps.com investor and director.

E-Stamp, now run by Silicon Valley veterans, also plans an alternative Internet solution that will not require special equipment, but required testing will put it months behind its rival.

Some analysts predict that E-Stamp will recover because the company has already lined up equity backers like Microsoft, AT&T and Compaq, which plan to integrate E-Stamp software into their products for small businesses.

The goal "is to take a solution Pitney Bowes has done in corporate mailrooms and bring it to the consumer," said Sunir Kapoor, E-Stamp's chief executive.

Both E-stamp and Stamps.com will charge transaction fees, which will not be regulated by the Postal Service.

Vernon Keenan, an Internet analyst in San Francisco who publishes a weekly newsletter called Keenan Vision, predicted online postal-transaction fees of $286 million annually in 2003.

Both Stamps.com and E-stamp have deals to be listed on America Online, which plans an online postal center. Both will pay AOL for the privilege. Stamps.com says it has the better deal because its software will be embedded in the millions of promotional CD's that AOL distributes annually, Payne said.

"At this point, I think Stamps.com is ahead of the game," said Bonnie J. Brooks of Creative Strategies, a consulting company in Campbell, Calif. Being first has a significant online advantage, she said, because "the first to market usually does well."

The Postal Service expects to expand the electronic stamp program to 10,000 customers per company and to add the New York area to the pilot program by spring or early summer, said Nancy W. Russell, a spokeswoman. Other companies may still apply, she said.

Existing mail-sorting equipment can read the bar-coded stamp, she said. It will take broader acceptance to determine if Internet postage eliminates the estimated $100 million in meter fraud that ignited the service's interest.

Meanwhile, the postage patriarch, Pitney Bowes, based in Stamford, Conn., is counting on being the tortoise to the two Internet hares.

"We don't want to be second to market," conceded William T. Shannon, director of the company's small-business division, which is further behind in testing its own Internet postal system, Clickstamp.com. But he added, "We want to get it right."

Several obstacles may slow the acceptance of electronic postage, he said. Right now, it is limited to postage for domestic addresses. And consumers may balk at using Internet stamps if it requires a switch from current software that is designed to print documents with delivery addresses that are visible through envelope windows. Such software is incompatible with electronic postage, which does three things at once: it verifies an address as deliverable and prints postage and recipient information.

Either the software or the standard envelopes needs reworking, Shannon said. "We want to try to close down each of these problems," he said. "Until we can break some of these, this market won't break wide open."

The laggard is Neopost, whose equipment handles 15 percent of domestic metered mail. The Neopost division in Hayward, Calif., won approval in January for its version of stamps online: a secure desktop printer that would be used to download $500 worth of postage from Neopost's site. The device would cost $50, require a monthly rental and be replenished with adhesive.

More hitches with electronic stamps are very likely to surface, predicted Ray L. Boggs, director of small-business research for International Data Corporation. How quickly they are ironed out will probably prove a test for the public-private partnership, he said.

"It's the slow-moving careful wheels of bureaucracy versus the ready-fire-aim of Silicon Valley, he said, "where if it doesn't work, fire again."