A Major Print-Media Bankruptcy Is Likely in 2012, Voters Say

A major print-related company is likely to go bankrupt this year, according to the vast majority of voters in a Dead Tree Edition poll that ended tonight. The voters just can't agree on which company it will be.

Out of 743 voters, only 158 (21%) chose "None of the above" on the question of which four print-dependent U.S. companies would go belly up in 2012. Leading the pack was Barnes & Noble, with 227 votes -- which still means that 70% of the voters think it won't go bankrupt this year.

With 161 votes (21%), Quad/Graphics edged out Verso Paper (157 votes; 21%) for second place, with the U.S. Postal Service not far behind at 153 votes (20%).

Judging by the sources of traffic to the articles about the poll, the voters seemed to be mostly a mix of people working in the postal, printing, paper, and publishing industries.

The voting seems to have had no impact on the companies' stock prices. Despite being voted most likely to succumb, B&N's stock price is up 4% since the poll was announced on Jan. 19. Verso is up almost 10%, but Quad's stock dropped nearly 12%.

Related articles:

• Which of These 4 Print-Related Giants Is Headed for Bankruptcy? Cast Your Vote
• A Surprise Leader in the Print-Media Bankruptcy Sweepstakes

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A Surprise Leader in the Print-Media Bankruptcy Sweepstakes

Which would you rather own: paper mills, large printing plants, a leading e-tablet platform, or the U.S. postal system?

Here’s another way to look at it: Which of those assets does not have to contend with overcapacity in a shrinking market.

In both cases, I thought the answer overwhelmingly favored tablets, which is why the results so far of the current Dead Tree Edition poll (in the right column, just below the first ad) surprise me so much. The 30% of voters who think Barnes & Noble (owner of the Nook tablet platform) will go bankrupt this year is well ahead of the number voting for Quad/Graphics (23%; printing presses), the U.S. Postal Service (22%), and Verso (paper mills, 20%).

Update: Final poll results are at A Major Print-Media Bankruptcy Is Likely in 2012, Voters Say.

Financial markets seem to have pegged Verso as the most likely to succumb among the three private companies. Its market value has dropped precipitously in the past year, to 84% below its peak and less than 1/30th of annual revenue. B&N and Quad both have market values of about 1/10th their annual sales.

The comments about the article introducing the poll, both on this site and in various LinkedIn groups, are some of the best I’ve ever seen. I extended the voting deadline by a week to 3 p.m. Hawaii time (8 p.m. Eastern) this Tuesday because I find the comments and the voting so interesting. As they say in Chicago, vote early and vote often.

Here are some of the best comments:

• The Postal Service will never truly reach bankruptcy in the sense we know it now, but restructuring is inevitable. Unfortunately no one in the 2012 Congress will have the ability to make the necessary moves. Apollo will keep Verso afloat this year, if only to have a play in the post-NewPage world -- some combination of these two groups will be the eventual endpoint. B&N is only a matter of time -- the Nook sell off will signal the end if or when it occurs. And Quad will hold on -- for all their pompousness and overreaching, their plan is sound and they will continue to shrink and optimize over the next few years.
• Who told you that Congress is REQUIRED to establish a post office? Read the constitution. It says, “The Congress shall have Power To establish Post Offices and post Roads.” [Good point. Constitutionally, providing mail delivery is optional. Politically, mail delivery is not optional.]
• Let’s get real, the tablets are going to kill the printing and publishing industries sooner than later! Paper companies and printers, we are living on borrowed time! I have been telling my kids for the last 10 years “DO NOT GET INTO THE PRINTING INDUSTRY IN ANY FORM!" It is sad but true!
• Verso ... has no near term maturities and an undrawn revolver.
• As for USPS going bankrupt, Congress will be forced to bankroll it no matter what because there will always be a need for a public delivery service to areas that the other services do not provide and never will; not to mention the thousands of mailbox services which depend on the USPS for survival.
• Verso will not go bankrupt. I believe they are fast and furiously getting out of the coated market and turning to more specialty grades and food grades that will be around for many years to come.
• As a quasi-Government agency, I seriously doubt that the Congress or Executive branch will let the Post Office go bankrupt. I do think that though that they will let it get to the edge before doing anything about it. Probably be mid-year, and then it will be another crisis for each party to point fingers at the other for not doing something about it.

 Related articles:

• Dear Print, We Print Buyers Now Want an Open Marriage
• Which of These 4 Print-Related Giants Is Headed for Bankruptcy? Cast Your Vote 
• Under Siege: The Outlook for Print Media Is Even Worse Than We Thought, Expert Says -- But Publishers May Prosper

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Dear Print, We Print Buyers Now Want an Open Marriage

Don’t get us wrong, Print. We still love you. We might look at web pages and tablets, but there’s nothing like holding you in our hands.

We still prefer the beauty and permanence of Print to the ephemeral nature of digital media. Geez, did you see how that photo came out on the iPad? It’s gorgeous. It makes me realize that page in the Print edition was a little out of regis – Oh, where was I?

It’s just that you alone can no longer fulfill all of our career needs. We can’t merely flirt with other media; we need the freedom to get fully involved with them.

Margie Dana, founder of Print Buyers International and the godmother of print buyers everywhere, has been encouraging us to branch out into other media. In this video, she even says, “You’re not leaving Print. It’s Print and, not Print or.”

See, even our godmother says a ménage a trois with other media is OK.

“I for one am 'retooling’ my abilities to go with the times,” commented a print buyer named Paul recently to the Print Production Professionals group on LinkedIn. “This way I can produce work for print and web. I've got twenty years of career left and don't want to be a dinosaur.”

He was responding to a recent article quoting forecaster Roman Hohol as saying that print media soon “will become less relevant and more expensive.” (As if that weren’t bad enough, Hohol did a webinar last week in which he said, “We haven’t yet felt the impact of tablets” on print demand and that tablets “will be as revolutionary in the way we consume media as Gutenberg’s printing press was more than 500 years ago.” Oy vey.)

You have taught us so much, like how to manage workflows and how to carry out customized manufacturing processes. It turns out that producing Web pages, apps, emails, and Facebook pages needs better workflows than the disorganized new-media people can concoct. And building digital content is a lot like doing customized manufacturing, except we’re producing virtual things rather than physical things.

So while our bosses may hate you, especially your costs and long timelines, they love what we’ve learned from you. And we’ll keep trying to show everyone how sexy and up to date you are by slipping in QR codes and other gimmicks.

Thanks for understanding, Print. By the way, could you scoot over a bit? We’ve invited some friends from other media to join us here in bed.

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We Already Have A Veterans Job Corps -- It's Called the Postal Service

Hours after a leading Congressman urged massive job cuts at the largest civilian employer of military veterans, President Obama proposed creation of a Veterans Job Corps.

"With the bipartisan support of this Congress, we are providing new tax credits to companies that hire vets," Obama said Tuesday night during his State of the Union address. "Michelle and Jill Biden have worked with American businesses to secure a pledge of 135,000 jobs for veterans and their families. And tonight, I’m proposing a Veterans Job Corps that will help our communities hire veterans as cops and firefighters, so that America is as strong as those who defend her."

Those 135,000 jobs don't quite equal the estimated number of vets who already work for the United States Postal Service.Veterans preference has long been part of USPS's hiring practices and culture, leading to approximately one-fourth of its current employees having military experience.



Earlier Tuesday, Rep. Darrell Issa called for a radical shrinking of the Postal Service's workforce:

"There are about 660,000 workers at the post office. In the private sector there would be about 400,000 and it’s not a debate about whether we need to get to that number, it’s how we get there," the committee chairman said during a TV interview. "Do we induce retirement and find a way to trim that workforce, or do we wait for people to retire from an organization that has three full-time employees that are 98 years old, literally. Not a talking point. We have a problem at the post office that it can’t seem to shrink on its own fast enough. As a result the biggest problem is we’re paying people we don’t really need and not doing the reorganizations we should."

I don't know about Issa's numbers, but clearly USPS needs to shrink its workforce faster than it's been doing to cope with declining mail volumes. I just hope the politicians realize that one of the best ways to minimize veterans unemployment in the coming years may be to help postal workers transition to new careers.

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Catalyst Paper Muddies the Water With Its Clarification and Its 443-Word Sentence

Today’s public relations tip: If you’re trying to clarify your company’s financial status, make sure your pronouncements are clear and that you don’t make people wade through a 443-word sentence that only a lawyer could love, or understand.

Catalyst Paper has generally been a leader when it comes to corporate transparency, especially on environmental issues. (See Ecologomania and Printed Products. No, the term "ecologomania" never caught on.) But it left readers dazed and confused when it issued a press release on Jan. 18 about its proposed recapitalization agreement.

“Contrary to certain media reports this is not a bankruptcy proceeding,” the statement said. “Further information concerning the recapitalization is contained in the Agreement, a copy of which is available on SEDAR (www.sedar.com), EDGAR (www.sec.gov) and the company’s web page (www.catalystpaper.com).”

But good luck finding the agreement on any of those sites without a lot of searching and clicking. Those who bothered were almost immediately confronted by this monstrosity of a sentence:



"WHEREAS, the Debtors and the Initial Supporting Noteholders are negotiating restructuring and recapitalization transactions with respect to the capital structure of the Debtors, including the Debtors’ obligations under: (i) the 11% Senior Secured Notes due December 15, 2016 (the “Senior Secured Notes”) issued by CPC pursuant to that certain Indenture, dated as of March 10, 2010 (as amended, restated, supplemented, or otherwise modified from time to time, the “Senior Secured Notes Indenture”), by and among CPC, as issuer, certain of its affiliates, as guarantors, Wilmington Trust FSB, as trustee (in such capacity, the “2016 Trustee”), and Computershare Trust Company of Canada, as collateral trustee (in such capacity, the “Collateral Trustee”); (ii) the Class B 11% Senior Secured Notes due December 15, 2016 (the “Class B Senior Secured Notes,” and, together with the Senior Secured Notes, the “2016 Notes”) issued by CPC pursuant to that certain Indenture, dated as of May 19, 2010 (as amended, restated, supplemented, or otherwise modified from time to time, the “Class B Indenture,” and, together with the Senior Secured Notes Indenture, the “2016 Indentures”), by and among CPC, as issuer, certain of its affiliates, as guarantors, the 2016 Trustee and the Collateral Trustee; and (iii) the 7.375% Senior Notes due March 1, 2014 (the “2014 Notes” and together with the 2016 Notes, the “Notes”) issued by CPC pursuant to that certain Indenture, dated as of March 23, 2004 (as amended, restated, supplemented, or otherwise modified from time to time, the “2014 Indenture”), by and among CPC, as issuer, certain of its affiliates, as guarantors, and Wells Fargo Bank, National Association, as trustee (the “2014 Trustee”), pursuant to the terms and conditions set forth in the Restructuring Term Sheet attached hereto as Exhibit A (the “Term Sheet”) and in this Agreement which are intended to form the basis of (i) a plan of arrangement (a “Plan” and, together with any Plan in a CCAA Plan Proceeding or the US Cases (each as defined herein) consistent in all respects with the Term Sheet and this Agreement, the “Plans”) in connection with proceedings to be commenced under section 192 of the Canada Business Corporations Act (the “CBCA”) and, subsequently, chapter 15 of title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) or, alternatively (ii) proceedings commenced pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”) and the Bankruptcy Code, as set forth more specifically in this Agreement and the Term Sheet (collectively, the “Transactions”); NOW, THEREFORE, in consideration of the covenants and agreements contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Party, intending to be legally bound hereby, agrees as follows:"

I won’t try to translate the sentence, but here’s my quick-and-dirty layman’s interpretation of the Catalyst situation. (*Please note the legal disclaimer below):

As was announced on Jan. 14, the Canadian papermaker has worked out a proposed deal with many of its bondholders that would enable it to avoid bankruptcy but would turn up to 99.5% of its stock over to the bondholders in exchange for debt reduction. The announcement didn’t mention that, as a result of the proposal, Catalyst would file a Chapter 15 case in U.S. Bankruptcy Court asking that Canadian courts have jurisdiction over its recapitalization.

When that filing came on Jan. 17, some news reports referred to bankruptcy reorganization or bankruptcy proceedings, which led to Catalyst’s Jan. 18 “clarification” that failed to mention it had indeed filed a case in bankruptcy court. Catalyst is still in business and has not repudiated debts owed to vendors, employees, or retirees, but isn’t it splitting hairs to claim that a case filed in bankruptcy court is not a bankruptcy proceeding?

Then again, maybe the clarification was written by Catalyst's attorneys, who obviously have a bit of trouble with the English language.

*Legal Disclaimer: Dead Tree Edition, the Party of the First Part, makes no guarantee or warranty regarding the accuracy of this interpretation and is not responsible for any damages, whether consequential or inconsequential, resulting from reliance on said interpretation. The approximate retail value of this analysis is 0 cents -- excluding taxes, tags, title, and dealer-installed options and depending upon exactly what the meaning of “is” is. What? Did you, oh Party of the Second Part, really expect to receive free legal advice from a freakin’ blog when you (Party of the Second Part) are too cheap to support our advertisers and too lazy to recommend this blog to friends? No legal disclaimer would be complete without some incomprehensible Latin phrases, so here's a little ditty I learned from some an ambulance chaser: "Slippo, slippere, fallus, fractus, if you get hurt just call our practice." Illegitimi non carborundum.

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Which of These 4 Print-Related Giants Is Headed for Bankruptcy? Cast Your Vote

It was one thing when weak companies like Borders and NewPage went Chapter 11 last year. But now the bankruptcy talk has spread to four print-related companies that once seemed invincible or eternal: the U.S. Postal Service, Barnes & Noble, Quad/Graphics, and Verso Paper.

Are things really so bad for print media that the companies we thought were victors of the competitive wars have now become victims? Dead Tree Edition isn't so sure, so we're turning to our readers to help us understand.

We have initiated a poll (in the right column, just below the first ad and above the "Popular Posts" listing), asking which, if any, of these four companies will end up in bankruptcy court during 2012. You may vote for more than one, or for "None of the above." In the early balloting, only 30% of the voters thought none of the four would face bankruptcy this year, while Verso and USPS were in a tight battle for the title of most likely to succumb.

Update: Final poll results are at A Major Print-Media Bankruptcy Is Likely in 2012, Voters Say. Additional commentary: A Surprise Leader in the Print-Media Bankruptcy Sweepstakes.

Here's a quick rundown of the candidates: 

USPS
In just a few years, declining mail volumes and Congress' inability to make decisions have turned what was the federal government's cash cow into a multi-billion-dollar money loser. Gene Del Polito president of the Association for Postal Commerce, summed up the situation this week:

"The one significant challenge that's facing the U.S. Postal Service is a very simple to discern: Its costs outstrip by a significant margin its ability to cover those costs with postage-paid revenue. Set aside for a moment all the rationalizing as to why this is so. No matter the reasoning, the result is still the same. Too many costs; not enough revenue."

The agency met with restructuring (AKA bankruptcy) advisors last year, and the word "bankruptcy" keeps popping up in news reports. (See Could Forever Stamps Become Worthless? What Bankruptcy Might Mean for USPS.)

But what exactly would "bankruptcy" mean for the Postal Service? Its dominant creditor, the federal government, is required by the Constitution to provide postal service. If the feds shuts down USPS, who will carry out this duty? (And don't do a George Will and tell me it will be FedEx and UPS.)

Barnes & Noble
The big bookstore chain was supposed to feast on the ruins of its rival, Borders, because it moved to the web much quicker and has the growing Nook line of e-readers (and a significant cut of the sales of any Nook editions of books and magazines). But a research organization recently put it on a list of the companies most likely to run into financial distress, and it does appear headed for another money-losing year.

The revelation that it might spin off the Nook business fueled speculation that the company is in trouble. One theory was that, after the spin-off, B&N itself would go Chapter 11. But why would the bondholders allow a spinoff that would weaken the parent company that much?

I think the possible spin-off is about tapping into the kind of deep pockets needed for the Nook division to keep pace with the likes of Amazon and Apple.

Quad/Graphics: 
Quad's relatively high profitability enabled it to swallow a much larger competitor, Worldcolor, 18 months ago. With its investments in training and new technology, high level of employee ownership, and a “drink the Koolaid” culture, Quad has been a favorite of management gurus over the years.

But Quad appeared right behind Barnes & Noble on that list of high-risk companies. The Worldcolor acquisition left it with lots of debt, lots of excess capacity, and lots of integration headaches.

With the continuing rise of digital media and growing uncertainty about the Postal Service’s fate, being the #1 or #2 printer in such fields as magazines, books, telephone directories, and catalogs doesn’t seem like a particularly inviting position. And despite numerous plant closures since the acquisition, Quad still finds itself facing overcapacity and declining prices in many of its market segments.

Verso Paper
Verso was spun off from the mighty International Paper and has been a force in the North American publication-papers business ever since. Like its chief rival, NewPage, it was taken over by hedge funds. But it avoided the excesses (arrogance, bad customer relations, debt) that dragged NewPage into Chapter 11 four months ago.

NewPage’s failure isn’t necessarily Verso’s gain. NewPage is still in business and is left with only low-cost mills. As long as it's in bankruptcy proceedings, it will run those mills to maximize short-term cash flow while ignoring market discipline.

Paper industry analyst Verle Sutton, writing in The Reel Time Report, recently summed up Verso’s predicament this way:

“Numerous reports indicate that Verso will have a very difficult time staying out of bankruptcy during the next couple of years. The company expresses much more optimism than I am suggesting here, and I wish the company well, but the odds are against avoiding bankruptcy. Shutting down capacity (permanently) in an attempt to balance supply and demand would be very costly for Verso, and . . . would likely drive the company into bankruptcy even sooner.”

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Under Siege: The Outlook for Print Media Is Even Worse Than We Thought, Expert Says -- But Publishers May Prosper

If you think the internet revolution has been rough on print media, wait until you see what the tablet revolution does, a paper-industry forecaster says.

As if there weren’t enough gloom and doom in the paper and printing industries these days, Roman Hohol says tablets and other digital devices will depress the demand for printed media even faster than most forecasts predict. But the director of the marketing practice for Forest Industry Consulting also sees signs that the tablet revolution will benefit many publishers.

“I believe that most [paper] industry forecasts underestimate the impact of digital media on graphic paper demand, not wanting to appear too negative to their clients,” Hohol told Dead Tree Edition. “We have developed an outlook for our clients that is quite negative.”

Hohol will present that outlook in more detail during the Industry Intelligence webcast “How the mobile media revolution will impact global graphic paper demand”, which will air at 2 p.m. EST Thursday and be available for download thereafter. Hohol gave Dead Tree Edition a sneak peek at the webcast, including the three main reasons he believes the global publication-papers industry is “under siege”:

1) The rapid adoption of tablets
The phenomenal sales growth of iPads, Kindles, Nooks, and other e-reading devices is already dampening demand for print media, he says.

“Because tablets are so new, the data on usage are spotty,” he says. But studies are already finding a measurable shift in consumer behavior away from print media and toward tablet versions, he adds.

“Print newspapers are the most affected media, followed by books and magazines.”

(Note this comment last week from Angela Bole of the Book Industry Study: “Consumers who migrate to digital are spending less on physical hardcover and paperback books.”)

2) Digital substitution in the developing world
The usual assumption has been that rising affluence and literacy in developing countries would mean growing demand for print media for some years in those countries before digital media ruin the party. That’s why so many huge coated-freesheet paper machines are coming on line in China.

But Hohol already sees signs of trouble for print media in China and India.

“Newspaper and magazine circulation is still growing in those countries (Brazil and Indonesia as well), but digital media growth is much faster.” He thinks newsprint consumption in China may already be near its peak.

3) A new business model for publishers
“Tablet users appear more willing to pay for content than do web browsers,” Hohol says. That is making publishers more enthusiastic about abandoning print than when the only alternative to print was the web.

(Similarly, Boles is optimistic about book publishers' prospects because her organization found that consumers who have transitioned to e-books are spending more than before on books in all formats. “Assuming the publishing industry can develop the right business models, this is good news,” she said.)

“As readers shift from print to digital forms,” Hohol said, “publishers will find the cost of producing print prohibitive (many of the executives I speak to would love to do away with the cost of paper, ink, printing and distribution) and therefore will have to recoup the costs of producing print from the readers. Does this mean that a woman will have to pay $50 for the September issue of a print Vogue? Maybe.”

Responding to a recent prediction about the outlook for newspapers in five years, he says, “I do not agree that there will be only five daily newspapers in the U.S. but do think that many large dailies will forego print editions and focus exclusively on digital delivery.”

“Print media is not going to disappear in the coming decade; but it will become less relevant and more expensive.”

Related articles:

• Print Is Dead? Not For This Growing Publication Niche
• The Changing World of Print Buyers: An Interview with Margie Dana
• App-oplexy: Magazines on the iPad

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Ruling Will Boost Pulp Makers' Gains from Black Liquor Boondoggle

A favorable ruling from a Congressional committee will add millions more dollars to what U.S. pulp and paper companies gained from the infamous black liquor tax credits.

KapStone Paper and Packaging announced yesterday that the Joint Committee on Taxation had accepted its position that the $186 million in black liquor credits it earned in 2009 are not taxable income. As a result, it is claiming $63.6 million in "gross unrecognized tax benefits and accrued interest expense" -- and Deutsche Bank upgraded its stock from "Hold" to "Buy".

Pulp manufacturers exploited a loophole in a renewable-fuel tax credit program to gain at least $8 billion in direct payments from the federal government in 2009. The government "rewarded" them for burning black liquor, a pulp byproduct, to power their operations, which they would have done even without the tax credits.

"The 'black liquor' scandal is the most notorious recent instance of the pitfalls of congressional efforts to pick and subsidize winners," Michael J. Graetz, a tax law professor at Columbia University, wrote recently in Wired magazine.

Most of the 21 publicly traded companies that received the black liquor payments also apparently thought they were not subject to income taxes. But like KapStone, some may have set aside money just in case.

At least one, Buckeye Technologies, had treated part of its $130 million windfall as taxable income. Exactly how much Buckeye has to gain from the KapStone precedent is not clear because the company has begun returning some of its black liquor tax credits to the IRS so that it can claim the more lucrative "Son of Black Liquor" tax credits.

KapStone was facing "the worst conditions I've seen in my career" in early 2009 before discovering "the miracle" of black liquor tax credits, CEO Roger Stone has said. The company ended that year with record earnings and cash flow.

For more background on the black liquor and Son of Black Liquor tax credits, please see:

• Black Liquor Makes the Top Ten
• Cost of New Black Liquor Boondoggle Reaches $1.1 Billion
• Son of Black Liquor Money Starts Rolling In For U.S. Pulp Makers
• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion
• IRS Brings Son of Black Liquor Back From the Dead; Ruling May Be Worth Billions to U.S. Pulp Makers

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Thrown Overboard: Publishers Feel Abandoned by the U.S. Postal Service

Until recently, Postal Service executives talked about periodicals as “the anchor in the mailbox.” But lately, says one publishing executive, it seems that “the USPS just tied us to the anchor and threw it overboard.”

With the demise of “Aunt Minnie mail” (personal letters), USPS officials talked about magazines and newspapers as the key to “the mailbox moment” when people excitedly check their mail. But in recent months publishers have grown increasingly nervous about their reliance on a nearly insolvent Postal Service that seems ready to jettison them, including a recent proposal to abolish the Periodicals class altogether.

“What’s a publisher to do when the mailbox is in danger of collapse?” the MPA (AKA The Association of Magazine Media) asks in a description of its Feb. 2 Postal Summit. The brochure  reflects what seems to be the entire magazine industry’s feelings about USPS these days -- and why publishers everywhere are saying, “How the hell do we get more of our subscribers switched over from print to the iPad, or the Nook, or whatever?”
“Bankrupt. Bailout. Broken business model. Words once used to describe Wall Street are now regularly linked to the United States Postal Service, the medium by which ninety percent of magazines are delivered.” That’s a lead-in to Postmaster General Pat Donahoe’s speech on “What Does a Modern USPS Look Like?”

One session will address the question, “How do our magazines get delivered by a smaller, slower and potentially more expensive Postal Service?” The brochure states that “As the Postal Service retools for the future, service and prices as we know them could be radically different. New entry and delivery timelines could radically change the magazine production schedule – earlier editorial deadlines, printing schedules – the works.”

More than any other USPS customers, publishers are feeling under the gun because USPS claims it loses money on the Periodicals class. Its latest numbers show that Periodicals revenue covered only 74.9% of the class’s costs in Fiscal Year 2011, down slightly from 75.4% in FY2010.

Another session will focus on the 10 Percent – the magazines not delivered by USPS. “For some titles, the changing Postal Service may no longer be the ideal method of delivery, leading publishers to consider alternatives.”

There’s no mention in the program of the Flats Sequencing System (FSS), which many in the magazine industry once hoped would help the Periodicals class’s profitability. Publishers have faced too many delayed deliveries and damaged copies caused by what some call the Flats Shredding System to have much faith in that solution any more.

Related articles:

• Postal Study Is Bad News For Publishers
• Don’t Blame ‘Overpaid Postal Workers' for Rising Periodicals Costs 
• Washington Post's New Magazine Will Bypass USPS
• 7 Reasons the Jury Is Still Out on Flats Sequencing

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No Such Thing as a Free Ounce: Does 'Second Ounce Free' Make Sense for USPS or for Mailers?

For the most part, mailers cheered when the U.S. Postal Service announced “Second Ounce Free” for bulk-mailed First Class letters. But guest columnist Robert W. Mitchell points out below that the pricing strategy is unlikely to be profitable for the Postal Service, is seemingly unfair to some mailers, and does not follow good pricing practices.

The average Jan. 22 increase in rates for all of First Class adheres to the inflation-based rate cap of just over 2%. That means the lower rates for presorted letters weighing between 1 and 2 ounces are being balanced out by higher-than-inflation increases for other types of First Class Mail.

Mitchell’s analysis makes the simplifying assumption that other bulk mailers are bearing the entire cost of Second Ounce Free. But it’s also possible that the high increases for parcels (10.9%), international (4.7%) and Forever Stamps (2.3%) are helping to bear the load.


Second Ounce Free also means that a 2.1-ounce letter costing 60 cents to mail would only be 35 cents if somehow its weight could be reduced below 2 ounces. Mitchell instead proposes a “piece-pound structure” – already used in such classes as Standard and Periodicals -- where the prices change gradually as weight increases or decreases.

Mitchell, a former employee of both USPS and the Postal Rate Commission, is one of the leading U.S. authorities on postal rates. His previous guest column for Dead Tree Edition was A Bad Move for Small Mailers: Postal Expert Questions Move Update Surcharge.

Beginning January 22, the first weight tier for Bulk First-Class letters will be zero to 2 ounces. That means that letters weighing from 1 to 2 ounces each will pay no more than letters weighing less than 1 ounce. But letters weighing from 2 to 3 ounces will pay (as now) two additional charges: an extra 12.5¢ for being over 1 ounce (a rate element unchanged from the current rates), and another 12.5¢ for being over 2 ounces. And 3-to-3.5-ounce letters will pay (as now) three of these charges. Is all this a good idea?

The new rates are designed to use the entire price cap, as would rates under the current tiers, so the no-free-lunch axiom is enforced by the math. Currently, 1-to-2-ounce letters pay an extra $209 million (beyond what they would pay if they weighed 0-to-1 ounces). That revenue will be lost with the new rates, so it is being made up by increasing other rates.

Someone has to pay
If it is made up by Bulk letters, then each pays an extra 0.51 cents (on average), so that a few can send 1-to-2-ounce letters at no additional charge. If it is made up by all First-Class pieces, then each pays an extra 0.28 cents. There is no way to tell exactly who is paying how much more (because we don’t know what the rates would have been without Second Ounce Free), but someone is. For present purposes, I assume that the burden is spread to Bulk letters only.

In rates, emphasis on fairness, signals, and value is now commonplace. Fairness is in the eye of the beholder. Signals have to do with how mailers respond. Value is difficult, mainly because it varies among pieces. It is fundamental that if the Postal Service charges above value, the pieces disappear. If it charges below value, revenue is anemic and the Postal Service goes broke. In other words, it must charge for value that is there, and avoid charging for value that is not there. Nothing else will work.

How mailers respond is critical. When rates are governed by a price cap, revenues are assumed to be the same regardless of the rate structure -- until mailers change how they mail in response to the new rates. Revenues and costs then adjust, leading to changes in net income. Of course, the Postal Service needs its net income to increase.

Some win, some lose
Look at the effects of Second Ounce Free:

1) Mailers of about 1.7 billion 1-to-2-ounce letters will see a big rate decrease. They will increase their volume somewhat. But the Postal Service will no longer be tapping the value that these mailers see that led them to find it profitable to send 1-to-2-ounce pieces even when their postage bill was higher.

2) Mailers of 2-to-3-ounce letters will have an incentive of 25¢ per piece (instead of the current 12.5¢) to figure out a way to get their pieces into the 0-to-2-ounce tier. For each piece that shifts, Postal Service revenues will decrease 25¢ and costs will decline just a little.

3) A Subset of mailers of 0-to-1-ounce pieces will increase their weight to something over 1 oz. They may increase their volume. They will realize more value. The Postal Service will not tap any of that increased value. Postal Service costs will increase just a little.

4) Because of the presumed increase of 0.51 cents for bulk letters, volumes will decline for mailers not in the Subset and not already sending 1-to-2-ounce pieces.

5) Mailers not in the Subset and not already sending 1-to-2-ounce pieces will ask if it is fair for them to have to pay higher rates, just so the 1-to-2-ounce mailers can get a big rate decrease and the Subset mailers can avail themselves of a “free” option to go over 1 ounce.

The Postal Service is banking on: a) overcoming the lost contribution from effect #1 mailers, b) the lost contribution from effect #2 mailers being small, c) the volume in the effect #3 Subset being large, d) that a sizable portion of the effect #3 Subset would have gone electronic but decides not to do so, e) an increase in contribution from effect #4 mailers, and f) effect #5 mailers remaining quiet.

Whether all this will pan out for the Postal Service is open to question. First, the alignment between rates and value does not look too good. Second, the number of mailers who are near 1 ounce now, who might stuff their mailings further, is not large. The average weight of 0-to-1-ounce letters is about 0.7 ounces. This means that most of them are well below 1 ounce. If they are not stuffing their pieces to 1 ounce already, why would they stuff them to something over 1 ounce under the new tiers? Third, there is no reason to believe that the effect #3 Subset mailers are closer to going electronic than the effect #4 mailers, which means that giving the latter a rate increase may not be a good idea.

If a change in structure is on the table, I would expect the utility mailers to ask for a lower rate for pieces under one-half ounce. There is nothing magical about one-ounce increments. In fact, if these weight breaks are important as signals, and are interfering with attempts by all parties to act on value, why not simply put in a piece-pound structure? The weight breaks would be gone. The signals would be smooth instead of abrupt. Value would be tapped systematically. Costs could be recognized appropriately. Fairness would increase. The rates would be more efficient. Mailers would be served more effectively. And the Postal Service would have a better chance at survival.

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USPS' Mess and NewPage's Saga: Dead Tree Edition's Best (and Worst) of 2011

Articles about the U.S. Postal Service’s struggles were the most-read features of Dead Tree Edition in 2011, while NewPage's downward spiral into bankruptcy protection was also a popular topic.

Once again, the 10 most popular articles were all about the Postal Service, led by USPS Retirement Mess: A Major Barrier to Downsizing and Obama Hints At Changes To Postal Service Workforce, each with nearly 20,000 page views. The irony is that many people mistakenly thought the first article was criticizing postal unions (I was actually praising them for addressing a problem that management seems to be ignoring.) and that nothing much has come of Obama’s hinting.

Readers actually spent the most time – nearly 1,000 hours – reading Postal Service, White House Engaged in 'Intense Discussions'. Nothing much seems to have come from those discussions, either.

The article receiving the most comments – a whopping 49 – was Postal Service Has Too Many Employees and Pays Them Too Much, Mailer Groups Say. A lot of postal employees wondered why USPS has so many supervisors, why they’re working overtime when there are supposedly too many workers, and why U.S. mailers are complaining about the best bulk postage rates in the world.

Speaking of overtime, both USPS Overtime on the Rise and Delayed Retirements, Rising Overtime Bedevil USPS Finances were on the top 10 list.

Getting Flipboarded out of business
One reason postal articles on Dead Tree Edition are so widely read is that sites devoted to postal news do such a good job of curating relevant content from other sites. Maybe that’s because they’re run  by amateurs.

Most of the professional journalists who publish the media devoted to the printing, catalog, and paper industries hew to the time-honored principle of journalistic ego, which means you don’t publish anything not written by your own people unless it’s a news release. Within a few years, they’ll be Flipboarded out of business. But the amateurs will thrive.

The most popular non-postal articles dealt with NewPage, North America’s largest maker of magazine-quality paper, as it tried to maneuver out from under a staggering debt load. Tops was the prescient Is Bankruptcy Inevitable for NewPage?, published in September 2010. (The answer, we learned 12 months later, was yes.) Also popular were NewPage Finally Says the B Word; NewPage, Verso Owners Reportedly Discussing a Deal; and NewPage-Verso Merger Unlikely, 2 Experts Say.

Other highlights (and lowlights) of the year included:

• Taking on the mainstream media regarding shoddy reporting on postal issues – first Bloomburg BusinessWeek, then The Wall Street Journal, and finally The Washington Post’s George Will. 
• Best headline: Wanted: New Postmaster General; Must Be Able To Kiss 535 Backsides Simultaneously. Runner-up: Mine's Bigger Than Yours: Quad and Donnelley Squabble Over Co-Mail.
• Best article that almost no one read: A tie between Invasion of the Bookazines, Featuring the Return of the Living Dead and The Magazine Industry's Identity Crisis, each of which had fewer than 300 readers. Because my day job is with a magazine company, some of my best writing is about the publishing business, but articles about postal issues and the paper industry get way more readership. People in publishing tend to be dangerously ignorant of their own industry.
• Most Controversial: Could Forever Stamps Become Worthless? What Bankruptcy Might Mean for USPS got swatted down by two different postal experts. Alan Robinson responded with Don’t Worry About Forever Stamps in Bankruptcy and Brian Sheehan with Why Postal Bankruptcy Doesn’t Make Sense. Ouch!
• Golden oldie: How Does the Postal Service Discourage Early Retirement? Let Me Count the Ways had more than 9,000 page views in 2011 even though it was published in September 2010. The issue is as relevant as ever, and the problem seems to be getting worse rather than better.
• Most edited: Sexy SlogansWith a Bite, which I wrote for Publishing Executive magazine. The PubExec editors wisely decided many of the slogans were too hot for a respectable magazine. But that didn't keep me from publishing them in Dead Tree Edition in the article Censor Me: The Magazine Slogans That Were Too Hot for Publishing Executive. 

Related articles: Tricky Dick, Spamazon, and 10 Other Media Failures of 2011 and USPS Retirements and Staffing Changes Captured Readers' Attention in 2010.

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Tricky Dick, Spamazon, and 10 Other Media Failures of 2011

Now that just about everyone else is done publishing their annual feel-good "Best Of" lists, it's time for Dead Tree Edition to remind us what a crappy year we just stumbled through.  Here’s a look back at some of the media world’s unsung losers and overlooked failures of 2011:

Spamazon: Amazon, once known for its uncanny ability to send emails promoting just the right products to the right person (See An Amazon Approach to Selling Magazine Subscriptions), decided to enter the deal-of-the-day business. But it turns out the big web retailer is better at algorithms than maps: Several readers report being deluged with irrelevant offers, including ones for car washes, hair salons, and the like that are more than two hours from where they live. By the time Amazon realizes the damage it has done, I’ll bet millions of us customers will have relegated its missives to our spam folders.

Georgia: Forbes recently announced the launch of its 20th “local language edition”, Forbes Georgia. Yat's raht, them good ol’ boys in Jawjuh fahnly had to abandon WDCHYDIUN (We Don't Care How You Do It Up North) as a business strategy and realized they need someone to explain the ways of Wall Street and other Yankee business practices to them in their own language. (What? There’s a country called Georgia? Sheee-it, I thought Georgia rejoined the Union just a few years after the War Against Northern Aggression.)

Candace the Caribou

Cari-booted: It was bad enough when Dead Tree Edition suggested in 2008 that environmental groups replace Candace the Caribou with Rudolph the Homeless Reindeer as the spokesbeast for protecting the boreal forest. (See Losing the Name Game.) Now ForestEthics itself has apparently retired Candace to make way for a new mascot, Sammy Smartphone. Not sure who’s the bigger loser, Candace or ForestEthics.

Sammy Smartphone

Hipper Than Thou: It was sad to see aging brands try desperately to connect with the youth market by including QR codes in their ads and articles. Epic fail: In a recent study of American college students, only 21% successfully scanned a sample QR code, and 75% said they are “not likely” to scan one in the future.

Fools’ Gold: Another sad sight was watching so many magazine publishers chase the iPad gold rush, only to find there ain’t much money in them there apps.

They like me, they really like me: Saddest of all were the publishers whose entire social-media strategy was to accumulate as many “likes” on Facebook as possible. Seth Godin summarizes this simple-minded approach as, “increase the number of fans, friends and followers, so your shouts will be heard. The problem of course is that more noise is not better noise."

I’ll bet the phone really sucks: Vivid Entertainment, a leading “publisher” of porn sites, engaged in a silly waste of legal fees by sending a cease-and-desist letter to the maker of a new cell phone called The Vivid. (While they're at it, why don't they charge Merriam-Webster with trademark infringement for using "vivid" in dictionaries?) Unless that phone has a really strong vibrate setting, it’s not likely to be much of a competitor to the porn giant.

And now for some awards:

The Hard To Believe Award goes to Don Fulsom, a former White House reporter for UPI, for his forthcoming book suggesting that President Richard Nixon was gay. C’mon, what self-respecting gay man would dress like a color-blind bank VP and go on prime-time TV with a 5 o’clock shadow? Still, it does make you wonder about that infamous 18-minute gap in the audiotapes. You don’t suppose Tricky Dick had a private meeting with J. Edgar . . .?

The Clueless Award goes to publishers and so-called publishing experts who talked incessantly about “digital media” when referring to anything that’s not in print. Any publishing company that hasn’t figured out that the web, email, apps, and Facebook are nearly as different from each other as they are from print is in for a rough 2012.

The John Adams Award: “I have come to the conclusion that one useless man is called a disgrace; that two are called a law firm; and that three or more become a Congress!” Adams is quoted as saying in the musical 1776. 2011 was the year that the mainstream media and general public started realizing how useless and damaging Congress' oversight of the allegedly independent U.S. Postal Service has been. Up for the award were the scores of Congress members who floated various "reform" proposals that mostly seemed designed to make matters even worse. The winner is Rep. Robert Aderholt (R-AL), whose proposed legislation would place such restrictions on USPS as allowing only 10% of its downsizings and post-office closings to occur in rural areas. Just what we need – even more Congressional micromanaging of the Postal Service.

The Adams Award runner-up trophy goes to Sen. Claire McCaskill (D-MO), who said we should stop closing postal facilities and just get people to write more letters. Let’s see, if we could persuade every American adult to mail one additional letter per month, it would be freakin’ miraculous – and barely dent the Postal Service’s budget deficit.

The Small Fortune Award goes to investors in paper companies, who once again demonstrated the old adage that the best way to make a small fortune in the paper industry is to start with a large fortune. Bankruptcy filings of companies like NewPage and White Birch grabbed all the headlines, but even the survivors didn’t fare so well. Verso and Catalyst stockholders saw their investments drop by as much as 85% and 95%, respectively, during the year. (All of Catalyst stock is worth $13.4 million, which is the value of the products it makes during a typical four-day period.) Even the Chinese struggled in 2011 despite their huge new world-class machines. Chinese mills added 1.6 million tonnes of coated-woodfree capacity during 2011, according to RISI, only to realize that it’s hard to compete when your country has leveled its forests, the West is running out of recycled fiber, and half the world’s markets are closed to you.

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