How The U.S. Postal Service Crushed an Innovative Startup
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By Derek Khanna,
InsideSources
April 29, 2014

Evan Baehr and Will Davis, were summoned to Washington for a meeting with the Postmaster General. Evan and Will wondered what it could be, “They must have seen the recent coverage in CNBC, maybe they’ll help our company expand?” Or, “maybe they wanted the traditional photo opportunity and positive media buzz that political actors care so much about. Surely their company made the Post Office look good, right?” But when the Postmaster General came out to meet them, the stark reality became clear, they weren’t interested in a photo-op.

As Evan and Will describe it: “This 30-minute meeting was the end of our business model.”

How Outbox Set Out to Help Consumers
Evan and Will were both former staffers on Capitol Hill, but they left Washington to go to Harvard Business School and then decided to build something new. They wanted to continue to tackle public problems, but they “aim[ed] to do so with private solutions.” So having worked on the Hill they knew of the USPS’s well-documented inefficiencies. As they describe it, they “knew that the USPS would not be able to work out its own problems, so perhaps naively, we hoped to partner with USPS to provide an alternative to the physical delivery of postal mail to a subset of users, hoping this would spur further innovation and cost savings.”

They wanted to allow consumers to digitize all of their postal mail so that individuals could get rid of junk mail, keep important things organized and never have to go out to their mailbox again. They set out to “redefine a long cherished but broken medium of communication: postal mail.” Customers would opt-in for $5 a month with “Outbox” to have their mail redirected, opened, scanned and available online or through a phone app.  Consumers could then click on a particular scanned letter and ask that it be physically delivered, or that certain types of letters not be opened (e.g., bills etc.).

Related: A Big Idea to Save the Post Office: Turn It Into a Bank

Will and Evan may have been inspired by their time working on Capitol Hill, as this is essentially the type of technology used in every Congressional Office to manage the deluge of millions of letters from constituents to Congress.  If it’s good enough for Congressional offices, they thought, why shouldn’t average people have access to similar technology?

Evan Baehr (left) and Will Davis (right)
Evan Baehr (left) and Will Davis (right)

There aren’t many politicos that leave DC to found a company, but Will and Evan did. They started out with an idea, at first a simple Word document, but eventually a full deck of their proposal, and they received funding from Silicon Valley, including from well-known venture capitalist Peter Thiel (one of the major backers of Facebook and PayPal).

They started out small, testing their hypothesis that consumers would want to limit or eliminate their junk mail, save a copy of their mail forever like e-mail, and be able to access their most recent mail anywhere in the world while traveling.

And they were right.

The Launch
They launched in Austin, Texas, and grew quickly. They were limited mainly by their ability to expand and meet demand. Users were gushing with positive reviews and Outbox had hundreds of paying users signing up and loving their service.  Once customers had experienced digital mail, they didn’t want to go back. As one customer, Marcia Navratil, explains “I don’t know why anyone wouldn’t get their mail this way, unless you just really like having paper delivered to your house.”

Technology entrepreneurs also loved the concept:

“Outbox is one of those ‘wow’ products. The moment I got my first batch of mail through their interface, I couldn’t believe it. It was pure magic. I’m a customer for life.” – Matt Galligan, CEO of the newspaper disruptor Circa

“Amazing service – can’t live without it. Read, sort, forward and unsubscribe from your physical mail, all online.” – Naval Ravikant, founder/CEO of Angellist

As they started to grow, positive press coverage kept increasing and the local Austin Magazine of Tribeza named Evan Baehr as one of 10 People to Watch for his success in co-launching Outbox. CNBC carried their story nationally and they expanded from Austin, TX to San Francisco, CA.

It was around this point that they became vulnerable by their own success. The local Austin, TX and San Francisco, CA Post Offices allowed individuals to sign forwarding contracts to have their mail forwarded to Outbox with the intention of it being opened and scanned – without these agreements Outbox’s market model wouldn’t be possible. In practice there are many types of forwarding contracts that the Post Office allows, so these contracts were not necessarily unusual.  Further, there were no reports of complaints by customers. These were all customers who wanted their mail to be forwarded, opened and scanned by Outbox.

But once Outbox started to get successful and was covered on CNBC, Evan and Will got a call requesting them to come back to Washington to meet with the Postmaster General. Evan and Will thought about discussing how they could work with USPS nationally, perhaps even to provide some of their technology through a license for USPS to offer it directly to all their consumers.

Related: Amazon Plans to Deliver by Drones: The Best Tweets

They believed that their technology could actually save the Post Office money. If consumers started to opt-in to Outbox, or other services like Outbox, then the Post Office could receive the full benefits of the stamped envelope but never have to deliver those packages, which is one of the biggest costs for the Post Office. In fact, if properly implemented, when a customer sends a letter from Austin, TX to Alaska, if the Post Office knew that they weren’t going to receive the letter anyway, then the Post Office could forward the letter from Austin directly to Outbox, and never have to ship the letter across the continent.

Thus digitization of mail could actually save the Post Office a large amount of money, but that wasn’t how the Post Office would see it.

What Does “Disruption” Mean to DC?
When Evan and Will got called in to meet with the Postmaster General they were joined by the USPS’s General Counsel and Chief of Digital Strategy. But instead, Evan recounts that US Postmaster General Patrick Donahoe “looked at us” and said “we have a misunderstanding. ‘You disrupt my service and we will never work with you.’” Further, “‘You mentioned making the service better for our customers; but the American citizens aren’t our customers—about 400 junk mailers are our customers.  Your service hurts our ability to serve those customers.”’

According to Evan, the Chief of Digital Strategy’s comments were even more stark, “[Your market model] will never work anyway. Digital is a fad. It will only work in Europe.”

Evan and Will would later call the meeting one of the most “surreal moments of their lives.”

Donahoe’s comments are even more incredible for people with technology backgrounds. In tech vernacular, “disruption” is an extremely positive term for when an old market model is displaced by a new market model that is better for the consumer and often cheaper to provide.

One of the metaphorical gods of innovation is Harvard MBA Professor Clayton Christensen who’s thesis and book “The Innovator’s Dilemma” explains how old successful companies, that were innovative themselves at first, eventually refuse to adapt to new technologies and new market conditions, and are thereby displaced by a scrappy underdog providing a new service or product. But Christianson’s key insight is that this “disruption” starts out very small, often with a niche market that the large goliath company ignores. Often the “disruptor” is providing inferior technology but at reduced margins providing a cheaper or better product for part of the market. Then the “disruptor” grows, sometimes very quickly, and competes with the large old successful company eventually “disrupting” the older industry paradigm and kicking out the incumbent player. Christianson’s findings were that if a large successful company refuses to innovate and is satisfied with its steady return, it will often be displaced by these underdogs, and therefore the mantra for a dynamic market must be “innovate or die.”

Related: Postal Service Sheds Jobs as Delivery Slows

Entrepreneurs across the country know how important “disruption” is to offering consumers innovative and useful products and services. TechCrunch, a major online blog for the tech and venture community, which previously featured Outbox, has an annual conference called “Disrupt” in honor of the innovative process of disruption.

Outbox was a disruptive innovation. Outbox offered utility for many consumers and offered new technology that the Post Office should have been offering for years. In a well-functioning market, we would expect a company like Outbox to disrupt the dominance of the incumbent and force them to either innovate or die. But of course, USPS is not a normal company; rather, it is an entity of the US government, and the market forces that lead to innovation and growth in the free market are completely missing in DC bureaucracy.

DC bureaucracy literally doesn’t speak the same language, as can be seen with their negative use of the term “disruption.”

Unlike in the free market, USPS didn’t have to compete with Outbox on the merits of their services; instead, they could simply tell them that they wouldn’t cooperate because Outbox could “disrupt” their service. Anyone who has looked at USPS’s balance sheets can tell you, if any government bureaucracy is in need of disruption, then it surely is the USPS.

In 2011, the GAO released a report entitled “Mail Trends Highlight Need to Fundamentally Change Business Model.” That report found that “trends underscore the need for USPS’s business model to undergo fundamental changes to reduce personnel and network-related costs.” In 2013, GAO released a report entitled “Urgent Action Needed to Achieve Financial Sustainability” urging that USPS “reduce its expenses to avoid even greater financial losses.”

But Postmaster General Donahue didn’t apparently want any “disruption,” even if it may have saved him money by reducing the expense of physical delivery.

Down but Not Out
Evan and Will had fought through every barrier that had stopped Outbox so far, they weren’t going to allow a simple regulatory issue like this stand in their way. After all, they were attempting to do something no start-up had tried before. They used all the tools available to them, and when the tools didn’t exist then they invented their own technological solutions.  They 1) developed the legal framework to open users’ mail, they 2) built new logistics software to handle their operations, they 3) created new industrial-grade scanning machines that were 80% cheaper than the market rate and 4) developed specialized optical character recognition software technology. Outbox was able to break through every technological and legal problem they confronted. They couldn’t simply give up in the face of a Washington bureaucracy that refused to adapt. The very reason they created Outbox was because they didn’t think DC would innovate and the best way to force innovation was from the outside – how could they stop now?

So instead of shutting down their operations they decided to hire a team of drivers to “un-deliver” mail out of customers mailboxes – of course with very explicit contractual permission. If the Post Office wouldn’t cooperate with them by forwarding the mail, then they could physically get the mail from users’ mailboxes and carry on their operations. They called their drivers the “Unpostmen”: reflecting a completely economically inefficient impediment created by government regulation.  The government would deliver the mail, and Outbox would un-deliver the mail, to provide a service, digitization, that the Post Office should have been providing a decade ago.

With this outlandish new market model, Outbox continued to expand. They were unable to meet with large scale growth of demand. Outbox’s prime service was to help unsubscribe customers from spam mail, and they unsubscribed customers from over 1 million senders of mail. Outbox scanned over 1.5 million pages, and when requested, re-delivered over 250,000 requested mail packages.   A nationwide survey found that they had a brand awareness of 10% even though they could handle only 2,000 customers in two markets. CNN praised their concept, and they even made it into Jay Leno’s monologue.

But while they had many satisfied customers, their overhead from un-delivering the mail was extremely high. Maintaining a fleet of vehicles to go to every person’s house every day was costing them a fortune when they were trying to allocate their resources towards marketing to expand. While they believed the market model was profitable, it would take precious time that they didn’t have. With the onerous requirement imposed by the Post Office, this new overhead had made their easily scalable company almost impossible to scale. And their market model needed to scale quickly to become profitable.

Closing Time
They knew that the only way to sustain Outbox was to have the Postmaster General change his mind. But they didn’t have time on their side. Even if Outbox tried to overturn the decision of Postmaster General Patrick Donahoe, by petitioning the President of the United States, by leading some advocacy effort, or by lobbying Congress for change, that would require resources they couldn’t divest from their current operations, and it would take years. As Evan and Will would explain, their company “lost because the main asset of the government is time – which is the resource of which startups have the least.”

In February, 2014, they announced on their blog that they were shutting down their company because they could not profitably scale the company unless the Post Office allowed consumers to forward their mail.

In their parting message, they explained, “You may think government organizations are completely, insanely backwards; you are wrong—they are worse.”

It’s likely news to the American people, but the Post Office apparently doesn’t consider you to be its customers. Two years after the launch of Outbox allowing consumers to have digital access to their mail, the Post Office still has not announced any plans to allow consumers to have access to a digital version of their mail. In February 2014, the same month that Outbox shut down, the Post Office incurred a net loss of $354 million, following a fiscal year 2013 loss of $5 billion. With comments like “digital is a fad,” it’s no wonder that the USPS is bankrupt.

USPS’s Response
While investigating this piece, we reached out to the USPS, by phone and by e-mail, to hear their version of why they decided to stop cooperating with Outbox and to see if they contested Outbox’s account of the meeting in Washington, DC. The entire response by USPS is included here:

Hi Derek

Thanks for contacting us about your story. Please see our statement below—that is all we have to say on this topic at this time.

Thanks

Dave Partenheimer

Manager, Media Relations

U.S. Postal Service

The Postal Service is focused on providing an essential service in our mission to serve the American public and does not view Outbox as supporting that mission. We do have concerns regarding the destruction of mail—even if authorized by the receiver—and will continue to monitor market activities to ensure protection of our brand and the value and security of the mail.

The comment by the Post Office presents more questions than it answers.

We followed up with the Post Office to find out if there were any consumers who lodged a complaint against Outbox. We also asked them, since their statement mentions concerns regarding the destruction of mail as authorized by the receiver, if Outbox had simply archived the mail and not destroyed it, then would that have been allowed and then why was that not presented as an option to Outbox? We also asked them if they could explain how Outbox undermines the “protection of their brand and value and security of the mail”? Since the Post Office mentions that they don’t think Outbox supports their mission, we asked them how does that justify the service not being an option for consumers that want to pay for it? We also asked them to provide relevant internal e-mails on the subject of Outbox and this meeting for us to see their version of events.

USPS declined to provide further comment, or respond to these questions, of any kind, despite repeated requests. USPS did not dispute Evan’s recollection of their USPS meeting in DC and did not comment on whether junk mailers are the Post Office’s customers versus average Americans.