The building blocks for a sustainable postal service

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					The building blocks for a sustainable
postal service
Analysis of Markets

March 2011
Key conclusions
The postal market has experienced structural decline as a result of changes in how
we choose to communicate and undertake business transactions. While mail is losing
volume to non-postal alternatives, our analysis suggests that non-postal alternatives
only exert a limited competitive constraint on the price of retail mail services. We
therefore provisionally conclude that for the time being, the retail markets for postal
services are no wider than postal services. However, we recognise that the market is
going through a transitional period and that it is important to consult on these
provisional conclusions.

We provisionally conclude that there are 10 retail markets for Letters and Large
Letters postal services in the UK, defined on a national basis. The markets we define
are as follows:

    Pre-sorted D+1 Letters and Large Letters
    Pre-sorted D+2 and later than D+2 Letters and Large Letters
    Unsorted High volume D+1 Letters
    Unsorted High volume D+2 and later than D+2 Letters
    Unsorted High volume D+1 Large Letters
    Unsorted High volume D+2 and later than D+2 Large Letters
    Unsorted Low volume D+1 Letters
    Unsorted Low volume D+2 and later than D+2 Letters
    Unsorted Low volume D+1 Large Letters
    Unsorted Low volume D+2 and later than D+2 Large Letters

We consider that Royal Mail has market power in each of these markets. In three of
these markets, however, we consider that there is increasing competition. These
markets are:

    Pre-sorted D+2 and later than D+2 Letters and Large Letters
    Unsorted High volume D+2 and later than D+2 Letters
    Unsorted High volume D+2 and later than D+2 Large Letters

We have also considered the markets for response, returns, redirections, redirections
data and business collection services. Our initial view is that there are separate
markets for each of these services and that Royal Mail has market power in all these
markets.
Supporting evidence
Our evidence is based on qualitative and quantitative information from operators and
customers. We gathered evidence by issuing requirements to furnish information,
industry and customer questionnaires, and through workshops, meetings and
telephone conferences. We have also relied on a number of published surveys,
consultancy reports, and our own commissioned surveys.




Expected impact
Our provisional conclusions on market definition and Royal Mail‟s market power will
inform our decisions on whether or to what extent to regulate different postal markets.
It will also assist us and (assuming the Postal Services Bill becomes law) our
successor, Ofcom, when considering future regulatory intervention




Consultation Questions
Q1. Do you agree that there is insufficient demand side substitution between
     transactional mail and non-postal alternatives provide for them to be included
     in the same market?

Q2.    Do you agree that there is insufficient demand side substitution between
       advertising mail and non-postal advertising media for them to be included in
       the same market?

Q3.    Do you agree that there is insufficient demand side substitution between
       publications mail and non-postal alternatives provide for them to be included in
       the same market?

Q4.    Do you agree that there is insufficient demand side substitution between social
       mail and non-postal alternatives provide for them to be included in the same
       market?

Q5.    Do you agree that there is insufficient demand side substitution between
       fulfilment mail and non-postal alternatives provide for them to be included in
       the same market?
Q6.   Do you agree with our provisional conclusion not to widen the market beyond
      post?

Q7.   Do you agree that the costs of pre-sorting mail are relatively low?

Q8.   Do you agree that there is insufficient demand side substitution between pre-
      sorted and unsorted mail for them to be included in the same economic
      market?

Q9.   Do you agree that there is sufficient demand side substitution between D+2
      and later than D+2 postal services for them to be included in the same
      market?

Q10. Do you agree that there is insufficient demand side substitution between D+1
     and D+2 and later postal services for them to be included in the same
     economic market?

Q11. Do you agree that there is insufficient demand side substitution between
     Letters and Large Letters for them to be included in the same economic
     market?

Q12. Do you agree that there is insufficient demand side substitution between Low
     volume and High volume unsorted mail for then to be included in the same
     economic market?

Q13. Do you agree that there is insufficient demand side substitution between D+1
     and D+2 and later postal services for them to be included in the same
     economic market?

Q14. Do you agree that different mail applications are in the same economic
     market?

Q15. Do you agree that each of the markets we have defined should be national
     (UK) markets?

Q16. Do you agree with our provisional conclusions on market definition?

Q17. Do you agree with out market power assessment?

Q18. Do you agree with our initial view that the market is that for response
     services?
Q19. Do you have evidence to suggest that significant PPS volumes are sent
     using response services?

Q20. Do you agree with our approach to limiting our analysis for response
     services to Letters and Large Letters and considering packet and parcels
     (PPS) under returns services?

Q21. Do you have any evidence to suggest that response services fall within the
     Low volume unsorted markets?

Q22. Do you have any evidence to suggest that a 5-10% increase in the prices of
     response services will lead to switching to non-postal alternatives?

Q23. Do you agree with our initial assessment that Royal Mail has market power
     for response services?

Q24. Do you have evidence to suggest that retailers‟ returns policies are important
     to the customers of online and mail-order retailers?

Q25. Do you have evidence of alternative operators offering returns service for
     third party items?

Q26. Are retailers who offer a returns service able to offer this service through a
     provider that is different from the one used for the initial delivery?

Q27. Do you consider there to be separate markets for the return of items on the
     basis of weight as in PPS B2X markets (i.e. below and above 2kg)?

Q28. Do you agree with our initial view that given our market definition Royal Mail
     is likely to have market power within the market for returns services below
     2kg?

Q29. Do you have any evidence that shows that Royal Mail has market power for
     the return of items above 2kg?

Q30. Do you agree that the market for redirections services should be no wider
     than the market for forwarding mail on to a new address?

Q31. Is there any evidence of other operators providing a competitive constraint
     on Royal Mail‟s redirections service?
Q32. Do you consider that there are alternative data sources that can be used to
     maintain up-to-date customer address databases?

Q33. Do you have any evidence that indicates that there are competitive
     constraints acting on Royal Mail‟s redirections data service?

Q34. Do you currently use a business collection service? Are you currently
     charged for this service or is it provided free of charge? How much are you
     charged and on what basis?

Q35. If you pay for a collection service, would you start entering mail directly into
     the postal pipeline via the Post Office Ltd. or pillar boxes in the event of a
     sustained 5-10% price rise?

Q36. Do you agree that at the market for business collections is a separate
     market?

Q37. Do you consider that Royal Mail face sufficient competition for its business
     collections to prevent it from increasing prices by 5-10%?
                                                                                                                     Summary



Summary

S.1       Our analysis of markets aims to define a set of economic markets across the
          postal sector, analyse competitive conditions and determine Royal Mail‟s
          market power in these markets. We would expect to deregulate1 markets
          where we find effective competition, and to consider the appropriate form of
          regulation (if any) in markets where Royal Mail retains market power -
          depending on the extent and nature of that market power.

S.2       We recognise that the postal market is going through a period of transition and
          has been impacted by both by the development of electronic means of
          communication and a recession. While mail is losing volume to other forms of
          communication, we need to consider the extent to which these non-postal
          alternatives constrain the price of retail mail services and whether structural
          change in the market will alter that relationship. For the purposes of setting a
          regulatory structure for post it is important to understand how far these changes
          impact upon market definition, and, more generally, on Royal Mail‟s ability to
          raise prices above competitive levels. Hence this consultation.

S.3       The Postal Services Bill2 will provide Ofcom with powers to impose ex ante
          regulation on USO products and services and in relation to Access. Our market
          study will therefore assist us and our successor, Ofcom, in considering future
          regulatory intervention.

S.4       This consultation represents Stage 3 of our analysis of markets. In May 2010
          we consulted on: provisional conclusions on:

                a supply side market definition and market power analysis of the retail
                Letters and Large Letters markets (we referred to these as Candidate
                markets since they are defined based on supply side analysis alone);
                market definitions and market power analysis for wholesale Letters and
                Large Letters markets; and
                market definitions and market power analysis for Packet and Parcel
                Services (PPS) markets.

S.5       In November 2010 we reached final decisions on market definition and market
          power within these markets.

S.6       In this consultation we examine the competitive constraints imposed by demand
          side factors for the Letter and Large Letter retail markets.3 We consider


1
 Subject to any measures necessary with respect to services in the USO.
2
 As currently drafted
3
 We follow Royal Mail‟s format specifications by defining Letters as items going through the post that weigh up to 100g and that
have a maximum size of 240mm x 165mm x 5mm and Large Letters as items exceeding the Letter dimensions that weigh up to




                                                         The building blocks for a sustainable postal service                      i
                                                                                                                      Summary



          whether the market is wider than postal services and whether there are wider
          markets within posts. We then bring together this demand side analysis with
          the November supply side analysis and set out our provisional conclusions on
          the relevant market definitions and whether Royal Mail has market power in
          those markets.

S.7       We also consider response, returns, redirections, redirections data and
          business collection services which do not fall within the markets already
          defined. We have brought redirections and business collection services into the
          scope of the analysis of markets as we are currently consulting on them as part
          of clarifying the scope of the universal service.4 We present our initial views on
          markets and market power for these services.


Summary of conclusions

S.8       Our demand side analysis suggests that mail fulfils two purposes that are hard
          to replicate: physical delivery and contacting named individuals. While mail is
          losing volume to non-postal alternatives, our analysis suggests that this is
          primarily due to non-price rather than price reasons – digital alternatives offer
          advantages in terms of speed, ease of use, functionality etc and the roll out of
          high speed mobile, broadband and Wi-fi networks have made these alternatives
          increasingly widely available.5 However, these non-postal alternatives only
          exert a limited competitive constraint on the price of retail mail services.

S.9       The reasons for this vary by postal application.

                For transactional mail, the cost of paper statements and bills is already
                more expensive than electronic substitutes. However switching away from
                post has been limited as customers continue to express a strong preference
                for paper copies, while senders of mail are often unable to charge for paper
                copies for commercial reasons (e.g. “free banking”).
                For advertising mail, the campaign is often complementary and the
                characteristics of direct mail are difficult to replicate. Email campaigns are
                less targeted, are often blocked by filters, and those that get through have a
                very poor customer response rate. Advertising (direct mail) is however the
                application with the strongest price constraint from non-postal alternatives.


750g and that have a maximum size of 353mm x 250mm x 25mm. However, we specifically exclude from our definition of Letters
and Large Letters any non vanilla Letters and Large Letters which are not subject to licensing requirements as they fall within the
scope of our PPS definition.
4
  Postcomm‟s Clarification of certain services in the universal service: a consultation dated (28 February 2011). In that
consultation document, we confirm our own views, and formally seek to amend Royal Mail‟s licence to clarify that these two
services (among other support services) should be provided as part of the universal service.
5
  Email and other forms of electronic communication generally cost significantly less per item than postage (and often have a
marginal cost close to zero). However, our evidence suggests that even if the price of post was much lower, significant switching
would still have occurred because electronic communication is more suitable for many applications and uses than post. Therefore
digital alternatives only act as a limited constraint on postal prices.




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                                                                                        Summary



          Publishers have a strong preference for postal subscriptions as it enhances
          customer loyalty and is more attractive for advertisers.
          For social mail, a lack of price awareness means that consumers are largely
          insensitive to price.
          Much fulfilment mail involves items such as credit cards, membership cards
          and SIM cards for which there is no real alternative but to use postal
          services. The postal cost is often a small proportion of the overall cost of the
          item.

S.10   Our findings are consistent with Royal Mail‟s estimate that the overall price
       elasticity of mail is around -0.35. We recognise that Royal Mail‟s average 15%
       price increase for business mail and access services may bring forward some
       switching away from post, increasing the price elasticity of mail in the medium
       term. However, the true long-run price elasticity would need to be around four
       times Royal Mail‟s estimates for us to conclude that the relevant market was
       wider than post (i.e. that a 5-10% price rise was not profitable).

S.11   Our evidence also suggests that there is limited demand side substitution within
       postal segments, other than for D+2 and later than D+2 mail. As a
       consequence our provisional conclusion is that the economic markets are
       identical to those set out in November and that we should continue to define
       separate markets for D+1 and D+2 and later, and pre-sorted and unsorted mail
       services. As in November we propose that the Low and High volume unsorted
       mail fall into separate economic markets and that Letters and Large Letters fall
       within separate markets for unsorted mail. We also confirm our view that the
       geographic market is UK wide.

S.12   Our market power analysis is more extensive than the supply side assessment
       in November. In addition to market shares and entry barriers, we assess buyer
       power, the intensity of competition between Royal Mail and DSA competitors
       and demand side competitive constraints from non-postal alternatives.

S.13   Our provisional conclusion is that the market definitions and market power
       assessments for the retail Letters and Large Letters market are identical to
       those reached in our November decision document for the Candidate retail
       markets.

S.14   Our initial view is that there are separate relevant markets for the response,
       return, redirections, redirections data and business collection services and that
       Royal Mail has market power in all these markets.




                                       The building blocks for a sustainable postal service   iii
                                                                                                                    Summary



Retail Letter and Large Letter market study: Our approach

S.15      To define economic markets we have followed the approach adopted by UK
          and EU competition authorities.6 Products are included in the same market
          where they are sufficiently strong substitutes in terms of characteristics, price
          and intended use that they are capable of acting as a constraint on each other‟s
          prices. A market has both a product and a geographic dimension.

S.16      We segment the retail Letter and Large Letter markets by the following
          characteristics:

               Sortation (pre-sorted, unsorted)
               Speed of mail (D+1, D+2, later than D+2)
               Format (Letters, Large Letters)
               Size of mailing (High volume, Low volume7)
               Mail applications (transactional, advertising, publications, fulfilment and
               social)

S.17      Each combination of these characteristics could be a relevant economic market
          - implying 120 possible markets. To simplify the analysis we consider each
          characteristic in turn.




6
  The Office of Fair Trading‟s Market Definition Guidelines, OFT 403, December 2004
(http://www.oft.gov.uk/OFTwork/publications/publication-categories/guidance/competition-act/); Commission Notice on the
definition of relevant markets for the purposes of Community competition law (OJ C372, p. 5)
7
  Low volumes are less than 250 items per collection – this represents the approximate point at which other operators would
consider collecting mail from a customer.




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                                                                                                                  Summary



Price and non-price substitution

Figure 1: Letter volume and GDP




Source: Royal Mail analysis


S.18      The Hooper Report noted that the primary cause for the breakdown in the
          relationship between letter post and GDP was the rapid growth of electronic
          means of communication. It described the growing divergence between the
          growth rates of letter post and GDP as a “technology wedge”.8

S.19      It is clear that businesses and residential customers have switched a
          substantial proportion of their communication needs from mail to digital
          alternatives and that the trend towards electronic substitution is continuing.
          However, customers may be switching for non-price as well as price reasons –
          digital alternatives offer advantages in terms of speed, ease of use, functionality
          etc and the roll out of high speed mobile, broadband and Wi-fi networks have
          made these alternatives increasingly widely available.

S.20      In defining markets we are primarily interested in consumer switching in
          response to a change in relative prices. In principle therefore we need to
          disentangle the price and non-price motives for the observed switching.




8
  For more information on the Hooper Review, see http://www.bis.gov.uk/policies/business-sectors/postal-services/hooper-
review-update




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                                                                                                                         Summary



S.21      To answer this question, we have considered a wide range of evidence
          including:

                internal and external interviews with business and residential customers to
                assess whether an increase in the price of post above the competitive level
                would be likely to cause them to switch to non-postal alternatives;
                empirical estimates of the price elasticity of demand of postal services;
                an assessment of indirect and direct competitive constraints; and
                inferences from Royal Mail‟s commercial behaviour.


Applications

S.22      The main part of our analysis has focused on whether each application faces a
          constraint from non-postal alternatives and, if so, whether that constraint is
          sufficient to define markets that are wider than post.

S.23      We consider five broad mail applications: transactional (64% of Royal Mail
          revenue), advertising (15%), social (10%), publishing (7%) and fulfilment (4%)9.
          Figure 2 below illustrates the different non-postal alternatives for each of these
          applications.




9
  Other operators have a similar split, but we believe that transactional mail is slightly lower than Royal Mail (50%) and advertising
slightly higher. Other operators do not carry social mail and we believe that their fulfilment volumes (for Letters and Large Letters)
are very small.




                                                           The building blocks for a sustainable postal service                    vi
                                                                                                                   Summary



Figure 2: Non-postal alternatives to each of the customer applications




S.24      On the supply side, the mail service offered to transactional, fulfilment,
          advertising and publishing customers is identical and operators supplying mail
          services for one application can easily offer a similar service for other
          applications.10 We therefore included all mail applications in our Candidate
          retail markets in May and November documents.

S.25      On the demand side, as different postal applications face different competitive
          constraints, we have considered for each postal application whether the postal
          price for that application is constrained by the price of non-postal alternatives.


Transactional mail

S.26      It is difficult for transactional mailers to switch away from post (direct
          substitution) as most businesses need to offer their customers‟ preferred means



10
  Supply side substitution for social mail is more limited, as social mail services are provided using a low volume network.
However, the need for simple payment channels such as stamps, means that all applications of Low volume unsorted mail are
sold at a single price, and are therefore bound by a common pricing constraint.




                                                        The building blocks for a sustainable postal service                   vii
                                                                                                                   Summary



          of communication. This is particularly the case as consumers have a strong
          preference for receiving transactional communications by post.

S.27      Indirect substitution (final consumers switching away from post) is also limited.
          Transactional mailers generally do not charge consumers directly for receiving
          mail11 and in most cases the customers are unaware of the postal costs of the
          service. Therefore an increase in the price of post is unlikely to induce
          significant switching by final customers.

S.28      In addition, while increasing numbers of customers are choosing to access their
          accounts digitally, the numbers who have switched away from mail remains
          relatively small e.g. only 10% of banking customers have chosen paperless
          billing.

S.29      This evidence is consistent with Royal Mail‟s price elasticity estimates which
          suggest that the demand for transactional mail is highly price inelastic (-0.2).


Advertising mail

S.30      Campaign objectives and target audiences are the main drivers when deciding
          which advertising medium to use, the postal cost is often secondary. Direct mail
          is often used in conjunction with other advertising media as part of an
          advertising campaign (other media can be complements as well as substitutes
          for direct mail).

S.31      The characteristics of direct mail are unique and difficult to replicate. In
          particular the informative nature and the individual targeting of an item means
          that direct mail serves a particular function within the marketing campaign.
          Email shares some of the characteristics but its conversion rates are
          significantly lower and they can easily be caught in spam filters or ignored.

S.32      While the growth of internet advertising has reduced the demand for other
          forms of advertising media, demand for direct mail has reduced by less than for
          many other alternatives. Royal Mail estimates that demand for advertising mail
          is more price elastic (-1.0) than other mail applications. However, this is still
          significantly lower than the level which would be required to make a 5-10%
          price rise unprofitable for a hypothetical monopolist.




11
  Some utility companies do charge for receiving paper statements or give discounts to customers who opt for online statements;
however this is generally combined with direct debit payments.




                                                        The building blocks for a sustainable postal service               viii
                                                                                        Summary



S.33   While the evidence does not support a finding of a market that is wider than
       post, we accept that advertising mail is subject to greater competitive
       constraints from non-postal alternatives than other applications.


Publications mail

S.34   Publishers have a strong preference for the development of postal
       subscriptions over alternative distribution methods (e.g. through newsagents or
       e-alternatives) as it enhances customer loyalty and is more attractive for
       advertisers.

S.35   The newsstand can substitute for certain publishers, but retail space scarcity,
       uncertainty of demand and suitability makes substitution possibilities limited. E-
       substitution is not sufficiently developed to be attractive at this point in time.
       Publishers tend to use digital versions to complement rather than substitute for
       their physical publications

S.36   Indirect constraints are limited because customers are generally not aware of
       postal price rises and consumers have a strong preference for receiving
       physical over electronic versions of publications.

S.37   Technological change may in the future drive a change in consumer behaviour
       which may result in e-alternatives becoming more substitutable for postal
       distribution of publications. However, it is not clear that this change is
       sufficiently imminent to justify defining a wider market at this stage.

S.38   This evidence is consistent with Royal Mail‟s price elasticity estimates which
       suggest the demand for publications mail is relatively price inelastic ([]).


Social mail

S.39   Consumer awareness of stamp prices is very low, due to, amongst other things,
       the infrequency of use. Consumers also have strong preferences for post for
       more personal communications such as greeting cards and legal documents.
       The evidence suggests that social mailers would not switch to non-postal media
       in sufficient numbers to support the view that social mailings should be seen as
       part of a wider market including non-postal media.

S.40   While social customers are increasingly using alternative forms of
       communication rather than post, this appears to be due to a change in
       consumer preferences and non-price factors.




                                       The building blocks for a sustainable postal service   ix
                                                                                         Summary



S.41   Again, this evidence is consistent with Royal Mail‟s price elasticity estimates for
       social mail (-0.4) which suggests demand is highly price inelastic.


Fulfilment mail

S.42   Letter and Large Letter fulfilment mail covers a wide range of products including
       books, CDs, tickets, SIM cards, tax discs and credit cards, all of which are likely
       to fit through a letter box.

S.43   The potential substitutes to fulfilment mail vary considerably by product. For
       example, a train ticket may be sent through the post, collected at a rail station
       or provided electronically, while a recording may be downloaded or purchased
       in the high street as well as from a mail order retailer. However, much fulfilment
       mail involves items such as credit cards, membership cards and SIM cards for
       which there is no real alternative but to use postal services.

S.44   Indirect substitution by final consumers is generally limited. While postal prices
       may or may not be passed on to consumers, they account for a relatively small
       proportion of the price of the good and are therefore unlikely to change
       behaviour.

S.45   This evidence is consistent with Royal Mail‟s elasticity estimates which suggest
       that the demand for fulfilment mail is highly price inelastic ([]).


Demand side substitution within the postal markets

S.46   Given that we have found applications to be no wider than post, we considered
       competition within different postal markets.

S.47   We considered whether, based on demand side evidence, the market should
       be considered to be wider in terms of speed of delivery, format and sortation
       level than our November supply side conclusions. While customers do not
       generally change format or sortation level in response to a small price change,
       there is some evidence that customers may be prepared to trade down from
       D+1 to D+2 and later markets in response to an increase in the price of D+1
       services, albeit not sufficiently to cause us to amend our market definition. We
       note that the cross-price elasticity of First Class with respect to Second Class is
       relatively low, suggesting that a 5-10% price increase would be profitable.

S.48   We therefore retain our November market definitions. We do however
       recognise the potential effect of demand side constraints in our market power
       assessment.



                                        The building blocks for a sustainable postal service   x
                                                                                                                        Summary



Bringing demand and supply side analysis together

S.49       Table 1 below summarises our demand and supply side and overall market
           definition conclusions. „Strong‟ means that the potential substitutes exert a
           sufficient constraint on each other to place them in the same market. „Weak‟
           implies that the constraint is insufficient. Note that potential substitutes should
           be included in the relevant market where they exert either a sufficient demand
           or a supply side constraint (or both).

Table 1: Summary Diagram
                      Demand side                          Supply side                           Market Definition
                      Constraints                          Constraints                           Provisional Conclusion
     Non-Postal       weak                                 weak                                  Non-postal substitutes lie
     Substitutes                                                                                 outside the market
     Postal
     Substitutes

     Mail             weak                                 strong                                All applications in same
     Applications                                                                                market
     Unsorted /       weak                                 weak                                  Separate markets for pre-
     Pre-sorted                                                                                  sorted and unsorted
     D+2 / D+2        strong                               strong                                D+2 and D+2 and later in
     and later                                                                                   same market
     D+1 / D+2        weak                                  weak                                 Separate markets for D+1
     and later                                                                                   and D+2/later than D+2
     than D+2
     Letter /         weak                                 strong (pre-sorted)                   Letters and Large Letters
     Large Letter                                          weak (unsorted)                       in same market for pre-
                                                                                                 sorted and separate
                                                                                                 markets for unsorted mail
     Low volume       weak                                 weak                                  Separate markets for Low
     / High                                                                                      volume and High volume
                                                                                                          12
     volume                                                                                      mailings


S.50       Having conducted a full demand and supply side market power assessment, we
           reached the same conclusions as in our November decision document.

S.51       We also found that Royal Mail has market power in all D+1 and low volume
           unsorted markets where it has a market share of almost 100%.

S.52       In the D+2 and later pre-sorted and High volume unsorted markets, Royal
           Mail‟s market share by revenue is:

                   44% in pre-sorted;13

12
  Applies to unsorted mail only. In pre-sorted mail all mailings fall within our definition of high volume (more than 250 items per
posting).




                                                           The building blocks for a sustainable postal service                   xi
                                                                                          Summary



              58% in High volume unsorted Letters;14 and
              75% in High volume unsorted Large Letters;15

S.53     As set out in the November 2010 document, while Royal Mail faces significant
         competition from access operators in the D+2 and later pre-sorted and High
         volume unsorted Letters and Large Letters markets, this competition has to
         some extent been created and supported by retail (headroom) regulation. Our
         market power assessment has been made on the basis that there is no retail
         regulation in order to avoid circularity. It is our view that Royal Mail‟s market
         shares would be higher without headroom controls, price notification
         requirements and price caps. The lack of appropriate equivalence between
         wholesale and retail terms (including lack of full accounting separation) may
         allow Royal Mail to use its market power in wholesale services to place higher
         costs on access operators than it faces itself. In addition, the continued VAT
         advantage remains a barrier to competition at the retail level.

S.54     Our further analysis adds weight to our November conclusions that Royal Mail
         has market power in these markets, but that they are increasingly competitive.

Figure 3: Provisional conclusions on market power within retail postal markets




13
   39% by volume
14
   48% by volume
15
   63% by volume




                                         The building blocks for a sustainable postal service   xii
                                                                                                                    Summary



Royal Mail’s application for additional price rises

S.55      Our provisional conclusions on market definition are supported by Royal Mail‟s
          elasticity evidence and Royal Mail‟s own expectation that it proposed 2011-12
          price increases will be incrementally profitable and increase its cash flow.
          However, it is possible that the shift towards non-postal alternatives will
          accelerate, which may change the elasticities over the medium term.16
          Responses to our consultation suggest that customers may bring forward
          investment that allows them to reduce their reliance on post in their business
          models. We are not in a position to predict what impact these changes will have
          at this stage17 but we note that any change would have to be very significant to
          affect our market definitions given how low long-run market elasticities are
          estimated to be at present.


Robustness of market definition and market power

S.56      If the demand for post continues to decline, it is possible that market definitions
          may become wider than post, particularly if consumers are prepared to switch
          to and from post in response to changes in relative prices. However, it is
          equally possible that there may continue to be a market for post even if
          volumes decline very significantly. This is because post has characteristics that
          are hard to replicate, notably physical delivery and the ability to contact named
          individuals, and that the switching that we are observing appears to be primarily
          driven by non-price rather than price reasons. Remaining postal users may also
          be relatively captive either because they value using post highly, or because
          non-postal alternatives are not viable.

S.57       It is possible that the markets for High volume unsorted and pre-sorted D+2
          and later mail may become effectively competitive in the future, if the issues we
          have identified are addressed.


Other products and services

S.58      Table 2 summarises the products and services which we are considering in this
          consultation. This analysis is being presented in the form of an open
          consultation rather than a comprehensive study as is the case for retail Letters
          and Large Letters to reflect the fact that we have relatively less information
          about these services at present.


16
   If the price increase has the effect of largely bringing forward switching that would have occurred anyway, then the price
elasticities may fall back towards their historic levels once this switching has taken place.
17
   Evidence from Royal Mail‟s conjoint study (2008) suggests that over 40% of customers who claimed they would switch away
from post had not done so when re-contacted one year later.




                                                         The building blocks for a sustainable postal service               xiii
                                                                                             Summary



Table 2: Services considered in this consultation

Services considered that were previously         Services considered that were previously
within the scope of the market study             outside the scope of the market study

Response Services                                Redirections Services

Business Reply Standard Plus, First and Second
                                                 Redirections
Class

Freepost Standard (two variants) and Freepost
                                                 Keepsafe
Plus, First and Second Class


Freepost Name, First Class only                  Do not Redirect


Special Delivery with Response                   NCOA Suppress and Update

Returns Services                                 Redirect Check

Packetpost Returns                               The Home Movers‟ Mailing Service


Mail Order Returns                               Business Change File


                                                 Business Collections Services


                                                 Customer Collect




Response services

S.59    Response services operate in a similar way to Low volume unsorted mail in that
        they rely on a large collection point network. We consider that it is unlikely that
        non-postal alternatives offer a sufficient constraint to be included in the same
        market. Our initial view is therefore that there is a single market for response
        services. Our initial view is that Royal Mail is likely to have market power in this
        market as it is the only operator to have a UK-wide collection network able to
        offer a comprehensive national service.


Returns services

S.60    Returns services also rely on a large collection point network, but other
        operators are able to provide a returns service for items that they deliver. Our
        initial view is that there is a separate market for returns services and that
        competitive conditions in this market will have similarities with the deferred B2X
        PPS markets (given that returns services involve the return of items that were



                                            The building blocks for a sustainable postal service   xiv
                                                                                         Summary



       likely to have been delivered by operators active in the deferred B2X PPS
       markets). Our initial view is that Royal Mail is likely to have market power in
       returns services below 2kg by virtue of its market power in the deferred B2X
       PPS market below 2kg. We have not gathered sufficient evidence to evaluate
       whether Royal Mail is likely to have market power for return services over 2kg
       and are inviting views from interested parties on this issue.


Change of address and redirections services and data

S.61   Royal Mail delivers nearly all mail and therefore is the only operator that could
       provide a redirections service. Our initial view is that the relevant market is the
       provision of redirections services (including change of address) and that Royal
       Mail has market power in this market.

S.62   Royal Mail is also the only operator that could generate redirections data. Our
       initial view is that the relevant market is the provision of redirections data and
       that Royal Mail has market power in this market.


Business collections

S.63   Our initial view is that the relevant market is the paid for business collections
       market, because the alternative of taking mail to a collection point (e.g. a Post
       Office) does not seem a sufficiently strong constraint to be included in the same
       market. Our initial view is that Royal Mail has market power in the paid for
       business collections market


Thank you

S.64   As part of this market study Postcomm and our consultants Ipsos MORI spoke
       to a large number of parties including residential customers, advertisers,
       publication houses, banks, mobile phone operators, utility companies, ticketing
       firms, government departments, health authorities, charities and many more.
       We spoke to smaller firms as well as very large senders of mail. We also met a
       range of postal operators and gained valuable insights from workshops as well
       as written responses on issues of relevance to the study. We received a large
       number of responses to our consultations. We are grateful for all the
       contributions to our work and parties‟ willingness to assist us with this analysis.




                                        The building blocks for a sustainable postal service   xv
                                                                                                                            Contents




Contents
Summary ....................................................................................................................... i
Chapter 1: Introduction ............................................................................................... 2
Section 1: Rationale for undertaking a market study ................................................................ 4
Section 2: Postcomm‟s approach to defining markets .............................................................. 5
Section 3: Structure of the document ..................................................................................... 14
Section 4: Timetable .............................................................................................................. 16
Chapter 2: Retail Market Study ................................................................................ 18
Section 1: Introduction ........................................................................................................... 18
Section 2: Transactional......................................................................................................... 26
Section 3: Advertising ............................................................................................................ 37
Section 4: Publications ........................................................................................................... 61
Section 5: Social .................................................................................................................... 79
Section 6: Fulfilment .............................................................................................................. 92
Section 7: Conclusion on applications .................................................................................. 102
Section 8: Demand side analysis of Post ............................................................................. 104
Section 9: Provisional conclusions on market definition ....................................................... 125
Section 10: Assessment of Market Power ............................................................................ 132
Chapter 3: Other services....................................................................................... 149
Section 1: Response and Returns services .......................................................................... 152
Section 2: Redirections services and data............................................................................ 160
Section 3: Business Collections ........................................................................................... 163
Section 4: Summary of initial views on the market for Other services ................................... 166
Chapter 4: Summary of Provisional Conclusions and Initial Views ................... 167
Section 1: Introduction ......................................................................................................... 167
Section 2: Retail Letter and Large Letter market study ......................................................... 167
Section 3: Other products and services ................................................................................ 170
Section 4: Views Invited ....................................................................................................... 172
Appendix A: Glossary........................................................................................................... 173
Appendix B: Format definitions and Royal Mail Products ..................................................... 178
Appendix C: Products included in the scope of the Analysis of Markets ............................... 181




                                                            The building blocks for a sustainable postal service
                                                                                                   Chapter 1: Introduction




Chapter 1: Introduction


Building a new regulatory framework for 2012

1.1         This consultation is part of a series of documents to be published by Postcomm
            that set out initial views on the building blocks for a new regulatory framework to
            be in place from 2012. Our aim is to maintain the momentum for much needed
            change to the regulation of postal services, and to do what we can to help
            develop a stable regulatory environment that, in particular, safeguards the
            universal service and protects the interests of customers.18

1.2         These proposals are being made while Postcomm retains regulatory
            responsibility for postal services under the Postal Services Act 2000. Since it is
            intended that regulatory responsibility will transfer to Ofcom under the system
            set out in the Postal Services Bill 2010 (“the Bill”), both Ofcom and Postcomm
            have agreed to work together as far as practicable to maintain regulatory
            stability.

1.3         The publication of this document follows on from our consultations on proposals
            to remove bulk mail from the universal service and to clarify the status of other
            universal service products.

1.4         In turn these consultations are expected to be followed by initial proposals for
            the new 2012 regulatory framework, including initial proposals for the regulation
            of access and, later in March, consideration of the form and structure of a price
            and quality of service control, including consideration of relevant price controls
            for access, and accompanying safeguards of product cost transparency and
            accounting separation. They will also be followed in May 2011 by a consultation
            on our initial views on the market for outbound international mail.

1.5         Final proposals about the new regulatory framework, informed by our ongoing
            research and the views of interested parties on all these consultations, are
            currently expected to be published in late summer 2011. We would expect a
            final decision to be made about the new regulatory framework in early 2012 and
            the new regulatory framework to take effect in spring 2012.

1.6         As part of the transfer of regulatory responsibility, Ofcom will need to:

                  consult as soon as practicable after Royal Assent on the initial authorisation
                  conditions to apply to Royal Mail and other postal operators in light of the


18
     See also our consultation on a Forward Work Plan, published on 25 February 2011, paragraph S.3.




                                                          The building blocks for a sustainable postal service          2
                                                                          Chapter 1: Introduction



           scope of the licences in place just before the regulatory provisions of the
           new Act come into force; and
           consider the scope of the first universal postal service order anticipated by
           the Bill.


This consultation

1.7    This document presents the provisional conclusions of our market definition and
       market power assessment of the Letters and Large Letters retail postal markets.
       As set out in the May 2010 consultation document and the November 2010
       decision document, the overall objective of our market study is to:

           formally define a set of relevant markets; and
           determine whether and to what extent Royal Mail has market power in those
           relevant markets.

1.8    In our November decision document we concluded on market definitions
       (Candidate retail markets) and market power on the basis of a supply side
       analysis. In this document we complete our market definition and market power
       assessment by undertaking a detailed demand side analysis of the retail Letters
       and Large Letters markets.

1.9    We then combine the two to set out our provisional conclusions on market
       definition and market power in retail Letters and Large Letters markets.

1.10   Our demand side analysis addresses two key questions:

           To what extent does post compete with non-postal alternatives e.g. does
           post compete in a wider communications market?
           To what extent is there competition between different postal services (e.g.
           between pre-sorted and unsorted, First Class and Second Class, and
           Letters and Large Letters)?

1.11   While mail is losing volume to non-postal alternatives, our analysis suggests
       that this is primarily due to non-price rather than price reasons and that non-
       postal alternatives only exert a limited competitive constraint on the price of
       retail mail services.

1.12   Within postal markets, we find that demand side substitution between different
       levels of sortation, speeds of mail, and mail format is generally weak, with the
       exception of D+2 and later than D+2 mail services (and, to a lesser extent,
       competition between D+1 and D+2 and later than D+2 services).




                                       The building blocks for a sustainable postal service    3
                                                                                                    Chapter 1: Introduction



1.13     On the basis of this demand side analysis and the supply side analysis
         contained in our November decision, we provisionally confirm the market
         definitions and market power findings in our November decision.

1.14     Together with our November document we have therefore now undertaken
         market definitions and market power analysis for:

               Retail Letters and Large Letters markets
               Wholesale Letters and Large Letters markets
               Packets and parcels markets

1.15     We also consider response, returns, redirections, redirections data and
         business collection services which do not fall within the markets already
         defined. We have brought redirections and business collection services into the
         scope of the analysis of markets as we are currently consulting on them as part
         of clarifying the scope of the universal service.19 We present our initial views on
         markets and market power for these services. We intend to consult on outbound
         international services in May.



Section 1: Rationale for undertaking a market study

1.16     This market study was one of the recommendations of the Independent Review
         of the Postal Sector conducted by Richard Hooper and endorsed by
         Government. The 2008 Hooper report highlighted that the “explosion of digital
         media – internet, email, mobile text and broadcasting - has prompted an
         unprecedented decline in the letters market” and suggested that a formal
         analysis of markets should be undertaken. Hooper recommended “a
         comprehensive analysis of postal services which are in competition and the
         extent to which Royal Mail has market power in each segment. Crucially, the
         exercise should take into account the emerging links between postal services
         and the wider communications sector”.20

1.17     A large number of interested parties have expressed the view that the observed
         switching from post to non-postal alternatives, such as email and the internet, is
         evidence that retail postal markets are now part of a wider communications
         market. However, while in a broad contextual sense they may be the cause
         switching may arise for both price and non-price reasons, and the motivation for
         switching has important implications for how we define markets from an

19
   Postcomm‟s Clarification of certain services in the universal service: a consultation dated (28 February 2011). In that
consultation document, we confirm our own views, and formally seek to amend Royal Mail‟s licence to clarify that these two
services (among other support services) should be provided as part of the universal service.
20
   Modernise or decline, policies to maintain the universal postal service in the United Kingdom, 16 December 2008. An
independent review of the UK postal services sector. (CM7529) http://www.bis.gov.uk/files/file49389.pdf para 177




                                                         The building blocks for a sustainable postal service                4
                                                                           Chapter 1: Introduction



       economic and regulatory perspective. We consider this issue in more detail in
       the methodological section below.

1.18   We have defined postal markets on the basis of the competitive constraints that
       we have observed at this point in time. We note that the postal markets are in
       transition and are subject to rapidly changing market conditions, including the
       possible privatisation of Royal Mail, changes in regulation as a result of the
       Postal Services Bill, and likely anticipated significant price increases for some
       mail products. We cannot predict the full impact of these changes, but consider
       that the provisional conclusions we make in this document are sufficiently robust
       to inform the regulatory framework for 2012. Undertaking a formal analysis of
       the markets provides a number of benefits:

           It follows good regulatory practice, providing a structured way of thinking
           about the interaction between market power and regulatory safeguards
           across different wholesale and retail markets.
           It gives Royal Mail and other interested parties more information about how
           we view the postal market and how this informs our regulatory proposals.
           The findings of our analysis have been be used to inform our approach to
           cost transparency, accounting separation and regulatory remedies in the
           context of the 2011-12 price control, as well as our thinking on possible
           changes to the access regime.
           It provides part of the evidence-base for the measures that we anticipate
           proposing for the new regulatory framework for 2012.
           It is relevant to investigations under Condition 11 of Royal Mail‟s licence
           since that condition does not apply where the relevant services are provided
           in a sector where there is effective competition.
           It will assist us and our intended successor, Ofcom, in considering future
           regulatory intervention.

Section 2: Postcomm’s approach to defining markets

1.19   In this section we outline our methodology for defining postal markets. We
       follow convention, and base our assessment on the hypothetical monopolist
       test. This considers the extent to which consumers are likely to switch between
       substitute products in response to a change in relative prices. However,
       consumers can also switch between products for non-price reasons, e.g.
       adapting to new products becoming available on the market. As price
       substitution is likely to act as a greater constraint on Royal Mail‟s prices, a key
       methodological challenge is to identify whether observed switching is primarily
       due to price or non-price reasons, and the impact this has on our market
       definition and market power assessment. We discuss these issues in a
       discussion of price and non-price substitution below.




                                        The building blocks for a sustainable postal service    5
                                                                                                    Chapter 1: Introduction



The hypothetical monopolist test

1.20     Our approach to market definition follows that of the UK and EU competition
         authorities.21 In broad terms, a relevant market includes products which are
         sufficiently strong substitutes in terms of characteristics, price and intended use
         that they are capable of acting as constraints on each other‟s prices. A relevant
         market has both a product and a geographic dimension.

1.21     To identify whether products are sufficiently close substitutes to each other to
         be included in the same market, we use the “hypothetical monopolist test”.22
         Starting from the focal product, usually the narrowest feasible market definition,
         the test asks whether it would be profitable for a hypothetical monopoly supplier
         of the product to raise its prices by 5-10% above the competitive level. If the
         answer to this question is yes, the focal product is then defined as the relevant
         market. If the answer is no, then further substitute products are added to the
         group until it would be profitable for a hypothetical monopolist to raise the prices
         of the products in that group 5-10% above competitive levels.

1.22     If a firm attempted to increase the price of the relevant product, this might cause
         some of its consumers to switch to alternative products (demand side
         substitution) and suppliers outside of the market to start supplying the relevant
         product (supply side substitution). The greater the extent of demand and supply
         side substitution, the less profitable it is likely to be for the supplier of the
         relevant product to increase prices. In terms of the hypothetical monopolist test
         we consider the extent to which demand and supply side substitution is
         sufficient, likely and timely to warrant defining the relevant market any wider
         than the focal product.23

1.23     The hypothetical monopolist test can also be used to determine the geographic
         boundaries of the relevant market. The test asks whether it would be feasible for
         a hypothetical monopoly supplier of a product in a particular geographic area to
         increase prices by 5-10% on a permanent basis.

1.24     Another factor that is sometimes an additional consideration in setting market
         boundaries is whether there exist common pricing constraints across
         customers, services or geographic areas (i.e. areas in which a firm offers its
         services at a geographically uniform price). Where common pricing constraints
         exist, the geographic areas in which they apply could be included within the


21
   The Office of Fair Trading‟s Market Definition Guidelines,OFT 403, December 2004
http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft403.pdf; Commission Notice on the definition of relevant
markets for the purposes of Community competition law (OJ C372, p. 5)
22
   This is alternatively known as the SSNIP test (Small, but Significant, Non-transitory, Increase in Price).
23
   We follow the OFT‟s rule of thumb as described in the Market Definition Guidelines that the hypothetical monopolist test
considers the demand and supply side substitution that occurs within a year – The Office of Fair Trading‟s Market Definition
Guidelines,OFT 403, December 2004, http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft403.pdf




                                                         The building blocks for a sustainable postal service                    6
                                                                           Chapter 1: Introduction



       same relevant market even if demand side and supply side substitutes are not
       present.

1.25   It should be noted that defining a market in strict accordance with the
       assumptions in the hypothetical monopolist test is rarely possible. For example,
       there is unlikely to be data relating to the extent of demand side and supply side
       substitution following a small price rise by a hypothetical monopolist. Therefore,
       determining whether a future price rise would be profitable for a hypothetical
       monopolist is rarely likely to be supported by empirical data. Furthermore,
       calculating the competitive price from which the test begins can also be
       problematic. Indeed, for many wholesale activities, explicit prices will not exist
       since the activities are not sold individually (and therefore priced individually).

1.26   Postcomm also recognises that the hypothetical monopolist test is not the only
       approach to defining a market and that other evidence, such as the
       characteristics or relative prices of products, may also be relevant. For these
       reasons, when carrying out a market definition, we have considered the
       evidence and arguments in the round, rather than solely in terms of the
       hypothetical monopolist test. This is also consistent with the approach adopted
       by UK and EU competition and other regulatory authorities.

1.27   Finally, it is important to recognise that market definitions maybe specific to a
       particular context. In particular, market definition can depend upon the choice of
       focal product. The appropriate focal product is context specific and may
       potentially be different in a Competition Act investigation, for example, where
       the relevant competition issue relates to a specific product, from that in a market
       study such as this one where the competition issues are more general and wide
       ranging.


Price and non-price substitution

1.28   Until around 2002/3, letter volumes and economic activity were closely
       correlated (see figure 4 below). However, since 2004 this relationship has
       changed and letter volumes have declined at a rate of approximately 3.5% per
       annum.




                                        The building blocks for a sustainable postal service    7
                                                                                                   Chapter 1: Introduction



Figure 4: Letter volume and Economic activity




1.29     The Hooper Report noted that the primary cause for the breakdown in the
         relationship between letter post and GDP was the rapid growth of electronic
         means of communication such as e-mail and mobile data (e-substitution). It
         described the growing divergence between the growth rates of letter post and
         GDP as a “technology wedge”.24

1.30     It is clear that businesses and residential consumers have switched a
         substantial proportion of their communication activity from letter post to
         electronic means and that the trend towards electronic forms of communication
         is continuing. However, evidence of switching does not necessarily imply that
         the market definition should be widened to include both post and non-postal
         alternatives.

1.31     Consumers may have a range of motives for switching between products. For
         example, consumers may switch from post to e-alternatives because the latter
         is lower priced or, more generally, because it offers greater value for money
         (price substitution).

1.32     However, consumers often switch between products for non-price reasons. For
         example, if a new product is introduced onto the market, or if consumers‟
         preferences change, they will increase their consumption of some products and


24
  Hooper, R. “Saving the Royal Mail‟s universal postal service in a digital age” (2008), CM7937
http://www.bis.gov.uk/assets/biscore/business-sectors/docs/s/10-1143-saving-royal-mail-universal-postal-service




                                                        The building blocks for a sustainable postal service            8
                                                                                                      Chapter 1: Introduction



          reduce the consumption of others. Such switching tends to be transitional in
          nature. That is, once consumers have adapted their spending to reflect the new
          products that are available or their new preferences, no further switching may
          take place. Of course, such transitional periods may be extensive, e.g. because
          some consumers (“early adopters”) are quicker to adapt to changes in
          technology than others.

1.33      The primary purpose of market definition is to identify products (that could be
          other mail products or non-postal alternatives) which exert a constraint on each
          others‟ prices. If customers are willing to switch to substitute products when
          relative prices change (price substitution) then such products will clearly act as
          a competitive constraint and should therefore be included in the relevant
          market.

1.34      When customers are primarily switching between products for non-price
          reasons then it is much less clear whether such switching acts as a competitive
          constraint on prices.

1.35      However, non-price switching can impose a significant competitive constraint on
          prices in certain circumstances, for example, where changes in preferences
          reduce consumers‟ willingness to pay for certain products. However, in many
          instances, if customers are not switching for price reasons, then they are
          unlikely to switch back should the price of the original product be lowered. For
          example, when the demand for salt reduced following health concerns about
          salt in babies‟ diets, it is doubtful that lowering the price of salt would have
          persuaded many parents to continue to demand salt at previous levels.

1.36      When markets are in structural decline due to the availability of substitute
          products, then consumers may become more price sensitive over time, and
          market definitions may therefore become wider. For example, in the
          Waterstones/Ottakar‟s merger, the Competition Commission, noting the decline
          in demand for high street book shops, defined the market to include all sellers of
          books, including supermarkets and internet retailers.25

1.37      However, as demand declines, it is possible that customers become less rather
          than more price sensitive. For example, the large post-war growth in ownership
          of cars led to the structural decline of the local bus market.26 While a car and


25
   HMW/Watersones/Ottakar‟s PLC, Competition Commission [2005] http://www.competition-
commission.org.uk/inquiries/ref2005/hmv/
26
   The demand for local bus journeys in Great Britain declined from 12.1 billion passenger journeys per annum in 1960 to 4.4
billion by 2000 largely as a result of the increased use of the car. However, despite this switching, there is very limited evidence
that private car journeys have provided a competitive constraint on the price of buses. For example, between 1985 and 2005, the
price of bus journeys increased by 40% in real terms, while the real price of car journeys remained approximately constant (see
National Express/East Anglia, op. cit.). For this and other reasons, UK competition authorities have continued to define a separate
economic market for local buses.




                                                          The building blocks for a sustainable postal service                   9
                                                                                               Chapter 1: Introduction



         bus journey are substitutable for those who own a car, increasingly the users of
         buses were limited to those customers who either did not have a car, or for
         whom a car journey was not possible. Therefore for these remaining bus
         customers, cars did not provide a constraint on bus prices.27

1.38     When defining the economic market, the key question we need to ask therefore
         is whether the switch to non-postal alternatives is likely to have a constraining
         effect on the price of current mail services.

1.39     To answer this question, we have considered a wide range of evidence
         including:

               interviews with business customers to assess whether an increase in the
               price of post above the competitive level would be likely to cause them to
               switch to non-postal alternatives;
               empirical estimates of the price elasticity of demand of postal services;
               responses to our consultation on allowing Royal Mail to raise prices;28
               an assessment of indirect and direct competitive constraints; and
               inferences from Royal Mail‟s commercial behaviour.


Our evidence base

1.40     In this section we identify the main sources of evidence which we have relied
         upon for our analysis of the demand side factors for Letters and Large Letters
         markets.


Ipsos MORI: Survey of UK postal users

1.41     In June 2010, we commissioned Ipsos MORI to undertake a survey with the aim
         of improving our understanding of retail postal markets.29 The survey consisted
         of the following:

               1000 computer assisted telephone interviews (CATI) with residential
               customers;
               702 CATI with business customers spending up to £50,000 on mail a year;
               and



27
   National Express PLC/Greater Anglia Franchise, Competition Commission (2004), available at::
 http://www.competition-commission.org.uk/rep_pub/reports/2004/493neg.htm
28
   For published consultation responses see: http://www.psc.gov.uk/consultations/march2011decision/consultationresponses
29
   Postcomm Retail Market Survey 2010, Report of Findings From Research with Business Mailers and Residential Customers, a
report for Postcomm by Ipsos MORI, December 2010




                                                      The building blocks for a sustainable postal service             10
                                                                                                       Chapter 1: Introduction



                42 qualitative interviews with large mailers (those spending more than
                £50,000 a year).

1.42      The study examined usage of postal services, price awareness, price sensitivity
          and switching to non-postal alternatives among residential customers, small
          businesses and large businesses. A full copy of the final report will be published
          at the same time as this consultation as a supporting document.


Royal Mail elasticities

1.43      Royal Mail has estimated long-run own price elasticities of demand for each of
          the following postal content types: social, direct mail and commercial.30,31 This
          has been done using the Inland Letter Traffic Model (ILTM), an econometric
          time-series model which has been developed in conjunction with the IDEI
          Toulouse. It is based on revealed preference data that spans from 1980/81 to
          2007/2008 financial year. The absence of readily available mail volume data by
          content type was overcome via the use of survey information.32

1.44      Royal Mail has also calculated estimates on a product-by-product basis. It has
          estimated the proportion of mail volumes that will switch from one product to
          another using the ILTM model, the Price Differential Model (PDM) and the Entry
          Pricing Model (EPM). The latter two models use stated preference data and
          Royal Mail‟s business opinion as inputs.


The impact of Royal Mail price increases

1.45      In December 2010 Royal Mail announced that from 4 April 2011 it intended to
          increase the prices of First and Second Class33 stamps by 5p and 4p
          respectively (a 12% increase). Other price increases for retail products in
          Basket A (captive customers) of the existing price control have also been
          announced. These give an average price increase of 10% across the basket as
          a whole. Royal Mail is also proposing average price increases of 12% for
          Basket B (primarily business mail) for the 2011-12 financial year, with a
          maximum of increase of 19%. Indicative wholesale price increases were
          published on 3rd February 2011.34



30
   These elasticity estimates relate to the overall demand for post and are detailed in Veruete-McKay et al., 2010, Letter Traffic
Demand in the UK: An analysis by Product and Envelope Content Type
31
   Commercial mail, as defined in the ILTM model, is mainly comprised of transactional mail but also includes publications and
fulfilment traffic.
32
   In the ILTM model, switching from post to e-substitutes is modelled as an exogenous trend. It is possible that this trend could be
accelerated were the price of post to rise. The ILTM model does not explicitly model this possibility.
33
   Up to 100g
34
    http://www.royalmailwholesale.com/




                                                           The building blocks for a sustainable postal service                  11
                                                                                                   Chapter 1: Introduction



1.46        These price increases aim to ensure that Royal Mail‟s cash position does not
            reduce to a level which could be a risk to its business and the provision of the
            USO. Royal Mail expects such price increases to be incrementally profitable
            and to increase its cash flow (which would be consistent with them having
            market power in these markets).

1.47        Responses to our consultation on allowing these price rises35 suggest that they
            will prompt many customers to consider switching away from post in the longer
            term. As a result, while the price increases may succeed in boosting Royal
            Mail‟s cash flow in the next financial year, it may be less profitable in the longer
            term.

1.48        If long-run price elasticities of demand turn out to be significantly greater than
            Royal Mail‟s estimates, then this might suggest that the relevant markets may
            be broader in scope, and that Royal Mail may not have market power. However,
            we have to acknowledge and take into account the consideration that it was not
            clear from most respondents that any expected switching out of mail would be in
            excess of the levels of switching already being considered within Royal Mail‟s
            estimates. Further, we note that such an increased level of switching is not
            generally supported by historical evidence, although equally we appreciate that
            there is no recent precedent for price rises of this size. Any move away from
            mail caused by the price increase may be a hastening of existing trends, rather
            than a new phenomenon.

1.49        A number of respondents have pointed out that price sensitivity is better
            measured over a somewhat longer period when customers have had a better
            chance to adjust their supply chain (e.g. IT systems) in response to prices. We
            will consider any evidence on this issue relevant to the definition of markets for
            the purposes of a 2012 price control obtained via responses to this consultation.


Postcomm interviews with postal users

1.50        Between July and August 2010 Postcomm conducted a qualitative survey of
            business mail users.

1.51        We held 59 telephone or face-to-face interviews with postal customers about
            their use of postal services. The customers used a range of the applications:
            transactional, advertising, fulfilment, and publications (see table 3).




35
     For published consultation responses see: http://www.psc.gov.uk/consultations/march2011decision/consultationresponses




                                                          The building blocks for a sustainable postal service               12
                                                                                                 Chapter 1: Introduction



Table 3 Number of interviews conducted by application of mail36

     Application         Transactional           Advertising             Fulfilment             Publications

     Number of           26                      23                      13                     18
     interviews


1.52       Interviews were conducted as a semi-structured qualitative questionnaire format
           either by telephone or face-to-face and generally lasted 20 minutes to an hour.
           The topics covered included:

                  Description of business
                  Use of mail
                  Switching between postal products / postal providers
                  Non-postal alternatives
                  Switching between post and non-postal alternatives
                  Impact of hypothetical price increases

1.53       Additional information was gathered for advertising from media planners and
           postal consultants. This was in relation to decisions around the use of
           advertising media and the development of advertising campaigns to provide
           information about the uses of the different media.


TNS-BRMB: Residential customer needs from a sustainable universal postal
service in the UK

1.54       Postcomm and Consumer Focus jointly commissioned TNS-BMRB to conduct
           research about residential and business customers‟ needs from a universal
           service. The results were published on 8 November 2010. The survey looked at
           customer trends in usage of postal services over the last three years, and
           examined what residential and business customers need from the postal
           service. We used the results from the residential customers survey to better
           understand usage and perceptions of postal services within the social mail
           application.

1.55       A total of 1,387 face-to-face or computer assisted personal interviews (CAPI)
           were conducted with a representative cross section of people aged 16+ in the
           UK who use postal services.




36
  Note: these sum to greater than the number of interviews conducted as often more than one mail application was discussed
within the interview.




                                                       The building blocks for a sustainable postal service                  13
                                                                                                     Chapter 1: Introduction



Additional sources

1.56      We also gathered information from:

                Structured meetings with operators (Royal Mail, TNT, UK Mail, DHL, DX),
                mail consolidators and consultancies;
                Postcomm reports and independent research such as academic studies
                carried out by Oxera and Royal Mail, the Hooper Report 2008 and WARC‟s
                Advertising Statistics Yearbook 2009;
                Submissions from operators in response to Requirements to Furnish
                Information; and
                Responses to the May 2010 consultation document and the November
                2010 decision document.

Section 3: Structure of the document

1.57      In chapter 2 we examine the competitive constraints imposed by demand side
          factors for the Letters and Large Letters37 retail markets. We examine whether
          the markets are wider than postal services and consider the main postal
          applications (transactional, advertising, publications, social and fulfilment) in
          turn. We then examine whether demand side factors result in wider markets
          within posts. Following this, we bring together the demand side analysis with the
          November 2010 supply side analysis and set out our provisional conclusions on
          the relevant market definitions and whether Royal Mail has market power in
          those markets.

1.58      In chapter 3 we consider response, returns, redirections, redirections data and
          business collection services which do not fall within the markets already
          defined. We have brought redirections and business collection services into the
          scope of the analysis of markets as we are currently consulting on them as part
          of clarifying the scope of the universal service.38 We present our initial views on
          market definitions and market power for these services.




37
   We follow Royal Mail‟s format specifications by defining Letters as items going through the post that weigh up to 100g and that
have a maximum size of 240mm x 165mm x 5mm and Large Letters as items exceeding the Letter dimensions that weigh up to
750g and that have a maximum size of 353mm x 250mm x 25mm. However, we specifically exclude from our definition of Letters
and Large Letters any premium Letters and Large Letters (those which offer additional added-value services and costing more
than £1) which are not subject to licensing requirements as they fall within the scope of our PPS definition.
38
   Postcomm‟s Clarification of certain services in the universal service: a consultation dated (28 February 2011). In that
consultation document, we confirm our own views, and formally seek to amend Royal Mail‟s licence to clarify that these two
services (among other support services) should be provided as part of the universal service.




                                                          The building blocks for a sustainable postal service                 14
                                                                             Chapter 1: Introduction



Table 4: Structure of the retail market analysis and other services
 Chapter    Title                       Description                    Objectives
            Summary
 1          Introduction                Provides background to
                                        the market analysis, the
                                        scope of the analysis,
                                        Postcomm‟s approach to
                                        defining markets and
                                        determining market power.
                                        Summarises our evidence
                                        base.
 2          Retail market study for     Examines the competitive       To provisionally define a
            Letters and Large Letters   constraints imposed by         set of retail markets for the
                                        demand side factors for the    postal services for Letters
                                        Letters and Large Letters      and Large Letters by taking
                                        retail markets.                account of both demand
                                        Considers whether the          and supply side factors.
                                        markets are wider than         To provisionally determine
                                        postal services and            the extent of Royal Mail‟s
                                        whether there are wider        market power within the
                                        markets within post. A         defined markets.
                                        separate analysis is carried   To gather views from
                                        out for transactional,         interested parties on our
                                        advertising, publications,     provisional conclusions.
                                        social and fulfilment mail.
                                        Brings together supply and
                                        demand side analysis for
                                        provisional conclusions on
                                        market definitions and
                                        market power.
 3          Other services              Provides our initial view of   To take an initial view on
                                        markets for response,          the market definition of
                                        returns, redirections,         these services.
                                        redirections data and          To take an initial view on
                                        business collection            the extent of Royal Mail‟s
                                        services                       market power within the
                                                                       defined markets.
                                                                       To gather information from
                                                                       interested parties on these
                                                                       markets.
 4          Conclusions




                                         The building blocks for a sustainable postal service     15
                                                                           Chapter 1: Introduction



Section 4: Timetable

Figure 5: Analysis of Markets timetable




Views invited

1.59   We welcome views on the proposals set out in this document from all interested
       parties and in particular on the consultation questions at the end of each policy
       chapter. The closing date for responses is Tuesday 31 May 2011. Responses
       should be sent or emailed to:

       Nancy Race
       Postcomm
       Hercules House
       London SE1 7DB

       Consult.responses@psc.gov.uk

1.60   If you would like to discuss any points raised in this document, please contact
       Nancy Race (telephone 020 7593 2165 or email Nancy.Race@psc.gov.uk).

1.61   Postcomm will make public all responses to this consultation document, subject
       to individual requests for confidentiality. If you do not want all or part of your
       response to be read by anyone outside Postcomm, please ensure that you
       clearly indicate which part is confidential. If you are happy for your contribution



                                        The building blocks for a sustainable postal service   16
                                                                   Chapter 1: Introduction



to made public, but do not want the name of the organisation or individual who
signed it to be revealed, please indicate this by adding the following: “Name of
organisation/sender NOT to be published”.




                                The building blocks for a sustainable postal service   17
                                                                           0 Retail Market Study



      Retail Market Study

Section 1: Introduction

2.1   In our November decision document we set out our decision on the Candidate
      retail markets for Letters and Large Letters. These were based on a supply side
      analysis only.

2.2   In this chapter we complete our market definition analysis by first considering
      the potential competitive constraints on mail services imposed by demand side
      substitutes. We examine:

          Whether from the demand side the market in which postal services are
          provided is wider than post i.e. is there a wider communications market.
          Whether from the demand side there are wider markets for Letters and
          Large Letters within post on the basis of format, sortation, speed of delivery,
          or size of mailing.
          We then bring together our demand and previous supply side evidence to
          set out our provisional conclusions on the relevant economic market for
          retail mail services.

Figure 6: Structure of analysis of Letters and Large Letters




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2.3   The structure of this chapter is set out below




2.4   In the remainder of this section we set out the definition of Letters and Large
      Letters, our approach to the analysis of wider markets and market definition in
      the postal markets.


Definition of Letters and Large Letters

2.5   This chapter concerns only Letters and Large Letters. We define Letters on the
      basis of Royal Mail‟s format specifications. Letters therefore includes all items
      going through the post that weigh up to 100g and that have a maximum size of
      240mm x 165mm x 5mm. On the same basis we define Large Letters as items
      exceeding the Letter dimensions that weigh up to 750g and that have a
      maximum size of 353mm x 250mm x 25mm.

2.6   We specifically exclude from our definition of Letters and Large Letters any
      premium Letters and Large Letters which are not subject to licensing
      requirements as they fall within the scope of our packets and parcels services
      (PPS) definition. That would, for example, exclude items that meet the Royal
      Mail Large Letter size and weight threshold (i.e. less than 353mm x 250mm x



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      25mm and between 100g and 750g) but that are sent using a premium service
      (i.e. costing more than £1).


Is the market wider than post?

2.7   At the time of the 2008 Hooper Review, many commentators, including Royal
      Mail, considered post to be operating in the wider communications market.
      Postal markets now appear to be in structural decline as alternatives to post
      such as the ability to communicate by email or to post information on the
      internet, provide alternatives. We have explained above the need to distinguish
      between price and non-price motives for switching. In this chapter we examine
      whether competition from non-postal alternatives acts as a sufficient constraint
      on postal prices to include post in a wider non-postal market.

2.8   The competitive constraints that mail operators face from non-postal
      alternatives vary significantly by application (see figure 7 below). For example,
      for direct mail (advertising) alternatives are likely to include other advertising
      media. For mail-order books and CDs (fulfilment), the closest substitute to post
      might be a high street shop, or possibly a digital download. For sending a bank
      statement (transactional), the closest substitute might be an email or, more
      usually, posting the information on a secure website.




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Figure 7: Potential Substitutes for Mail Services




2.9         We define these applications in the following table:39

Table 5: Definitions of applications
        Application                                                         Definition


     Transactional          Communication between companies or between companies and individuals relating to the
                            ongoing provision of goods or services. Examples include monthly statements sent by banks,
                            bills sent by utilities and invoices sent to other businesses or residential customers.

                                                                           40
     Advertising            Addressed-advertising mail, (direct mail).


     Publications           Printed publications published as part of a series and circulated at least twice a year, but less
                            often than daily. We focus on the magazine industry and the provision of postal subscriptions
                            and also include academic journals but exclude daily newspapers.




39
   These definitions closely follow those used by Royal Mail. The only significant difference is that we have defined social mail to
include all mail sent by residential customers, whereas Royal Mail classifies mail sent by customers to businesses, e.g. a cheque,
as transactional mail. As such mail accounts for a very small proportion of mail, we do not believe that there is any significant
difference between statistics based on our own and Royal Mail‟s definitions.
40
   We exclude unaddressed-advertising mail (door drops) and transpromotional mail (included in transactional).




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     Fulfilment               Letters and Large Letters which deliver a tangible item that a customer has requested and can
                              be delivered through a letterbox. Examples including concert tickets, mail order CDs and
                                     41.
                              books.


     Social                   All Letter and Large Letter mail sent by residential customers. Social mail therefore includes
                              items that are purely social in function such as personal letters, postcards and greeting cards
                              as well as those that are more transactional items such as payments of bills and official mail
                              where the item it is paid for and sent by residential customers.



2.10          As is often the case it is not always easy to determine what application a piece
              of mail falls within. For example, a mailing containing a credit card could fall
              into either the fulfilment or transactional applications. Similarly, transpromotional
              mail42 could fall into both the transactional or advertising applications – we
              consider it is transactional because the primary purpose of the mail is
              transactional. Such blurring of the lines between the various applications do not
              however have an impact on our analysis as we do not rely on the relative
              volumes of mail sent by each channel.

2.11          Transactional mail is by some margin the largest category of mail accounting for
              64% of Royal Mail‟s mail revenues, followed by advertising at 15%. See figure 8
              below. Other operators do not convey social mail and have negligible fulfilment
              volumes, focusing instead on transactional and advertising mail.

Figure 8: Royal Mail’s revenues split by application (2009/10)




              Source: Postcomm analysis of Royal Mail data




41
  These will generally be capable of being posted through a letter box.
42
  Transpromotional mail is transactional mail where advertising leaflets are either inserted in the same envelope or where
advertising is printed on the transactional mail piece.




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Direct and indirect substitution

2.12   Postal services can be used by retailers to provide goods or services to their
       customers. If the price of post were to increase by 5-10%, some retailers might
       choose to use non-postal alternatives. A bank might switch from paper to
       “paperless” statements, and a music retailer might switch from offering CDs by
       mail-order to retailing digital downloads. This substitution by immediate
       purchasers is called “direct substitution”.

2.13   Alternatively a retailer might continue to use post, but pass on price rises to
       customers. Customers might respond by choosing paperless bank statements,
       or purchasing a CD from a high street shop or downloading music digitally. This
       substitution by final consumers is called “indirect substitution”.

2.14   We must take account of both direct and indirect substitution possibilities. Direct
       substitution is analysed by considering the extent to which the senders of mail
       respond to a small price increase by switching to non-mail alternatives. Indirect
       substitution needs an additional step to determine the extent to which a small
       increase in the price of mail translates into higher prices for receivers of mail
       and impacts on their behaviour in relation to postal services. This depends upon
       two factors:

           The proportion of the total cost of providing the retail service that is
           accounted for by the price of post (“dilution effect”); and
           The extent to which increases in the costs of the postal service are passed
           on to consumers.

2.15   Indirect substitution may often provide a stronger competitive constraint than
       direct substitution. For example, while the “dilution effect” generally reduces the
       impact of the price rise, it might be easier for a final consumer to switch from
       (say) mail order to a high street shop than it would be for a retailer to adapt,
       given that this might involve significant investment costs and a change in
       business model.

2.16   We note, however, that indirect constraints are unlikely to be relevant for all mail
       applications as in many instances final consumers do not pay for the mail they
       receive, e.g. advertising and social mail. For other types of mail, there may be
       no pass through of postal prices as it will not always be commercially viable for
       senders to levy a charge for postal communications, e.g. where customers have
       an expectation of “free banking”.




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Provisional conclusions on whether the market is wider than post

2.17         In our analysis we find that non-postal alternatives are likely to provide only a
             relatively weak constraint on the price of mail services.

2.18         The reasons for this vary by postal application:

                   For transactional mail the cost of paper statements and bills is already more
                   expensive than electronic substitutes. However, switching away from post
                   has been limited as customers continue to express a strong preference for
                   paper copies, while senders of mail are often unable to charge for paper
                   copies for commercial reasons (e.g. “free banking”).
                   For advertising mail, the campaign is often complementary and the
                   characteristics of direct mail are difficult to replicate. Email campaigns are
                   less targeted, are often blocked by filters, and those that get through have a
                   very poor customer response rate. Advertising (direct mail) is however the
                   application with the strongest price constraint from non-postal alternatives.
                   Publishers have a strong preference for postal subscriptions as it enhances
                   customer loyalty and is more attractive for advertisers.
                   For social mail, lack of price awareness means that consumers are largely
                   insensitive to price.
                   Much fulfilment mail involves items such as credit cards, membership cards
                   and SIM cards for which there is no real alternative but to use postal
                   services. The postal cost is often a small proportion of the overall cost of the
                   item.

2.19         Our findings are consistent with Royal Mail‟s estimate that the overall price
             elasticity of mail is around -0.35,43 this would need to be around four times
             higher before posts would be considered as part of a wider non-postal market.


Are there wider markets within post?

2.20         In our November 2010 document we defined ten separate Candidate retail
             markets, based on a supply side analysis only. These markets were segmented
             by format, speed of delivery, type of sortation and size of mailing.

2.21         We now complete our market definition analysis by considering the extent to
             which different types of mail service (and different sizes of mailings) impose
             demand side constraints on each other. If these constraints are significant then
             it may be appropriate to amend our market definitions to include these demand




43
     An elasticity of -0.35 means that a 10% price rise would be likely to lead to a 3.5% fall in volume (all other things being equal).




                                                              The building blocks for a sustainable postal service                    24
                                                                               0 Retail Market Study



       side substitutes. In this section we therefore consider whether the following
       market dimensions should be combined:

           Letters and Large Letters;
           Pre-sorted and unsorted mail;
           D+1 and D+2 and later;
           D+2 and later than D+2;
           Low volume unsorted mail and High volume unsorted mail; and
           Different mail applications.

2.22   Our provisional conclusions are that there is very limited demand side
       substitution between letters of different formats, levels of sortation or speed of
       delivery. There is no demand side substitution between High and Low volume
       mailings. Therefore our provisional conclusion is that the relevant retail markets
       are the same as the Candidate retail markets set out in our November decisions
       document.

2.23   We now consider each of the applications in turn.




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Section 2: Transactional

Section 2.1. Introduction

2.24      In this section we consider whether transactional mailings should be seen as
          part of a wider market, including non-postal alternatives such as email, the
          internet and text messages.

2.25      We define transactional mail as: communication between companies or
          between companies and individuals relating to the ongoing provision of goods
          or services. We consider only mail which is paid for by the provider.44
          Examples of transactional mail include monthly statements sent by banks, bills
          sent by utilities and invoices sent to other businesses or residential customers.45

2.26      Transactional mail is by far the largest application of mail sent and is
          consequently very important to postal operators. Transactional mail revenues
          are estimated to represent 64% of Royal Mail‟s retail revenues and also
          represent a large proportion of Letter and Large Letter volumes carried by
          alternative operators.

2.27      The remainder of this section is set out as follows.

                The first section provides some background information on transactional
                mail. It describes the main senders of transactional mail, and the types of
                non-postal alternatives that can be used.
                The second section considers the evidence on market definition including
                an analysis of direct and indirect competitive constraints.
                The final section contains our provisional conclusions on whether
                transactional mailings should be part of a wider market.


Background

2.28      In this section we describe the main senders of transactional mail, the postal
          services and the non-postal alternatives that can be used.




44
   Royal Mail‟s definition of transactional mail includes mail from residential customers to businesses, e.g., paying invoices. We
have included this mail in our “social mail” definition. Consumer to business mail represents a very low proportion of transactional
mail, and so we do not believe that the differences in definitions affect the validity of the data on which we have relied.
45
   Transactional mail may include advertising items in addition to the transactional item. For example, a bank statement could
include advertising space on the statement or could contain a leaflet informing customers about home insurance offers. These
mail pieces could be referred to as transpromotional. However, because the main purpose of the mailing is a transaction we
include such mailings in our definition of transactional.




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Senders of transactional mail

2.29     The senders of transactional mail typically fall into one of four types:

               Financial companies sending information to their customers, for example,
               banks sending monthly statements or credit card bills. Mailings sent to
               inform customers about changes to the terms and conditions of their credit
               cards, mortgage and savings accounts or insurance policies would also be
               considered as examples of transactional mailings.46 Royal Mail estimates
               that over half of transactional mail relates to a financial transaction.47
               Utility companies sending bills or information to their customers.
               Government departments which communicate with members of the public
               or businesses. This includes HM Revenue and Customs sending
               information to individuals or companies.
               Other companies and institutions communicating with their customers, who
               may be private individuals or other companies. This mail could include
               general correspondence, invoices or training documentation.


Non-postal alternatives

2.30     Transactional mailers have various alternatives which they could use for their
         communications. Set out below are the alternatives that we considered in more
         detail:

               Email: Companies and other institutions are increasingly making use of
               email to communicate with their customers.48 The services that are
               provided by email range from direct substitutes to postal services, e.g.
               sending invoices embedded in the email or as an attached pdf file, to more
               complementary and innovative services, for example, email reminders and
               alerts where a customer is close to becoming overdrawn on his or her
               account.
               Internet: Many companies and other institutions allow individuals to access
               information through websites. Many banks offer online banking services
               and allow customers to opt out of receiving hard copy statements.49
               Government departments increasingly allow and often strongly encourage
               internet transactions.50
               Telephones: While not a new means of communication, companies and
               other institutions can communicate with their customers in increasingly
               sophisticated ways by telephone instead of mail.

46
   Some companies offering insurance products will send their customers an annual reminder when the policy is about to expire.
These mailings could be considered transactional or advertising mailings.
47
   Royal Mail, TNS Consumer Panel Survey Q1 2010, provided to Postcomm July 2010
48
   Some firms are also offering discounts to their customers to entice them to move away from mail. We discuss this issue in more
depth below.
49
   See http://www.rbs.co.uk/content/personal/downloads/NoticeOfVariation.pdf, [Accessed 26 January 2011]
50
   See http://www.hmrc.gov.uk/sa/file-online.htm, [Accessed 26 January 2011]




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               Text messaging: Many companies and other institutions now communicate
               with their customers through text message. Some banks offer customers
               text message balance updates and overdraft alerts.51 Some dentists,
               doctors and hospitals remind their patients of upcoming appointments with
               text messages.52

Section 2.2. Market Definition

2.31     In this section, we consider whether evidence on demand side substitution
         suggests that transactional mailings should be seen as part of a wider market.
         This includes both post and non-postal alternatives like email, the internet and
         text messages. We examine the indirect constraints imposed by non-postal
         alternatives before considering direct constraints on postal services as these
         are likely to be a primary consideration for senders of transactional mail.


Indirect constraints

2.32     In this section, we consider factors which influence customer preferences, the
         extent to which a 5-10% price increase in postal services is likely to be passed
         on to the final consumer and the extent to which such a price increase would
         induce switching by the final consumer.

2.33     The evidence suggests that customers of transactional mailers dictate how they
         want to receive their communication. In other words the demand is a derived
         demand. This is highlighted by the quote from the Ipsos MORI retail market
         survey:

           “We will go with whatever our clients require and each client is different, so if
           they prefer hard copy they will get hard copy, if we can transact electronically
           then we will transact electronically.”53

2.34     The importance of customer preferences is further supported by the Ipsos MORI
         survey. For instance, it found that receivers‟ preferences are very important or
         fairly important when very small and small companies are deciding on the
         medium of communication.




51
  For example, see http://www.lloydstsb.com/internet_banking/sms_text_alerts.asp, [Accessed 26 January 2010].
52
  For example, see http://www.sath.nhs.uk/news/news_articles/text23.asp, [Accessed 26 August 2010].
53
  Postcomm Retail Market Survey 2010, Report of Findings From Research with Business Mailers and Residential Customers, a
report for Postcomm by Ipsos MORI, December 2010




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Figure 9: Importance of receivers’ preferences for very small mailers (VSMs) and
small mailers (SMs)54




Source: Ipsos MORI survey


2.35     We explore three different aspects of this derived demand:

               Receiver preference
               Transparency of the postal cost
               Characteristics of the mail


Receiver preference

2.36     Customers of transactional mailers are not a homogenous group and may have
         different communication preferences. It is possible that individuals may have a
         preference for a certain type of communication or may have different



54
  Small mailers refers to businesses spending less than £50,000 a year on postal services and Very Small mailers, refers to those
spending less than £5,000 a year on postal services.




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         preferences depending on whether they are getting their monthly statement
         from a bank or paying a bill.

2.37     Figure 10 shows that preferences can vary depending on the type of
         communication the customer receives. Transactional customers have a strong
         preference for post across the various types of communications surveyed and in
         most cases the second strongest preference is for email, except where
         customers are dealing with more complex queries or loans where they prefer
         face to face contact.

Figure 10: Customers preferences for transactional communication




Source: Ipsos MORI survey


2.38     The Payments Council55 found that for retail banking nearly 60% of adults with
         regular internet access used internet banking in the first half of 2010 and 32%
         used telephone banking.56 However, this does not indicate that they are no
         longer receiving paper statements. Indeed a bank in our internal survey stated
         that only around 5% of customers using online banking had switched off paper
         statements. This indicates that, although consumers are using online banking
         services, they do not regard this as a substitute for paper statements. This is in
         line with the Ipsos MORI survey findings.




55
   The Payments Council was established by the Payment Systems Task Force in March 2007 to assume responsibility for setting
'the strategy for UK payment systems [and] … to ensure that UK payment systems and services meet the needs of users,
payment service providers and the wider economy' - www.paymentscouncil.org.uk
56
   Payments Council, Internet Monitor XVI, December 2010




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Transparency of the postal price

2.39     Postage costs are typically not transparent to the receivers of transactional mail.
         Customers rarely pay directly for the transactional postal communication and
         would be unaware of postal price increases. Their preference for postal
         communication is therefore unlikely to be changed as a result of an increase in
         postal prices.

2.40     For example, while an average electricity bill in the UK is around £44557 per
         annum and the cost of sending quarterly statements to customers would be
         around 74p58 the consumer only sees the total bill and not the breakdown into
         £444.25 plus £0.75 for postage. Similarly, for bank statements the cost of the
         statements is covered by the interest payments that the customer is charged
         and the consumer is not made aware of the cost of postal mailings.

2.41     Furthermore, transactional mailers may choose to absorb a 5-10% increase in
         postal prices (either partially or completely), particularly when there are
         administrative costs involved with adjusting tariffs. Indeed the postal charge on
         a per customer basis is likely to be only a small proportion of the overall
         revenue gained from the consumer. Notwithstanding, even a 100% pass
         through of postage costs will typically represent a small proportion of receiving
         transactional mailings – in the case of the average UK electricity bill example
         cited above, a 5-10% price increase in postage would equate to less than a
         0.1% price increase in the final product. A price increase of this magnitude is
         unlikely to result in induce customers to switch away from post.

2.42     We have observed that many transactional senders offer their customers
         incentives to move online.

               British Gas‟ OnlineSaver 3 tariff offers customers a minimum 4% discount
               against their standard tariff. For an average energy user this could
               represent a saving of £30 on their annual bill.59
               NPower‟s Online 19 tariff offers customers a 2% saving compared to its
               standard tariff for customers.60
               BT offered a discount for customers who chose online billing. This discount
               is no longer offered. 61
               HMRC allows tax payers to file their tax returns online; it quotes many
               advantages including a later deadline and automatic calculation of tax
               liability.62

57
   Ofgem estimate for average quarterly electricity bill at July 2009 prices, [Online]:
http://www.ofgem.gov.uk/Media/FactSheets/Documents1/updatedhouseholdbills09.pdf, [Accessed 26 January 2010]
58
   Based on the direct price of Mailsort 120 CBC Second Class service with volume related discount of 100,000 items.
59
   http://www.britishgas.co.uk/products-and-services/energy/our-tariffs/onlinesaver.html [Accessed 02 December 2010]
60
   http://www.npower.com/web/At_home/electricity_and_gas/Products/signonline/index.htm. [Accessed 1 October 2010].
61
   http://www.homephonechoices.co.uk/bt-drops-paperless-billing-discount-010910.html [Accessed 29 September 2010]




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2.43     These incentives are likely to be significantly greater than the saving in postal
         costs alone to the institution. This is because there are many different reasons
         why a company or institution would want to offer incentives for customers to
         move online which are not related to the cost of post. It could, for example, be
         that online accounts limit the need for data imputing or that they allow for
         automatic billing.

2.44     A company which offered discounts for online tariffs told us that many different
         aspects influence the level of discounts given. While it would lead to savings
         because of reduced postal charges (and associated stationery and printing
         costs), the primary driver is often the linking of online tariffs with direct debits.
         This leads to significant reductions in bad debt costs. Alternatively, companies
         may wish to reduce their carbon footprint. On the demand side, customers
         signing up for online tariffs are often seen as the most price sensitive and
         discounts are a way of attracting these customers.

2.45     When defining markets we need to determine the extent to which an increase in
         the price of post would be passed through into higher prices to final consumers
         (and, consumers‟ responses to these higher prices). Even if a 10% increase in
         the price of post were to be passed on to consumers in full, as this would
         amount to only a 7.5p increase in the annual price of postal bills compared to
         paperless billing, this is unlikely to induce many consumers to switch, and
         certainly insufficient to make a price rise unprofitable.


Characteristics

2.46     The use of non-postal alternatives is dependent to some degree on the item
         being sent, the sender and the recipient. Below we consider the issues that may
         impact on the choice of communication contact medium for senders.

2.47     An essential factor influencing whether non-postal alternatives to transactional
         mail are valid alternatives, especially digital alternatives, is whether the item
         being delivered can be transmitted in a different form, i.e. electronically.
         Transactional mail is often information printed on paper and for which the
         internet or email can provide a valid alternative. However, other items (for
         example, credit cards and SIM cards) cannot be digitised. 63



62
  http://www.hmrc.gov.uk/sa/understand-online.htm, [Accessed 02 December 2010]
63
  We note that some companies are developing technologies which allow plastic cards to be replaced by mobile phones. For
example, Tesco has developed an application which allows customers to use their iPhones to scan in their Clubcard details
instead of using physical Clubcards, [Online]http://itunes.apple.com/gb/app/tesco-clubcard/id351841850?mt=8, [Accessed 7
September 2010]. Development of this technology could in the future lead to a situation where consumers no longer have to be
sent credit cards, but instead use their phones to pay for goods. However widespread conversion to such technology is unlikely to
be in the near future.




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2.48        Our research indicates that the following issues are important when considering
            the use of non-postal alternatives for transactional mail:

                  Size of postal budget: Institutions which spend considerable sums on post
                  are more likely to investigate non-postal alternatives when prices rise as the
                  potential cost savings are likely to be greater.
                  Communication strategies: Institutions which value the opportunity to
                  promote loyalty through regular postal communications with their customers
                  may be less likely to switch to non-postal alternatives.
                  Ease of use: Institutions may need to consider the ease with which they can
                  communicate with their customers as well as the ability of their customers to
                  communicate with them.
                  Corporate social responsibility: Institutions may consider the wider impact of
                  their communications choice, such as environmental impact.
                  IT infrastructure: The institution‟s ability to distribute information may be
                  impacted by the level of their IT capabilities. According to Ofcom only 71%64
                  of the population have access to the internet which could impact on the
                  decision to use digital alternatives to post.
                  Legal issues: There are circumstances where it is necessary to use
                  transactional mailings for legal reasons, for example, where original
                  documents require signatures.
                  Security issues: Transactional mail is more likely to contain confidential
                  information, and therefore the institution may need to consider security
                  implications. More generally, concerns of the receiver over the security of
                  the communications channel used can impact on an institution‟s decision.
                  Customer demographics: The demographic profile of the institution‟s client
                  base may impact on the institution‟s ability to use non-postal alternatives.
                  Digital alternatives may require a level of technical competence. Different
                  customer groups may simply prefer different forms of communication.

2.49        Our evidence on indirect constraints suggests that there are limitations to the
            use of non-postal alternatives. Constraints arise from consumer characteristics
            and preferences. Customers in the main still appear to prefer postal
            communication and companies consider customer preference to be an
            important factor in their decision making process. Consumers rarely see the
            postage price of their mail. Looking at the incentives offered by companies to
            switch online and/or go paperless, they are often greater than the cost of
            postage. This suggests that companies‟ encouragement of switching from post
            is for reasons other than the postal price. We find therefore that indirect
            substitution is indicative of a post only market definition.




64
     Proportion of adults with broadband in the UK (fixed + mobile) http://media.ofcom.org.uk/facts/ ,[Accessed 06 December 2010]




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Direct constraints

2.50   Senders of transactional mail often have very limited ability to switch to non-
       postal substitutes. The main reason for this is that, as the Ipsos MORI research
       highlights, final consumers continue to express a strong preference for
       communication by post. This view is consistent across all age groups, and
       across all types of communication message.

2.51   As access to broadband increases and consumers become more confident in
       switching to electronic forms of communication, consumers‟ preference for
       postal communication may wane. While this may lead to more indirect
       substitution of post to non-postal substitutes, it is likely that many senders of
       transactional mail will wish to continue to offer customers a choice as to how
       they receive their communication, and, in particular, to offer a postal alternative.
       While some organisations have shown that it is possible to offer paperless
       communication, this model tends to work best with firms that are able to target
       niche customer groups, in particular, those with a preference for digital
       communication.

2.52   The largest transactional mailers are comprised of banks and other financial
       institutions, utilities, and public sector organisations. For the most part these
       organisations have to serve a very wide range of customers, with different
       preferences. In this context, there is often a significant commercial risk in not
       offering postal communication, as customers may choose to switch to an
       organisation that offers them a postal alternative.

2.53   There are, of course, ways in which senders of transactional mail can continue
       to offer a postal option, but to encourage final customers to use alternative
       means of communication. For example, customers may have to “opt out” rather
       than “opt in” to paperless billing. Firms may be also able to charge for postal
       communication, or to set up products or brands that are targeted at customers
       with a preference for digital communication. However, as in these
       circumstances transactional mailers are continuing to offer a postal alternative,
       the competitive constraint primarily comes from final customers switching away
       from post (indirect constraints).

2.54   For the above reasons, we believe that direct substitution by the senders of
       transactional mail is likely to be limited.


Price elasticity of demand

2.55   Royal Mail has provided us with estimates of the own price elasticity of demand
       for commercial mail. This comprises both transactional and fulfilment mail, but,



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            as fulfilment mail accounts for less than 10% of transactional mail, it should
            provide a good proxy for transactional mail.

2.56        Royal Mail estimates that commercial mail has a price elasticity of -0.2, which
            implies that a 10% increase in price would cause only a 2% reduction in the
            demand for commercial mail.65 This evidence suggests that demand for
            transactional mail is highly inelastic and that non-postal alternatives do not
            provide any significant competitive constraint.

2.57        In November 2010 Postcomm published its “minded to” decision to allow Royal
            Mail to raise an extra £100m in the revenue in 2011. On average this would
            mean an increase of 12% on bulk mail and 15% on the price for Royal Mail
            Wholesale access products. It could also mean price increases up to a
            maximum of 19% for individual bulk products. We note that transactional
            mailers‟ responses to our consultation highlight that a 19% increase in particular
            would significantly encourage consideration of a shift towards electronic
            alternatives.66 The outcome from this price increase will provide further
            evidence as to the price elasticity of transactional mail.

2.58        The implications of these responses are discussed in the introduction section
            above. In that section we explained why this increase is unlikely to have an
            impact on our market definition analysis or our provisional conclusions.

Section 2.3. Provisional Conclusions

2.59        Our evidence shows that senders of transactional mailings may be prepared to
            switch from post to digital alternatives for a variety of reasons including cost.
            However our analysis suggests that transactional mailers would not switch to
            digital alternatives in sufficient numbers as a result of a 5-10% price increase in
            postal services. This supports the view that transactional mailings should not
            be seen as part of a wider market including digital alternatives.

2.60        For the following reasons Postcomm therefore considers that the relevant
            market should not be widened to include non- postal alternatives for
            transactional mail:

                  Consumer preferences are important to senders in their decision as to
                  whether to use post. Our evidence shows that consumer preferences favour
                  post for their transactional communications.




65
     Veruete-McKay et al., 2010, Letter Traffic Demand in the UK: An analysis by Product and Envelope Content Type
66
     See www.psc.gov.uk for published responses to our November 2010 decision document




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         In many instances customers often do not pay for transactional mail, so
         than an increase in postal costs will not induce customers to switch to non-
         postal alternatives.
         Where companies offer incentives and discounts to switch to
         online/paperless transactional services, a 10% increase in postage costs
         would only increase the cost of paper bills by approximately 7.5p, and thus
         is unlikely to cause customers to switch.
         Royal Mail estimated elasticities indicate that transactional mailers are
         highly price inelastic (-0.2).


Consultation Question
Q1.   Do you agree that there is insufficient demand side substitution between
      transactional mail and non-postal alternatives provide for them to be included in
      the same market?




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Section 3: Advertising

Section 3.1. Introduction

2.61      In this section we consider whether advertising mail67 is part of a wider
          advertising economic market which includes non-postal media such as email,
          internet, TV, press, outdoor, radio, cinema and door drops advertising.

2.62      The remainder of this section is set out as follows:

                The first section provides some background information on advertising. It
                sets out the usage and characteristics of direct mail, the various forms of
                advertising media, the way in which advertising budgets are allocated and
                the role of recipient preferences.
                The second section examines case law precedents before considering the
                extent of demand side substitution from alternative advertising media in
                terms of direct constraints.
                In the final section we set out our provisional conclusions on whether
                advertising mail should be seen as part of a wider market.


Definition of Advertising

2.63      Advertising is a form of communication intended to promote or raise awareness
          or to persuade an audience to purchase or take some action. Advertising
          communication often includes the name of a product or service and how that
          product or service could benefit the consumer, to persuade customers in a
          target market to consume that particular brand. Royal Mail defines advertising
          mail as a communication used to sell products and services.68

2.64      Two main types of advertising can be distinguished:

                Brand advertising – in this form of advertising, the audience is either made
                aware of a product or service, or instilled with positive sentiments about it
                (e.g., brand loyalty) thereby predisposing them to take some action on it at a
                later date. There is no immediate and specific “call to action”69 where the
                customer is asked explicitly to purchase the product. However, an objective
                of brand advertising may be to increase the response rate to a call to action
                in the future. Brand advertising often enables the recipient to recall and


67
  In the context of postal services, advertising mail is generally sent using Letter or Large Letter formats.
68
  Royal Mail, 2010, Advertising Mail Competitive Dynamics, February 2010 submission to Postcomm.
69
  A call to action is part of the terminology of direct response advertising. It refers to wording that asks the reader or viewer to take
immediate action. The desired action may be to fill out and send in an order form or reply card, make a phone call, click something
on a website, look for the product in a certain store or many other possible actions. The call to action closes the sale by telling the
recipient exactly what to do to get the product, service or information offered.




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                recognise the brand under different conditions and creates an association
                between a logo, jingles, a memory or a sensation and the brand name.
                Examples of brands are Coca Cola, Gap, McDonald‟s and Mastercard.
                Direct response advertising70 – this form of advertising is normally aimed at
                triggering consumers to take immediate action. It includes a call to action
                and provides the audience with details on how to complete the specified
                action. For example, an advertisement by a retailer which suggests
                customers should “get the new product today” and provides the audience
                with a website address and/or telephone number through which they can
                purchase the item.


Direct Mail

2.65      For the purpose of this document, when we refer to “direct mail” we mean
          addressed advertising mail.71 Direct mail therefore is the delivery of advertising
          material, for example, addressed letters including leaflets or catalogues, to a
          specified recipient of postal mail.

2.66      Direct mail is targeted at individuals who are thought to be interested in the
          product or service offered (e.g. the individual may have bought from the
          company or donated to a charity on a previous occasion). Utility companies
          routinely send direct mail to consumers who have recently switched away to
          another supplier to try to win them back, usually including a personal direct
          message to contact customer services with an offer of a new improved tariff.

2.67      Direct mail is employed as an advertising medium by a wide range of
          organisations including charities, financial services, mail order and high street
          shops, insurance, utilities and government. In 2008, charities sent the largest
          number of direct mail, accounting for 15% of total volumes,72 as illustrated in
          Figure 11 which identifies the top ten direct mail senders.




70
   Traditionally, direct mail is considered as a form of direct response advertising.
71
   We do not include unaddressed advertising mail in our definition of direct mail. This type of advertising mail is referred to as
door drops. We also exclude transpromotional mail which we consider to be transactional mail because the primary purpose of the
mail is transactional.
72
   Advertising Association, 2009,The Advertising Statistics Yearbook 2009.




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Figure 11: Use of consumer direct mail by sector 2008 (%)




Source: The Advertising Statistics Yearbook 2009


2.68        Direct mail is sent through both Royal Mail‟s and access operators services. In
            2009/10, Royal Mail estimates it carried approximately 45% of total direct mail
            volumes through its retail services, with the remaining 55% being carried by
            DSA operators using Royal Mail wholesale services. Direct mail is estimated to
            represent 15% of Royal Mail‟s retail Letter and Large Letter revenues. Of the
            total direct mail volumes carried by Royal Mail retail in 2009/10, []% was sent
            using Third Class services and []% was sent using Second Class, only []%
            was delivered by a First Class service.73


Direct mail characteristics

2.69        To examine the demand for direct mail and the characteristics which determine
            that demand, we interviewed 23 organisations including charities, financial
            services providers and media planners.

2.70        From our research, we consider that direct mail possesses the following
            characteristics:




73
     Source: Royal Mail.




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                Targeted/personal: Tailored to the individual, therefore facilitating focus on
                the named individual considered to be most responsive to the product or
                service offering.
                Informative: Well suited to conveying a lot of information and explaining
                detailed propositions which can be viewed at the customer‟s leisure.
                Tangible: The texture, shape, colour and smell can appeal to recipients‟
                willingness to find out more about a product or a service, for example
                through the use of product samples.
                Visual: Combining text and graphics to grab the recipient‟s attention.
                Measurable: Making it easier to assess the response to the mailing as there
                is a specific call to action to the recipient.
                Lasting: Sometimes referred to as “dwell time”, facilitating storage and
                repeated exposure.

2.71      The two characteristics of direct mail most frequently cited as beneficial to the
          customers we interviewed were that it was targeted and informative, as the
          following quotes illustrate:

2.72      “However, some advertising campaigns were better suited to particular
          advertising mediums…if you were selling life insurance a more targeted and
          personalised direct mail campaign would be more appropriate.”

2.73      “People are used to receiving fund raising campaigns via direct mail and there is
          enough space (compared to an e mail) to explain the proposition.”

2.74      This is not to suggest targeting is necessarily unique to direct mail. All
          advertising media can be targeted to a certain extent, e.g., television adverts
          can be run in connection with a particular programme, press advertisements
          placed in a particular newspaper. Further developments in internet technology,
          such as the PhormDiscover74 or Google‟s Adsense75 services, mean that
          increasingly, more relevant advertising can be directed to consumers by their
          ISP through the provision of personalised content. However, unlike these non-
          postal media, direct mail users are able to target named individuals who are
          considered likely to purchase rather than larger customer groups (the typical
          audience for TV, radio and internet advertising).

2.75      An example of how direct mail can be more personal was provided by a digital
          print company. One of its clients sends direct mail promoting holiday
          destinations. It tailors the direct mail to the individual by incorporating pictures
          of where the individual went on holiday the previous year.


74
  See http://www.phorm.com/about_us/index.html, [Accessed January 2011]
75
  A program that enables websites to display relevant adverts on a variety of content related to the site, see
http://www.google.com/Adsense, [Accessed January 2011].




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2.76        Direct mail‟s ability to convey a lot of information, i.e., being informative, was
            highlighted in our interviews. A media planning agency noted that this was an
            advantage. It stated that this characteristic was one reason why direct mail is
            popular with financial services companies and charities (the top two direct mail
            senders) whose marketing messages are often quite detailed and may include
            legal wording or „small print‟.

2.77        An access operator suggested that direct mail was particularly effective
            because it was tangible. Recipients are more likely to pick up mail that drops
            through their letter box, and either open it or save it for later. Research has
            shown that 70% of promotional material received by households is read, filed or
            passed on, and over a third of recipients will respond if an offer is included.
            Direct mail allows the audience to choose the time they are most receptive to
            reading the message, which means they are far more likely to engage with it.76

2.78        Advertising messages received via the internet, email, TV or radio may not get
            the same exposure. The increased use of applications which prevent receipt of
            advertising messages such as email spam blockers and internet browsers that
            contain filters to block unsolicited communication can also make it more difficult
            to reach the target audience.


Allocation of the advertising budget

2.79        Customers‟ advertising budget is another underlying factor affecting the demand
            for advertising media, in terms of how this is allocated between different media.
            In this section we examine the issues which influence customers‟ decisions on
            how they allocate their advertising budget, namely:

                 Brand and direct response advertising.
                 Integrated campaigns.
                 Role of intermediaries.
                 Importance of Return on Investment.
                 Preferences of recipients.


Brand and direct response advertising

2.80        Traditionally customers have used „above the line‟ media such as TV and radio
            for brand advertising and „below the line‟ media such as direct mail or door


76
     See http://www.mailmarketing.com.au/index.php?sectionID=1449&pageID=3011 [Accessed 16 February 2011]




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         drops for direct response advertising. Our customer interviews revealed that
         some customers still consider that certain media are better for brand building
         and others are more suited to generating a response from the customer. For
         example, an insurance company we spoke to uses direct mail (supported by
         email and outbound telephony) to secure insurance renewals but employs other
         media for brand building. Similarly, another large advertiser thought direct mail
         generally complements other media as a follow up to a prior branding exercise
         carried out using TV, radio or press.

2.81     More recently, there has been some convergence between the different types of
         advertising. Increasingly brand advertisements include a link to the customer‟s
         website and a subtle call to action such as “for more information please see…”
         and direct response advertisements can also be designed to maintain and
         improve companies‟ brand image.

2.82     An example of a direct mail campaign being used for brand advertising is a
         recent campaign by a major car maker which predominantly targeted a specific
         section of the population to raise awareness of its new look compact model. The
         mailing was designed to rouse curiosity and invite recipients to develop an
         affinity with the model prior to the UK launch date.


Integrated campaigns

2.83     A McKinsey & Company study77 reported that companies that successfully
         implemented a multi-channel approach to marketing have increased sales by up
         to 30-40%, while lowering their cost-per-revenue by up to 10-15%. The trend to
         employ more integrated campaigns was reflected by all of the customers we
         interviewed; they have used direct mail in combination with a number of other
         advertising media including TV, press, radio, outdoor, door drops, email, online,
         outbound telephony and cinema. A charity told us that it found that following up
         its direct mail campaigns with an email led to an increased response rate
         because customers prefer to donate via the internet. This use of multiple
         channels is also broadly consistent with research carried out by Royal Mail78
         which shows that customers rarely use a single medium to reach their
         audience.79



77
   http://www.mckinsey.com/practices/retail/knowledge/articles/Multichannelmarketing.pdf, [Accessed 13 December 2010].
78
   Royal Mail, 2010,The position of DM in the media mix and how media choices are made, September 2010 submission to
Postcomm.
79
   Royal Mail considers that direct mail‟s suitability for a particular advertising campaign depends on three factors:
            The target audience: Some media are more appealing to certain customer groups. For example, younger people spend
            more time online and housewives watch more day time TV
            The type of campaign: Whether it is being undertaken to acquire new customers or target existing customers. Royal
            Mail‟s research shows that customers and media planning agencies perceive direct mail to be ideal for developing
            existing customers




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2.84      Media planners describe the additional benefit which can be derived from
          adopting a multi channel approach as the “multiplier” or “halo” effect. This is
          where the use of a combination of media gives rise to better results than using
          any one medium in isolation. The OMD BrandScience study80 found that using
          direct mail alongside non-postal media, increases the campaign‟s Return on
          Investment (ROI) (discussed in detail below), compared to single media
          activities. This suggested that digital campaigns benefited the most from being
          combined with direct mail, with an increase in return of 62%. Other customers
          we interviewed also felt that direct mail and non-postal media were
          complements. A print management company confirmed that its clients are
          adopting a more integrated approach to direct marketing. It explained that some
          clients are splitting their mailing lists based on demographics; so that their
          younger customers receive an email rather than a letter. In this case, alternative
          media and direct mail can be viewed as largely complementary.


The role of intermediaries

2.85      It is important to establish at what point customers choose whether to use direct
          mail at all and how much to allocate to direct mail within their advertising
          budget. If these decisions are primarily made by media planning agencies then
          we may expect that the amount spent on direct mail would be driven by the
          decision to maximise the ROI from the client‟s chosen media mix for a given
          budget.

2.86      According to Royal Mail81 large customers in particular, arrange advertising
          campaigns through a number of intermediaries. Customers may select a
          creative agency to design the campaign which then employs a media planner to
          decide how best to deploy the advertising message. The media planner may
          commission media buyers to secure delivery space for the advertising content.
          Royal Mail argues that, since some media planners provide two or more of
          these functions, they have a significant role in choosing the types of advertising
          medium as they can recommend and then purchase the advertising space for
          clients.

2.87       A media planning agency we interviewed said that it worked with customers to
          determine what proportion of their advertising budget should be allocated to
          direct mail. However, it was not responsible for designing the mail packs or
          deciding which postal operator should be used, these choices were made by the
          client and/or the creative agency.


           The desired impact of the message: The type of physical and emotional interaction the advertiser is seeking to elicit will
           also impact upon their media choice
80
   http://www.utalkmarketing.com/pages/Article.aspx?ArticleID=14655
81
   Royal Mail, 2010, Advertising Mail Competitive Dynamics, February 2010 submission to Postcomm.




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2.88      From discussions with media planning agencies and their customers, we found
          that, while customers regularly employ media planning agencies in connection
          with their wider advertising campaigns, the majority choose to plan their direct
          mail campaigns in-house. One of the main reasons given for this is that in
          contrast to other media, media planning agencies are not able to obtain a better
          price for post than the customer negotiating directly with Royal Mail as prices
          tend to be predetermined.82

2.89      A media planning agency noted that when clients used an intermediary, they
          tended to prefer using specialist direct marketing agencies when planning a
          direct mail campaign. In its view, a direct mail campaign is more complicated
          than planning a campaign with non-postal media as customer data has to be
          bought separately from the postal service (in other media such as newsprint, the
          medium and the audience tends to come as a bundle, i.e., purchasing
          advertising space in a newspaper provides access to the audience: that papers‟
          readership).

2.90      It seems, therefore, that there is no hard and fast rule for how the direct mail
          budget is determined and whether intermediaries are engaged. Overall there
          may be less incentive to use media buyers as these are not likely to obtain
          better deals than the companies themselves, which is in contrast with the
          experience in other media. In addition we understand that the activities involved
          in putting a direct mail campaign together may be better addressed by direct
          marketing specialists or in house, than through media planning agencies.


Return on Investment (ROI)

2.91      Advertising media are generally compared by planners and customers on the
          basis of ROI. This is a measure of the effectiveness of an advertising medium
          (or mix of media) for a specific campaign. It is usually qualitative and compares
          the level of result (in terms of revenue or awareness) obtained for a given level
          of spend.83

2.92      Royal Mail notes that ROI is the key metric driving advertising buyer behaviour.
          Although advertising media may be priced very differently, these media actually
          compete much more closely on the basis of ROI. 84



82
   Currently, prices for the Royal Mail services typically used for direct mail are calculated according to published prices. In
addition, the relevant discounts are available directly to the customer and they are able to aggregate volumes of mail sent for
other purposes to achieve these discounts.
83
   A media planning agency we spoke to employed an in house team of econometricians responsible for ROI modelling. The
models are used to help assess the impact of different types of media taking into account a number of different factors including
economic cycle, income and demographics to ensure that clients get the appropriate media mix to maximise their sales.
84
   Royal Mail, 2010, Advertising Mail Competitive Dynamics, February 2010 submission to Postcomm




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2.93     The majority of companies in our interviews indicated that they considered ROI
         in deciding the choice of media (or media mix). These companies varied in how
         far they relied on ROI. At one end, ROI was stated as the sole basis for deciding
         the appropriate media on all marketing activity whereas at the other end it was
         used either for specific mailing or in deciding which customers to target by what
         media.

2.94     It was also suggested that direct mail is used because it tends to provide a good
         ROI. We found that ROI can vary significantly for direct mail and other media
         depending on a number of factors including product attractiveness, seasonality,
         message, cost of product and previous experience with the product. Royal Mail
         indicates that the average ROI of direct mail has increased consistently over the
         last four years from £1.57 per £1 in 2006 to £3.22 per £1 in 2009. Two possible
         reasons for this are:

               better customer data and more precise targeting of campaigns (by
               excluding the customers who are less likely to respond) producing better
               results.
               the general decline in direct mail volumes leading to better “cut through” on
               the doormat because there are now fewer direct mail items competing with
               one another.


Recipients’ preferences

2.95     Recipients‟ preferences towards different advertising media will also impact on
         the overall effectiveness of the advertising campaign and therefore the demand
         for particular media. This section considers evidence on customers‟ preferences
         towards different advertising media when being contacted by companies with
         whom they do and do not have an existing relationship.

2.96     The Ipsos MORI retail market survey85 showed that existing customers prefer to
         be contacted by post rather than by any other medium when being informed
         about new products and services;86 Figure 12 below summarises customers‟
         responses.




85
   Postcomm Retail Market Survey 2010, Report of Findings From Research with Business Mailers and Residential Customers, a
report for Postcomm by Ipsos MORI, December 2010
86
   Customers were asked how they would prefer to be contacted by their main bank or building society with information about
savings and loan products.




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Figure 12: Preferred method of contact – banks/building societies




Source: Ipsos MORI survey


2.97     Where customers are being contacted by companies that they do not know they
         also have a preference for post, although a significant proportion would prefer
         not to be contacted at all; as illustrated by Figure 13.

Figure 13: Preferred method of contact – new companies




Source: Ipsos MORI survey


2.98     According to the survey, the medium by which customers prefer to be contacted
         also varies depending on social group and age. For example, only 31% of AB
         customers prefer to be contacted by post in comparison with 51% in group DE.
         22% of customers aged 16-24 would prefer to be contacted by post compared
         to 57% of those aged over 65.




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2.99   The effectiveness of direct mail when contacting particular segments of society
       was also noted by some of the customers we interviewed. For example, a
       financial services provider, stated that non-postal media were just “not right” for
       its audience, who, overwhelmingly, were within a particular age group.

2.100 We acknowledge that the preference displayed by recipients towards post and
      to a lesser extent email does not actually demonstrate that these media are
      more effective at securing a response compared to other advertising media,
      e.g., face to face or telephone communication. It could be that recipients favour
      post and email because these media require less active engagement than a
      telephone call or a face to face meeting and thus are easier to ignore.

2.101 The evidence highlights the importance of maximising ROI by using an
      integrated media mix that best supports campaign objectives. This could result
      in some substitution between advertising media based on ROI. However other
      factors are also important for how the advertising budget is allocated including
      campaign objective and recipient‟s preferences.

Section 3.2. Market Definition

2.102 In this section, we consider whether the evidence on demand side substitution
      suggests that direct mail should be seen as part of a wider market, including
      non-postal media such as internet, email, TV, press, outdoor, radio, cinema and
      door drops. We begin with a review of the case law and take account of the
      approach taken by competition authorities, followed by the analysis of
      competitive constraints on direct mail.

2.103 The starting point for our analysis is to assess direct constraints from possible
      direct media substitutes. Next we examine switching as a result of a 5-10%
      increase in postage prices, based on evidence from our interviews with
      customers as well as a bespoke survey of mail customers conducted by Ipsos
      MORI. We also analyse indirect constraints. Finally, we consider evidence
      provided by Royal Mail on long-run price elasticity estimates.


Case Law

2.104 As part of our market definition analysis, we have considered the approach
      taken by competition authorities to arguments based on wider substitutability
      within advertising markets.

2.105 We note that there is considerable case law (both under EC and UK competition
      law) indicating that different advertising media represent separate markets and
      are not part of one wider advertising market. For example, the European



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         Commission reached this conclusion some time ago in Telia/Telenor87 where it
         held that there was a separate market for advertising over the internet and a
         separate market for the sale of advertising space in local telephone directories.
         While the use of internet has grown significantly since that case, it is notable
         that more recent decisions have adopted the same approach. For example, in
         Google/DoubleClick88 the European Commission did not accept Google‟s
         submission that the relevant product market should encompass the provision of
         advertising space in all types of media. It concluded that there was a separate
         market for the provision of online advertising space.

2.106 In the UK, the OFT has identified a separate market for advertising space in
      local newspapers.89 The Competition Commission has identified a separate
      market for radio advertising,90 cinema advertising,91 roadside posters92 and
      classified directories.93 More recently, in its final report94 following its review of
      ITV‟s Contracts Rights Renewal Undertakings,95 the Competition Commission
      concluded that, despite changes in advertising expenditure by media since
      2003, the relevant market remained television advertising in the UK and, in
      particular, that it was not constrained by internet display advertising now (or
      likely to become so in the near future). Ofcom, in its analysis of the markets for
      a wide range of telecoms and broadcasting services, has never considered
      postal services to be in these markets.

2.107 The competition authorities have recognised that the different advertising media
      used in a diversified marketing campaign are complements in the loose sense
      of the word. For example, in the Aberdeen Journals case, the OFT indicated
      that: “whilst advertising in one medium may not be wholly or directly
      substitutable with advertising in another medium, for example, because it
      conveys a slightly different messages aimed at a different target audience, it
      may be complementary to it, in the sense that it reinforces the advertiser‟s
      overall message and thus increases the effectiveness of each type of
      advertising”.96 The Commission noted in Telia/Telenor that the fact that most
      advertisers market their products through several advertising channels does not

87
   Case No COMP/M.1439 of 13/10/1999.
88
   Case No COMP/M.4731 of 11/03/2008.
89
   Predation by Aberdeen Journals Limited (Remitted case) Case CE/1217/02 (16 September 2002).
90
   Capital Radio Plc and Virgin Radio Holdings Limited: A report on the proposed acquisition, HMSO, Cm 3817, 13.01.1998],
Scottish Radio Holdings Plc and GWR Group plc and Galaxy Radio Wales and the West Limited: A report on the merger situation,
Cm 5811, 16.05.03 and Ofcom‟s Radio Advertising Market Research: Assessment of the constraints on the price of direct and
indirect radio advertising, 19 October 2006 (in which Ofcom identified even narrower radio advertising markets for direct and
indirect radio advertising).
91
   The Supply of Cinema Advertising Services: a report on the supply in the United Kingdom of cinema advertising services,
HMSO, Cm 1080, May 1990.
92
   Avenir Havas Media SA and Brunton Curtis Outdoor Advertising Ltd: a report on the acquisition by Avenir Havas Media SA of
Brunton Curtis Outdoor Advertising Ltd, HMSO, Cm 1737, November 1991.
93
   Classified Directory Advertising Services, HMSO, Cm 3171, March 1996.
94
   Final Report dated 21 May 2010.
95
   The Review involved an assessment of whether the contracts rights renewal remedy that was one of the undertakings given by
Carlton Communications Plc and Granada plc pursuant to the Competition Commission‟s investigation into the merger between
these two parties needed to be varied or superseded.
96
   Predation by Aberdeen Journals Limited (Remitted case) Case CE/1217/02 (16 September 2002).at paragraph 24.




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         demonstrate that these different channels are demand substitutes; it merely
         shows that advertisers pursue a diversified marketing campaign aimed at as
         many people as possible.97

2.108 As the OFT indicated in that case, the issue, for market definition purposes, is
      not whether a medium is a substitute or a complement for another. It is rather a
      question of whether sufficient marginal advertisers in one medium would
      consider switching all or a sufficient portion of their advertising expenditure to
      the alternative media if faced with an appreciable price rise from a competitive
      price level, to render that price rise unprofitable.98

2.109 Finally, even if the market analysis indicates that alternative media do not fall
      within the same market as the advertising medium in question, that does not
      mean that they cannot exert pricing constraints on each other. The OFT
      recognised that possibility in the Aberdeen Journals case99 as did the
      Competition Commission in the Scottish Radio Holdings case.100 Similarly in the
      Archant101 case, the Competition Commission followed the approach adopted in
      previous recent local newspaper inquiries in concluding that the relevant
      product market was the market for local paid-for and free weekly newspapers,
      but acknowledging that other printed and non-printed media might impose some
      competitive constraint on local weekly newspapers for different categories of
      advertising.

2.110 In summary, the case law shows that different advertising media represent
      separate markets. The fact that they are often used in combination with each
      other in diversified marketing campaigns is because they are complements.
      Whether they are also substitutes is a question of fact in each case and
      depends on the extent to which sufficient marginal advertisers in one medium
      would switch to another in the event of a price rise. The case law also shows
      that it is possible for an advertising medium to exert a competitive constraint on
      another medium even if it is not sufficiently substitutable to be classed as falling
      within the same market.


Substitution between direct mail and other advertising media

2.111 As the case law indicates, for market definition purposes, we need to establish
      the extent to which alternative advertising media are substitutable for each


97
   Telia/Telenor at paragraph 107.
98
   Predation by Aberdeen Journals Limited (Remitted case) Case CE/1217/02 (16 September 2002). at paragraph 86.
99
   Predation by Aberdeen Journals Limited (Remitted case) Case CE/1217/02 (16 September 2002)..
100
    Scottish Radio Holdings Plc and GWR Group plc and Galaxy Radio Wales and the West Limited: A report on the merger
situation, Cm 5811, 16.05.03
101
    A report on the acquisition by Archant Limited of the London newspapers of Independent News and Media Limited, Final
Report, ISBN 0117022683, 22.09.04 at paragraph 4.17.




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            other. Specifically, we need to determine whether customers would switch from
            direct mail to non-postal media if the price of direct mail rose by 5-10%.

2.112 Our research has shown that customers tend to run advertising campaigns
      using a multi media approach that involves a mixture of above and below the
      line media. This suggests that direct mail when used in conjunction with other
      media may enhance the response rate but can also increase brand awareness.
      Therefore different media channels, traditionally considered substitutes, can
      often be complementary in use in the sense that when used in combination they
      may provide a greater impact than when used individually (see Box 1 below).

  Box 1 Media channels: substitutes, complements or both?

  OMD‟s BrandScience study found that supporting an online media campaign with
  direct mail could achieve 62% uplift in ROI compared to using online media alone.

  Case study: Google AdWords

  Google used an eBridge* mailing to promote its AdWords paid search service to
  small business owners. These potential customers, who were hard to target online,
  were sent a CD via post. The CD took recipients directly to the company‟s website,
  included an AdWords tutorial and also acted as a digital voucher to trial the service
  for free.

  The campaign resulted in an 11.7% response rate.
  *
  eBridge is a computer software package used by direct marketers to bridge direct mail and online media and deliver quality
  media content without extended loading times.
  Source: www.mmc.co.uk




2.113 The Google AdWords case study highlights that, direct mail and internet
      advertising can be both complements and potential substitutes depending upon
      circumstances. Indeed, the unique characteristics of direct mail can also in
      some circumstance increase the response rate of other media.

2.114 From a market definition perspective, the central question is whether sufficient
      marginal advertisers in one medium would consider switching all or a sufficient
      portion of their advertising expenditure to the alternative media if faced with an
      appreciable price rise from a competitive price level, to render that price rise
      unprofitable.102 In this respect the greater the complementarity between direct
      mail and the non-postal media, the weaker the competitive constraints imposed
      by other advertising media is likely to be.

102
      See Predation by Aberdeen Journals Limited at paragraph 86




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Direct media alternatives

2.115 A particularly important characteristic of direct mail is that it enables advertisers
      to target named individuals. This characteristic is shared with other direct media
      such as email and text. Our interviews suggest that media which are not able to
      target named individuals are not regarded as close substitutes to direct mail.

2.116 Of businesses that send advertising communications to customers, the Ipsos
      MORI survey found that businesses predominantly use internet (31%), direct
      mail (19%), and door drops (16%).103

2.117 Table 6 summarises the comparison of direct advertising media to direct mail.
      We assess which media are likely to be close substitutes with regards to those
      characteristics that are important to direct mail advertisers.104 We also include
      telemarketing105 and SMS.106 For each media, we assess the extent to which
      they are compatible with each characteristic, rank their suitability according to
      „Low‟, „Medium‟, „High‟ on the basis of relative appeal to advertisers.

Table 6: Comparisons; characteristics of direct advertising media

                                                                                                                Ease of
                                                                                                               response
                            Informative        Tangible          Visual        Personal        Targeted
                                                                                                                  (via
                                                                                                               channel)

  Direct Mail                    High             High            High            High            High          Medium

  Internet                       High             Low             High            Low           Medium            High

  Email                          High             Low           Medium            High            High            High

  Telemarketing                Medium             Low             Low           Medium            High            High

  SMS                            Low              Low             Low             Low             High            High

  Door Drops                     High             High            High            Low             Low           Medium
Source: Postcomm analysis


2.118 Table 6 indicates that, in terms of attributes, internet, email and door drops most
      closely replicate the key characteristics of direct mail. Telemarketing and SMS
      marketing on the other hand, are much less favourable with respect to these
      characteristics.



103
    Businesses were asked “Thinking about the way your organisation sends advertising and marketing communications to its
customers, what media do you use to communicate? “Only 2% and 1% mentioned Radio and TV respectively. 52% stated they do
not send advertising at all.
104
    Email advertising is considered separately from internet as email is more generally used in direct marketing to convey
advertising to an individual and therefore is to an extent different from other types of internet advertising.
105
    Marketing conducted over the telephone, most telemarketing calls are "cold calls"; meaning the recipient of the call has not
requested that the telemarketer contact them.
106
    A postal consultancy we interviewed said that other forms of direct media such as text messaging and telemarketing exerted
the greatest competitive pressure on direct mail.




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Internet advertising

2.119 The internet can be used for the purpose of delivering marketing messages to
      customers. Sometimes known as online advertising, internet covers a range of
      methods of advertising. Examples include contextual adverts on search engine
      results pages (whereby an internet search on an issue provides links to adverts
      for related items); social network advertising, online classified advertising
      including banner adverts. Internet advertising expenditure can be split into three
      broad categories, namely paid for search (or contextual adverts), other
      classified and display. Of the three, paid for search107 accounts for the largest
      proportion of expenditure, 59% in 2007,108 which suggests that it is the most
      widely used by advertisers.

2.120 By pointing customers to a relevant internet advert or page, paid for search may
      be viewed as a close substitute to direct mail. However, as Table 6 shows,
      unlike direct mail, it is not tangible, and it does not target named individuals.

2.121 It is also worth noting that for the largest customer groups for direct mail (i.e.
      charities and financial services, see Figure 11) paid for search is not likely to be
      a good substitute. A customer targeted through paid for search is generally one
      who is already interested in the product or service as that is the reason they do
      a web search on it. Charities generally send direct mail to solicit support for their
      programmes as it is the best medium for explaining a message in detail;109 paid
      for search will have limited effectiveness for their purposes. One national charity
      stated that direct mail is considered as the most effective medium for fund
      raising in charities. For financial services, the next largest users, this limitation is
      also relevant but to a lesser extent.

2.122 Classified internet advertising is very different in terms of characteristics to
      direct mail as it does not target named individuals. Furthermore, the customer
      has a choice of whether to click through or not to the advert when the web
      advert is displayed; hence there is often no direct call to action. According to
      Royal Mail,110 there is some evidence that the effectiveness and growth of
      online advertising is slowing as the medium matures and loses its novelty. It
      notes that click through rates for internet advertising were 5-10% in 2004 but by
      2007 this had declined to 0.18%.




107
     A type of contextual advertising where Web site owners pay an advertising fee, usually based on click-throughs or ad views to
have their Web site search results shown in top placement on search engine result pages.
108
    Advertising Statistics Yearbook, 2009
109
    48%of customers felt that information received by direct mail was easy to take in compared with 20% by email
http://www.linkmailing.co.uk/pictures/content26/key_reasons_rw_3.pdf, [Accessed 16 February 2011]
110
    Royal Mail, 2010, characteristics of the DM channel, September 2010 submission to Postcomm.




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Email

2.123 Email can be used to send a detailed written message and visual marketing
      material to a named individual. Therefore, in terms of characteristics, it perhaps
      provides the closest substitute to direct mail. Evidence of switching from the
      Royal Mail sale111 supports the view that email may be a close substitute; 26%
      of customers switched their advertising spend to direct mail. Of these, more
      customers switched from email than any other media.

2.124 However, Royal Mail research112 shows that advertisers and media agencies
      prefer direct mail and email to other media as a means of developing existing
      customers.

2.125 More generally, we believe that there are a number of factors which limit the
      effectiveness of email as a substitute for direct mail:

                Legislation: according to current legislation,113 email marketing messages
                should not be sent to individuals without prior permission unless they have
                opted in.114
                Filtering/spam: Emails can be blocked by filters; as much as 15% of email
                was identified as spam, missing or not delivered at all.115 Also the marketing
                messages which people may wish to receive risk getting lost amongst
                unsolicited emails that they do not want to receive.
                Reach: 27%116 of households in the UK do not have internet access.
                Address accuracy: people change their email addresses more frequently
                than they change their postal address.

2.126 Consumers and businesses already receive a large volume of email. In 2010,
      the typical corporate user sends and receives about 110 messages daily.117 By
      2014 the average number of email received is expected to be 80 compared to
      74 now, of which 15 are expected to be spam (see Table 7 below). Currently,
      the average number of spam e-mails received is 13 which suggests that 1 in 10
      of emails that are sent are possibly not received or seen by the recipient.



111
    A 20% discount on Mailsort 3 and Sustainable Mailsort 3 prices for incremental mail posted during March and April 2010.
113
    Section 22(2) f the Privacy and Electronic Communications (EC Diretive) Regulations 2003/2426, implementing the Privacy
and Electronic Communications Directive prohibits the sending of unsolicited communications unless the prior consent of the
addressee has been obtained (opt-in system). See http://www.ico.gov.uk/for organisations/privacy and electronic
communications/which law.aspx.
114
    A report by Pitney Bowes found that email permission levels are not insignificant -39% of people have given „permission to
email‟ in the last year to at least one organisation from whom they have not yet made a purchase. Pitney Bowes, 2009, United we
stand, A European research report into the role of direct mail and direct response advertising in driving web traffic and purchase
consideration,
115
    Return Path, 2009, The Global Email Deliverability Benchmark Report, 2H 2009, Online, www.returnpath.net v011909
116
    73% of households have internet access. ONS statistical bulletin, August 2010, Internet Access Households and Individuals,
Online, http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=5672, [Accessed 16 February 2011]
117
    Roughly 18% of emails received is spam, comprising both actual spam and “graymail” (i.e. unwanted newsletters, alerts, etc.)
http://www.radicati.com/.../Email-Statistics-Report-2010-2014-Executive- Summary2.pdf. [Accessed 16 February 2011]




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Table 7: Forecast of the volumes of emails sent and received

Business Email                  2010                2011                 2012                2013                 2014

Avg. # of Emails
Sent/Received per
User/Day                        110                 112                  115                 117                  119

Average Number of
Emails Received                 74                  75                   77                  79                   80

Average Number of
Legitimate Emails               61                  62                   63                  65                   65

Average Number of
Spam Emails                     13                  13                   14                   14                  15

Average Number of
Emails Sent                     36                  37                   38                  38                   39
Source: Email statistics report, 2010


2.127 As the volume of emails increases, consumers are likely to rely more on email
      filtering and spam control, and therefore the likelihood that a direct advertising
      message will be caught by filters or get swamped by other emails is likely to
      increase.

2.128 In contrast, direct mail is highly effective in terms of reach, with on average
      92%118 of direct mail opened.

2.129 The Ipsos MORI survey also explored why customers were using electronic
      communication rather than post for their advertising. It found that this was
      mainly due to speed and price.119 Importantly, where customers had chosen not
      to use email, this was primarily a result of this not being suitable for their
      customer base or for their products or services.120

2.130 Our analysis suggests that online advertising (including internet and email) is
      only substitutable for offline techniques such as direct mail marketing to a
      limited extent. A Pitney Bowes report,121 suggests that

           „..overall response to these questions was a major endorsement of traditional
          direct marketing and direct mail, with almost two thirds (62%) of European
          consumers saying they were the most effective channels for encouraging
          website visits. In contrast, only 24% of European consumers felt the same way
          about the power of new media advertising – sponsored links, prospecting
          emails, Facebook adverts, etc – to encourage serious website visits.


118
    Billets Media Monitoring data, October 2009 to March 2010.
119
    Source: Ipsos MORI survey
120
   Source: Ipsos MORI survey
121
    Pitney Bowes, 2009, United we stand, A European research report into the role of direct mail and direct response advertising in
driving web traffic and purchase consideration,




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Door drops

2.131 Door drops, unlike other forms of direct mail, are not personalised or targeted at
      named individuals.122 However, door drops share a few attributes with direct
      mail. Specifically; door drops are tangible, visual and are delivered through the
      letter box (as is direct mail).

2.132 There are however significant differences between door drops and direct mail.
      For example, targeting by door drop is typically limited to a geographic area and
      the message is usually generic, whereas, direct mail can be individually
      targeted with a personalised message. In addition, door drops are generally y
      distributed to a diverse audience (even when targeted to a postcode), and the
      results of a campaign are less measurable compared to direct mail (which is
      delivered to a named addressee). This attribute is very important to some
      senders and therefore, we do not believe that door drops are sufficiently
      substitutable for direct mail.


Evidence on hypothetical switching

2.133 We asked business customers how they would react to a sustained 5-10%
      hypothetical price increase in the postal services that they use most frequently
      to send direct mail campaigns. The majority of customers interviewed
      responded that they would not switch any of their direct mail budgets to non-
      postal media in response to this level of price change. Instead, most would
      reduce their mailing volumes, switch to an alternative postal provider or
      continue posting as before.

2.134 One of the media planning agencies we spoke to thought that a sustained 5-
      10% price increase would put greater pressure on address list sellers (where
      the sender is not the data owner) to negotiate lower prices. Another considered
      that an increase in postal prices would put pressure on customers to increase
      the accuracy of their address lists and carry out more targeted campaigns.


Evidence on actual switching

2.135 Actual switching data is not readily available due to the diversity of senders and
      their objectives for using different advertising media. We have however
      examined trends in advertising expenditure by media over time as a proxy for
      actual switching. This data provides an indication as to which media have



122
      Door drops are unaddressed.




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            gained or lost over time, and, in particular, how alternative media have been
            affected by the growth in internet advertising.

2.136 Figure 14 below illustrates share of total advertising over time based on value 123
      of different advertising media between 1998 and 2008. This shows that the
      value of all other media, except internet has been falling over time.

Figure 14: Expenditure share by channel (selected media), 1998 -2008




  Source: Advertising Statistics Yearbook 2009


2.137 Royal Mail has argued that the proportion of customers‟ budgets allocated to
      direct mail has been under pressure in recent years. It suggests that the decline
      in expenditure on direct mail is being driven by several factors including e-
      substitution and considers that the primary reason for this is the rise in the
      proportion of customers‟ advertising budgets being spent on the internet.124

2.138 As shown in Figure 14, there has been a decrease in direct mail expenditure
      over time. However, direct mail has declined at a very similar rate to television
      and radio advertising, and there is no evidence that direct mail has been hit
      harder by the growth of internet advertising than other advertising media. Press
      shows the largest decline over time. While there are structural reasons for this,



123
      Value is measured by total expenditure on respective media.
124
      Royal Mail, 2010, Advertising mail competitive dynamics, page 14, February 2010 submission to Postcomm.




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         for example, the fall in readership, the data is consistent with Press being a
         relatively close substitute to internet advertising.

2.139 The Ipsos MORI survey assessed the extent to which customers had switched
      advertising spend from mail to non-postal media in the last two years. It found
      that 47% of customers had never switched. Of the remainder, 44% confirmed
      they had switched up to 100% of their total advertising spend from post to other
      media. 11% had not switched away from direct mail but confirmed that they had
      sent an even greater proportion by other media, whilst still maintaining the level
      of postal usage. This implies, that fewer customers had switched than had not in
      the last two years.

2.140 This switching data needs to be interpreted with care as customers switch
      between advertising media for many reasons other than price. For example,
      internet advertising provides its own unique characteristics which are attractive
      to many advertisers, who in turn will wish to reduce spend on other advertising
      media to make room in their budget for spend on internet advertising.
      Campaigns and campaign objectives also change from year on year, which will
      affect advertising mix. As our survey did not explore the motivation for switching
      it is not possible to judge what proportion of this switching reflects price and
      non-price substitution.

Figure 15: Switching from post




Source: Ipsos MORI survey




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2.141 Finally, we consider evidence of switching in response to a price change from
      Royal Mail (Box 2).125

      Box 2: Royal Mail Sale

      In March – April 2010, Royal Mail offered a 20% discount to incremental* Mailsort
      3 and Sustainable Mail 3 postings.

      Of the [] successful applicants, [] (26%) stated that some or all of their
      incremental volume was generated by switching budget from non-postal media.
      One customer suggested that the price reduction improved the ROI of direct mail
      in relation to other media; email, telemarketing and press were those most
      commonly cited.

      In summary, the substitution that occurred in response to the sale confirms that
      some customers are willing to switch their advertising budgets from non-postal
      media to direct mail in response to a significant reduction in price. However,
      because of the temporary nature of the sale and the size of the discount, we
      consider that we should be cautious about interpreting this evidence for market
      definition purposes.

      *,excluding mailings that had previously been sent by mail whether via Royal Mail‟s own services or those of an alternative
      operator.




2.142 Box 2 provides evidence from Royal Mail‟s sale customers‟ response to
      reduction in price of direct mail. Whilst informative in terms of customers‟ actual
      switching behaviour in response to a temporary decrease in postal prices, it
      does not demonstrate directly the responses under the conditions in the SSNIP
      test. However, it is consistent with the view that advertisers‟ budgets (which, as
      discussed above, are constrained) and the way in which these are allocated to
      specific media play an important role as regards demand for direct mail. The
      limited substitution,126 (i.e. the proportion of the incremental volumes that were
      switched) between direct mail and other advertising media points to weak
      competitive constraints on post which suggests that direct mail is not part of a
      wider economic market including non-postal media.




125
    The Royal Mail Sale offered a 20% discount on incremental Mailsort 3 and Sustainable Mail 3 volumes (letter format posted via
OBA) during March and April 2010. See the Royal Mail Sale web page for details of the sale.
126
    We recognise that the criteria that were set for the Sale may have also played some part in restricting the full extent of growth
in volume due to a 20% price reduction.




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Indirect constraints

2.143 We note that, for direct mail, as for all other advertising media, it is the sender
      who pays for the advertising message to be distributed and selects the most
      appropriate advertising medium. As the recipient is not able to directly affect this
      process, indirect substitution possibilities are unlikely to exert a constraint on the
      price of direct mail.


Price elasticity of demand

2.144 Royal Mail has carried out econometric modelling to estimate the long-run price
      elasticity of demand for direct mail.127 The results of the modelling suggest that
      a 10% increase in the price of direct mail would lead to a 10% fall in demand.128
      This elasticity implies that a price increase (of the order of 5-10%) would be
      revenue neutral, but there could be a cost saving associated with conveying
      lower volumes of mail. This implies that it could be profitable for a hypothetical
      monopolist supplier of direct mail to raise prices by 5-10%,129 which is indicative
      of a narrow market definition.

2.145 This result does, however, suggest that direct mail is significantly more price
      elastic than transactional, fulfilment, publications and social mail. While this may
      be more consistent with non-postal media imposing a greater constraint on
      advertising compared to other mail applications, our evidence suggests that an
      important factor is that advertisers generally work within fixed budgets, so if the
      price of advertising mail increases, they may respond by sending direct mail to
      fewer and more targeted addresses rather than switching to non-postal
      alternatives.

2.146 Royal Mail has stated that it believes that advertising mail is especially
      constrained by wider media but that at the moment the market definition
      includes only post.130 We agree on the basis of evidence available. We consider
      that non-postal media offer only a limited direct constraint to direct mail. This is
      consistent with a narrow market definition including only post. This is moreover
      consistent with the case law which has consistently identified different media as
      falling within separate relevant markets. The evidence also shows that, while
      not part of the same market, non-postal media may nonetheless exert a
      competitive constraint on direct mail. This is also consistent with case law.




127
    The responsiveness of postal volumes to a change in postal prices
128
    Detailed in Veruete-McKay et al., 2010, Letter Traffic Demand in the UK: An analysis by Product and Envelope Content Type
129
    This assumes that the current price of direct mail is at the competitive level.
130
    RMG‟s view on market definition, Annex 2 – A response to the Postal Services Commission‟s May 2010 consultation
document. August 2010




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Section 3.3. Provisional Conclusions

2.147 The level of competition that direct mail faces from non-postal media is variable
      and difficult to assess. We acknowledge that some customers are switching (to
      other postal services and also non-postal media), as well as reducing their
      direct mail budget. In some instances this is driven by changes in price.
      However, at present, we do not consider that enough customers show a
      sufficient degree of responsiveness to marginal changes in price to support a
      wider market definition.

2.148 We consider that there are a number of advertising media that display
      comparable characteristics to those that are considered important by direct mail
      senders. The evidence we have analysed suggests that those media that are
      most comparable: internet and email are not sufficiently close substitutes. This
      leads us to conclude that direct mail is not part of a wider economic market
      including non-postal media. This provisional conclusion is supported by the
      following factors:

           Direct mail has a unique combination of characteristics that are valued by
           customers and which are not perceived to be easily replicated by non-postal
           media.
           Most customers consider direct mail to be a complement to other media
           rather than a substitute and carry out integrated advertising campaigns,
           which weakens the competitive constraint from alternative media.
           The case law precedents we have reviewed conclude that different types of
           advertising media are not in the same relevant market.
           The majority of customers we interviewed would not switch any of their
           direct mail budgets to other media in response to a sustained 5-10%
           hypothetical price increase.
           Indirect constraints are not applicable for our analysis of competitive
           constraints on direct mail as recipients do not directly consume advertising.
           The price elasticity estimates provided by Royal Mail are consistent with a
           conclusion that the market is not wider than post.


Consultation Question

Q2.    Do you agree that there is insufficient demand side substitution between
       advertising mail and non-postal advertising media for them to be included in the
       same market?




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Section 4: Publications

Section 4.1. Introduction

2.149 Within this section we consider whether distribution of publications by postal
      services is part of a wider publications market that includes other distribution
      methods.

2.150 In this document, when we refer to a „publication‟, we mean a printed publication
      published as part of a series and circulated at least twice a year, but less often
      than daily. We follow the Hooper Report131 and focus on the magazine industry
      and the provision of postal subscriptions. Our definition also includes Academic
      Journals, as these are distributed in a similar way to magazines, but not daily
      newspapers as these are not generally distributed by post due to their
      perishable132 nature.

2.151 The remainder of this section is set out as follows:

               The first section provides some background information on publications
               mail. It sets out the types of publications that are distributed by post, the
               various postal services that are used by publishers to distribute them and
               the relative merits of postal subscriptions compared to alternative
               distribution methods.
               The second section considers the extent of demand side substitution from
               alternative distribution methods in terms of direct and indirect constraints.
               In the final section we set out our provisional conclusions on whether
               publications mail should be seen as part of a wider market.


Background

2.152 In this section, we consider first the types of publication that are distributed by
      post and the various postal services that are used by publishers to distribute
      them. We then consider the relative merits of postal subscriptions for both
      publishers and subscribers, compared to alternative distribution methods.

2.153 We use the term postal subscription to refer to any magazine that is distributed
      via postal services whether it is a paid subscription or controlled circulation.133

2.154 There are three main types of publication:


131
    Hooper (2008), Modernise or Decline: Policies to maintain the universal postal service in the United Kingdom, An independent
review of the UK postal services sector, The Stationery Office
132
    By perishable we mean the need for rapid often early morning distribution and a short shelf life. For newspapers this is
generally 24 hours or less.
133
    Controlled circulation is where a magazine is provided free of change to a known chosen user group.




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               business or professional magazines;
               customer magazines; and
               consumer magazines.

2.155 Business/professional magazines are aimed at specific industries or
      occupations, such as Creative Head for the hairdressing industry. These cover
      a wide range of topics and varying degrees of specialism. Around 10% of
      business and professional magazine titles are available at the newsstand.134
      The majority are only available via subscription including controlled circulation
      where the magazine is funded solely from advertising and is sent free to a
      selected group of recipients. An example would be Accountancy Age.

2.156 Customer magazines are aimed at the customers of a specific company, brand,
      or society/club. Examples include Sky Magazine, NatWest Sense, and
      magazines sent out to members of organisations such as the National Trust or
      Tate Gallery. Customer magazines may be similar to consumer magazines in
      style and content. The articles tend to focus on, or are linked to, the brand‟s
      products, service and/or image. For example, Land Rover‟s customer magazine
      carries articles based around exploration and adventure. Customer magazines
      are predominantly distributed free of charge, with funding in the main coming
      from marketing budgets or club/society membership fees. Third party
      advertising is also used in some customer magazines. Customer magazines are
      the largest category of magazines accounting for 48% of volumes, and 65% of
      postal volumes.

2.157 Consumer magazines cover a wide range of interests and are aimed at the
      general public, for example, Men‟s Health, Marie Claire or The Economist. They
      can be distributed in a variety of ways: free distribution, charged at the
      newsstand, postal subscription or digitally. The newsstand tends to focus on the
      most popular magazines that have wide appeal. By contrast, titles serving more
      niche interests are available principally via postal subscription. The Advertising
      Association estimates that the top 500 titles for which it could obtain acceptable
      circulation figures135 represent 95% of total circulation. However it notes that the
      remaining 5% represents a long thin tail, suggesting many titles with low
      volume. It is estimated that almost 1.2 billion copies of consumer magazines
      were sold136 in 2008. Revenue from selling advertising space in consumer
      magazines represents a considerable proportion of their total revenue; the
      Advertising Association estimated advertising revenue to represent around 36%
      of total consumer magazine industry revenue, which as a whole was estimated
      to be in the region of £1.8bn.


134
    PPA (2010)
135
    Advertising Association, 2009, The Advertising Statistics Yearbook 2009
136
    Advertising Association,2009, The Advertising Statistics Yearbook 2009




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2.158 Figure 16 below shows the estimated volumes of each magazine type and the
      number sent by post.

Figure 16: Estimated magazine volumes 2008




Source: PPA, and APA analysis, Royal Mail submission for 2006 price control, and Advertising Statistics Year Book 2009


2.159 Table 8 below provides a summary of funding sources for publications by
      magazine segment.




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Table 8: Magazine revenue streams by segment

                           Business / Professional                      Customer                 Consumer

                           Paid for               Controlled
                                                  circulation
                                                                          137
  Cover Price                                                                                  

  Subscription Price                                                                            

  Third Party                                                                                 
  Advertising

  Company/ Brand                                                        
  funded


2.160 Academic journals are generally published in a set number of volumes per year
      and focus on a specific area. For example, Agricultural Water Management is
      published 12 times a year and focuses on papers of international significance
      regarding the science, economics and policy of agricultural water management.
      The publication dates for journals are not necessarily fixed and are not generally
      time sensitive. So far as funding is concerned, academic journals carry little, if
      any, third party advertising and, the cost of production is borne entirely by the
      subscriber. The subscription base is likely to consist of a high proportion of
      institutions (universities, libraries, and corporations) as well as individuals.


Postal Services

2.161 In this section we consider the postal services available to publishers for the
      distribution of their magazines. We consider Royal Mail first before considering
      alternative operators‟ products.

2.162 Royal Mail Presstream services (See Box 3) are dedicated to publications.
      However other Royal Mail products are also used for sending publications. For
      example, Mailsort services can be used for high volume publications mailings
      and Automated Standard Tariff Large Letter138 (ASTLL) services can be used
      for low volume mailings of publications that do not fulfil the volume requirements
      for Mailsort or Presstream.




137
    Where we have observed a cover price this is usually waived if the purchaser is a member of a loyalty scheme or purchases
additional products from the company.
138
    ASTLL requires a minimum of 250 items per posting.




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 BOX 3 Presstream

 Presstream is a Royal Mail service specifically for magazines, journals and
 newsletters. It offers a discount off the standard Mailsort 1400 tariff. For First Class
 the discount for a magazine between 250g and 500g would be around 11%. The
 service can be used to mail items that meet the following criteria:

          One sixth editorial content, certified by Royal Mail prior to sending;
          A minimum of two mailings a year consisting of at least 1,000 uniform Large
          Letters, A3 Packets or Packets, as defined by Royal Mail;
          The front cover should show the title, date and month or season of publication.

 The service offers the following discounts off the standard tariff:

          Sortation discounts;
          Volume related discounts;
          Profile discounts can be applied where there is a higher drop density in certain
          postcodes; this is not available if sortation and volume discounts have been
          offered.

 For mailings of over 250,000 items, Royal Mail offers a different price scheme. This
 does not involve additional discounts for sortation, volume, or postcode profile, but is
 significantly cheaper then the standard Presstream pricing.

 Presstream 1 is a First Class service and therefore has a quality of service target of
 91% next day.

 Presstream 2 is a Second Class service and therefore has a quality of service target
 of 97.5% delivered within three days.

 Presstream Premium is also available at selected delivery offices. This product
 allows for posting up to 1am aiming for same day delivery.
 Source: Royal Mail product information royalmail.com



2.163 Figure 17 below shows that Presstream volumes have declined by 39% since
      2006/07. Over the same period, consumer magazines have fallen by just over
      10%. However, the PPA and publishers state that their current strategies focus
      on growing their subscription base which would mean a heavier reliance on
      post. This also suggests that items that have traditionally been posted via
      Presstream are now being posted via alternative postal services, including
      those supplied by Royal Mail (e.g. Mailsort 3 for publications that are less time
      sensitive or ASTLL where the volume criteria of Presstream cannot be met).
      Publishers have told us that it is not uncommon for some large circulation titles
      to be mailed out using different products so as to minimise costs.




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Figure 17 Royal Mail Presstream volumes 2006/07 to 2009/10




Source: Postcomm analysis of Royal Mail data


2.164 Access operators carry publications mail. In terms of end-to-end postal
      operators, DX Group offers specific publications services, and also provides an
      end-to-end service covering a proportion of postcodes. Citipost has also been
      mentioned as an alternative for delivery in certain urban areas. Packets and
      parcels carriers provide an alternative end-to-end delivery service for some
      magazine traffic; however, they typically only offer delivery for heavy
      publications or where multiple copies are sent to a single location (discussed
      below).


Postal Subscriptions

2.165 Postal subscriptions provide a variety of advantages over the newsstand as a
      means of distribution of magazines. Subscriptions provide publishers with a
      known and stable income stream in advance of the life of the subscription. This
      helps the publisher‟s budgeting and cash flow management. It also provides a
      known audience (in terms of guaranteed circulation and known profile), which is
      beneficial for attracting advertising. Subscriptions are generally for one year.
      However, longer offers are increasingly available. For some titles, subscriptions
      can last up to three years.

2.166 Subscriptions also allow the publisher to manage the costs of production and
      reduce the wastage involved with newsstand sales. It is estimated that up to




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             30% of a print run can be wasted in the printing of additional copies to ensure
             sufficient supply at the newsstand.139

2.167 Finally, publishers have mentioned the importance of the relationship that they
      have with consumers through subscriptions. Publishers have stated that
      subscribers tend to purchase the magazine for a longer period than those
      purchasing from the newsstand. Subscriptions also give publishers the
      opportunity to grow their business by cross selling products based on the
      customer data which subscriptions allow them to collect. Thus subscribers can
      have a value that is greater than the subscription revenue that they provide.

2.168 The subscriber may also benefit from a subscription. They can obtain significant
      discounts off the newsstand cover price (the average discount offered across a
      range of magazines was 50.9%, this ranged from 18% to 90%).140 The
      subscriber also gets a guaranteed copy of the magazine often on a specified
      day (in some cases prior to the newsstand) and does not have to purchase
      each issue separately.


Print, production and postage costs

2.169 There are three main costs involved with producing a magazine for subscription:
      print, production and postage.

2.170 Print costs include paper, print and collation of the magazine. These tend to be
      procured through long-term contracts which make specific provisions for how to
      manage any price rises. The paper manufacturing and print markets are highly
      competitive; in some cases, despite known cost rises to the paper mills, some
      publishers have not seen input price rises for up to three years.

2.171 The production costs consist of the creative, journalistic and editorial content.
      These do not necessarily represent a large element of the cost base and can be
      altered on an issue by issue basis.

2.172 Postage is often the largest cost for the provision of postal subscription
      magazines, and can be up to 50% of the cost base for the magazine. Some
      publishers found the contracting and overall relationship with postal providers
      different from their other business arrangements, with few longer-term contracts
      and no ability to build in planning for future price rises. This increases the
      uncertainty for publishers when entering into subscription contracts of at least a
      year without full knowledge of the cost of provision.


139
      Pria (2006), The future of Magazines and Direct Mail 2015-2020: Implications for the printing industry, Pria International
140
      Figures are based on the weekly top ten magazines offered through Isubscribe.co.uk accessed on the 12 th August 2010.




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Section 4.2. Market Definition

2.173 In this section, we consider whether evidence on demand side substitution
      suggests that publications mailings should be seen as part of a wider market.
      We firstly examine the extent of direct substitution from both postal and non-
      postal alternatives such as packet and parcel delivery and newsstand. We go
      on to consider the likelihood that consumers would switch to non-postal
      alternatives in response to a 5-10% price increase. We conclude by setting out
      our provisional conclusions on whether publications mail should be seen as part
      of a wider market.


Direct constraints


Distribution alternatives

2.174 This section examines whether the relevant economic market should be
      widened to include demand side substitutes for distributing publications by post
      such as:

               Packet and parcel services (PPS)
               Self supply
               In street delivery
               Newsstand
               E-alternatives


Packet and parcel services

2.175 Packet and parcel services (PPS), as defined in the November 2010 decision
      document, generally involve a hub and spoke network used to deliver ordered
      goods to businesses and consumers. End-to-end PPS operators tend to have
      lower drop densities and higher delivery costs per item than letter delivery, but
      will offer premium services such as track and trace. The price differential
      between these services is generally significant: packet services presented in the
      table below range from 27%-131% more expensive than the large letter service
      depending on the weight of the publication.141




141
   We would not expect an alternative end-to-end PPS operator to be able to supply items of these weights at the same prices as
Presstream Packet which is Royal Mail‟s vanilla PPS product; we would expect alternative end-to-end PPS operators‟ prices to be
significantly higher.




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Table 9 Price differential between Large Letter and PPS Second Class
services142

Weight                                          Presstream Large Letter                      Presstream Packet

250g                                            36.7p                                        84.8p

500g                                            65.8p                                        102.75p

750g                                            94.9p                                        120.7p


2.176 Evidence from publishers suggests that they make some use of PPS networks
      to deliver some of their magazine traffic. This is particularly the case where the
      magazine is very large (heavy) or where multiple copies of the magazine are
      sent to the same non-residential building (such as hospitals and universities).
      The magazines are sent in bulk and then distributed locally by the buildings‟
      post room by prior agreement thereby reducing the unit cost of the delivery per
      magazine making it an efficient alternative to mail delivery. However, for the
      majority of magazines this would not be an option, as they tend to have a
      dispersed and unrelated subscription base.

2.177 We therefore do not consider that PPS would provide a competitive restraint on
      postal subscriptions for the following reasons:

                   The significant price differential between large letter and PPS services
                   make their use economically unfeasible.
                   Current use is limited to a small number of heavy titles or where bundling of
                   multiple issues is possible.


Self-supply

2.178 As with PPS operators, publishers could hire a „man and a van‟ and self supply
      distribution of magazines. We have not come across any publishers that use
      this approach. From our discussion with publishers, there are two issues that
      are raised as important for the delivery of magazines: the reach of the delivery
      service and timing. With the self supply approach both of these elements would
      be at risk without significant investment in creating an entire end-to-end
      network. The self supply approach lacks the economies of scale required to
      make delivery efficient.

2.179 Some large publishers do have their own distribution network for bulk delivery of
      Newsstand titles. However, due to the nature of the network it could not easily
      be adapted for home delivery. The drop density of magazines to the Newsstand


142
      Prices are calculated on Royal Mail‟s Presstream 2 price with no discounts for sortation, volume or profile.




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       (often bundled with daily newspapers and other publications) is much higher
       than delivering single magazines to a select number of addresses in a given
       postcode.

2.180 We therefore do not consider that self-supply would provide a competitive
      restraint on postal subscriptions for the following reasons:

           The lack of geographic reach that the service could achieve; and
           The lack of scale economies, which we consider would significantly
           increase the distribution costs.


In street delivery

2.181 This involves the magazine being offered free to the public in the street either by
      an individual or from a roadside container. This technique is used by some
      publishers. However it only tends to be used for general interest titles, e.g. Sport
      and ShortList.

2.182 We do not consider that this form of delivery would pose a constraint on the
      postal subscription. The subscription price is an income stream that could not
      be gained using this method of delivery. As regards magazines that are on
      controlled circulation, they rely on the knowledge of their audience to gain
      advertising which funds the magazine. The use of in street delivery would
      therefore involve a significantly different business model for the publisher.
      Further we note that the majority of magazine sent via postal subscriptions are
      not necessarily general interest titles, coming from the business/professional
      and customer segments.

2.183 We therefore do not consider that in street delivery would provide a competitive
      restraint on postal subscriptions for the following reasons:

           The loss of revenue stream from a subscription fee and an unknown
           audience would impact on the revenue achievable via advertising.
           The limited applicability of the distribution method to generalist titles only.


Newsstand

2.184 The newsstand refers to retail outlets selling magazines, including newsagents,
      supermarkets, petrol stations, and corner shops. Magazines are generally sold
      as single items at the full cover price. In general, the newsstand retailer charges
      around 25%-30% of the cover price to carry the magazine.




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2.185 The newsstand is the main distribution channel for the big name consumer
      magazines, such as TV Choice, Cosmopolitan, and Men‟s Health. However
      customer magazines do not have this option as they are targeted at a specific
      customer base and business/professional magazines are not suited for the
      newsstand as they have limited coverage. Niche consumer titles that do not
      have the mass appeal for the modern newsstand also rely more heavily on
      subscriptions.

2.186 Newsstand space has declined and therefore become more competitive as
      magazines fight for shelf space. This appears to be motivated by consumers
      changing their purchasing habits to supermarkets from newsagents.
      Supermarkets in general only wish to stock the best selling magazines, to
      maximise their returns on the retail space used. There is an opportunity cost
      involved in the stocking of niche title magazines that do not have the mass
      market appeal, where other products could be sold. This trend is less marked
      among newsagents due to the relative importance of magazines to their overall
      retail offering.

2.187 Around 18%143 of consumer magazines are sent by post. We understand that
      this is likely skewed towards monthly magazines, as weekly magazines tend to
      have a high postage to cover price ratio; possibly above 50%.

2.188 Almost 90%144 of business/professional magazine titles are sent via a postal
      service, with only 10% having a newsstand presence. Those that are sold from
      the newsstand tend to be either retail related magazines (e.g. the Grocer) or
      titles that have some wider appeal (e.g. PC Pro). There is also a proportion of
      business/professional traffic that is provided free via controlled circulation, such
      as Creative Head. It is likely that a significant proportion of these readers would
      not actively seek the publication if they had to pay for it and make an active
      choice to buy it from a newsstand. This coupled with the low newsstand
      presence amongst these titles leads us to the initial view that the newsstand
      does not constrain the price of subscriptions in the business/professional
      segment.

2.189 Around 75% of customer magazines are distributed via the postal channel and
      25% via in store delivery. In store delivery is only an option for those that have a
      „store‟ network such as Boots or NatWest. It is generally restricted to general
      retail, retail banking, and travel companies. By contrast, the top three
      magazines by circulation145 in the UK are all customer magazines published for




143
    PPA estimate provided to Postcomm July 2010
144
    PPA estimate provided to Postcomm July 2010
145
    ABC: Consumer Magazines Concurrent Release - December 2009




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        BSkyB,146 which does not have outlets in which it can present its magazine.
        Adapting these magazines for sale at the newsstand would alter their purpose
        from loyalty magazines to more generalised entertainment magazines. It would
        also be likely that the readership level that is currently achieved could not be
        matched by the newsstand.

2.190 Faced with a 5-10% increase in postal prices, only one smaller publisher said
      that they would have to drive more newsstand sales. On the whole encouraging
      newsstand sales was not mentioned as a reaction to an increase in postal
      prices. One large publisher stated that due to the benefits of postal subscription
      it would push for greater subscription volume rather than encourage use of the
      newsstand given a postal price rise. This suggests that given the combination of
      the cost incurred through the Newsstand supply chain, the associated waste,
      and volatile demand, the Newsstand is seen as an expensive option. In the
      main, publishers stated that, to the extent possible, they would seek to absorb
      the increased costs. They regarded passing on the cost to the consumer or
      advertiser as undesirable especially given the current economic climate.
      Publishers also noted that the long-term nature of subscription contracts
      imposed a constraint on the ability to raise prices once a contract had been sold
      to the subscriber.

2.191 It is important to note that publishers generally have two audiences: readers and
      advertisers. Advertisers tend to be interested in magazines that provide high
      levels of exposure to their advertisements. As such, publishers may not expect
      the cover price or subscription fee to be a profit centre, as keeping these prices
      low and circulation high allows the publisher a stronger negotiating position with
      advertisers, where the profits will be made.

2.192 In summary, we do not believe that the newsstand places a sufficient constraint
      on the postal price to widen the market definition of the publications application
      for the following reasons:

              Newsstand only appears to be a substitute for a minority of publications
              currently provided via postal subscriptions. This is particularly the case
              because newsstand space is at a premium.
              Publishers would not generally switch postal subscriptions to the newsstand
              if postal prices increased by 5-10%.
              The benefits derived from postal subscriptions by the publisher, in terms of
              reduced waste, increased customer loyalty and guaranteed demand makes
              postal subscriptions more valuable to publishers than equivalent sales at
              the newsstand.


146
  ABC: Consumer Magazines Concurrent Release - December 2009, Sky Magazine 7.4m, Sky Sports (UK) 4.1m, and Sky
Movies (UK) 3.4m




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E-alternatives

2.193 This section considers whether the electronic distribution of publications places
      a competitive constraint on the postal distribution of publications. E-alternatives
      offer a range of electronic distribution methods for the magazine content. The
      range includes a basic pdf presenting a carbon copy digital alternative of the
      magazine as well as an e-zine with page turning technology which reads more
      like the magazine. At the far end of the e-alternative spectrum would be a fully
      interactive website with video clip content.

2.194 All publishers interviewed stated that they have some form of e-alternative with
      their magazine. Many of the publishers stated that the e-alternative supported
      and complemented the print magazine brand. We could only find one example
      where a publisher had stopped its print edition in favour of an e-alternative.

2.195 Publishers indicated that they use web-based content to advertise the print
      edition. Web-based content is also used to promote the magazine and provided
      a feedback method for magazine development, through the use of forums and
      online communities. The content that was specifically mentioned was usually
      differentiated quite substantially from the print editions, for example, with the
      use of online forums or interactive content such as video clips. Some publishers
      are offering or moving to offer a more integrated approach, the e-alternative
      being used to deliver time-sensitive information (i.e. news) leaving the print
      magazine as a more editorial and analysis focused publication, thus highlighting
      the differentiation between the products.

2.196 Publishers that served a variety of markets noted that the applicability of the e-
      alternative to print publication varies considerably with sector. For example,
      magazines serving, say, the IT industries have seen a greater use of e-
      alternatives, when compared to magazines serving agricultural industries.

2.197 The PPA and some publishers stated that the requirements for an online
      magazine style publication are distinct from that of a printed magazine,
      particularly as regards the format, layout, interactivity and journalism required.
      The main differences arise because of the regularity of updating the information
      for an online magazine by comparison with a printed magazine. Instead of being
      updated on a monthly or weekly basis, there is an expectation that an online
      publication will be updated daily or hourly. Many publishers stated that
      producing an online magazine is not simply a matter of producing a magazine
      for print and placing it on the web. The differences are reflected in the fact that
      many publishers stated that they made limited use of their e-zines. Indeed, one
      publisher stated that they only used them in any capacity during the last period
      of strike action at Royal Mail.




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2.198 Publishers also highlighted that considerable upfront investment is needed to
      provide an e-alternative of sufficient quality to attract consumers. Added to this,
      publishers had concerns about the ability to monetise the e-alternative. This
      appears to be a barrier to switching to e-alternatives, with many publishers
      awaiting further research. The success or failure of the Times move to charge
      for e-content will likely have a significant impact on publishers‟ willingness to
      switch in the future.

2.199 If postal prices were to increase by 5-10%, no publishers said that they would
      switch significantly to e-alternatives. However a limited number of publishers
      suggested that they would promote more a move to e-alternatives. Some
      publishers were able to provide examples of where this had happened to some
      degree. However, this generally reflected a change in strategy with the
      magazine becoming a more highly editorialised part of the offer or a premium
      part of the brand offer, and e-alternatives being used for updates between less
      regular issues.

2.200 Publishers perceived that there was a trend towards electronic consumption of
      information. One publisher stated that, with the launch of the iPad, they had
      seen a significant increase in the volume of their e-zines being used and
      purchased. In the event of a rise in postal prices, some publishers indicated that
      they would actively seek to accelerate this trend.

2.201 Historically Royal Mail has suggested that e-substitution imposes a
      considerable constraint on postal pricing. It now considers that the extent of this
      demand side constraint varies by application. However, we have found only
      limited occurrences of e-substitution occurring in publications with only one
      known title moving completely out of print to online.


The future of e-distribution vs. postal distribution

2.202 Many publishers have mentioned that, in the future, e-readers and especially
      the iPad and other tablet devices with page turning technology will change
      consumer behaviour. Publishers consider that the change will come as the e-
      alternatives become more able to replicate the magazine experience and the
      relationship that readers have with the print editions. Publishers predicted that
      this might occur at the earliest within 18 months. However, the majority of
      publishers considered that this was more likely to be on a three to five year time
      horizon. The impact of this will depend on a number of issues such as
      penetration of these devices and the value of the advertising revenue that they
      can generate.




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2.203 In summary, we consider the following evidence does not indicate that we
      should widen the market definition to include e-alternatives:

           Publishers consider electronic magazines to be complementary to their print
           editions.
           The journalistic and editorial requirements for an electronic publication are
           different from that of a printed publication, for example, electronic
           publications are a more interactive offering.
           Publishers currently do not consider that there is a clear way to monetise e-
           alternatives in both of charging for a cover price and the revenue that can
           be gained via advertising.
           If postal prices were to increase by 5-10%, no publishers said that they
           would switch significantly to e-alternatives; and
           Technological change may in the future drive a change in consumer
           behaviour which may result in e-alternatives becoming more substitutable
           for postal distribution of publications. However, it is not clear that this
           change is sufficiently imminent to justify defining a wider market at this
           stage. If, as mentioned, above e-alternatives cannot produce suitable
           revenue streams for publishers, even a significant shift in consumer
           preference may not remove the need for physical copies.


Reducing the cost base

2.204 In our discussions with publishers, they highlighted three main options for
      maintaining their cost base in the event of increased postage costs. The
      applicability of each of the options varies by magazine:

           Change paper quality – this affects the weight of the magazine and can
           result in savings of both paper costs and postage. However, changing paper
           quality may have an adverse impact on the desirability of the magazine. For
           example, the paper used for daily newspaper is of a lower quality then that
           used in high quality magazines. Furthermore, paper quality is not just
           selected to reflect the perceived quality of the magazine, but also to support
           the content as the paper quality also impacts on the resolution quality of
           printed pictures. Lower paper quality could therefore result in lower
           advertising revenue.
           Cut pages or shift editorial to advertising ratio – this can change the weight
           of the magazine and/or bring in additional revenue. However, one publisher
           mentioned that it specifies a minimum proportion of the magazine for
           editorial content; this was due to that publisher‟s perception that too much
           advertising space would have an adverse impact on the quality of the
           magazine. Not only subscribers but advertisers may also consider it less
           appealing to advertise in a magazine with low editorial content.
           Furthermore, if the editorial content drops below one sixth of the magazine it
           would not qualify for Presstream discounts.



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                 Reduce the frequency or reach of circulation – this is only really an option
                 for the customer segment where the magazine itself is a form of brand
                 loyalty scheme and the company can decide which customers receive a
                 copy. For subscription or membership magazines, there is a requirement to
                 fulfil the printed edition. With controlled circulation magazines, advertising
                 tends to be sold on the scope of market coverage. Therefore, any reduction
                 in reach would have an impact on the attractiveness of the publication to
                 advertisers.

2.205 This evidence suggests that there are often only very limited direct substitutes
      for publications mail. In the event of an increase in price of post, it is possible
      that publishers would take measures to reduce their costs of postal distribution
      by reducing the weight of their publication or the frequency or reach of
      circulation. However, we do not believe that these constraints, either individually
      or collectively, are sufficient to constrain the price of publications mail.


Responses to the November “minded to” Decision

2.206 In November 2010 Postcomm published its “minded to” decision to allow Royal
      Mail to raise an extra £100m in revenue in 2011. On average this would mean
      an increase of 12% on bulk mail and 15% on the price for Royal Mail Wholesale
      access products. It could also mean price increases up to a maximum of 19%
      for individual bulk products. Publications mailers‟ responses to our consultation
      highlight that a 19% increase in particular would significantly encourage
      consideration of a shift towards electronic alternatives.147

2.207 The implications of these responses are discussed in the introduction section
      above. In that section we explained why this increase is unlikely to have an
      impact on our market definition analysis or our provisional conclusions.


 Indirect constraints

2.208 Non-postal alternatives may exercise an indirect constraint on the price of postal
      subscriptions where receiving customers would switch to alternatives in
      response to a 5-10% increase in the price of post. The extent of this indirect
      substitution will depend upon:

                 The proportion of the total cost of providing the retail service that is
                 accounted for by the price of post (“dilution effect”); and
                 The extent to which increases in the costs of the postal service are passed
                 on to consumers.


147
      See www.psc.gov.uk for published responses to our November 2010 decision document




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2.209 So far as subscriptions are concerned, publishers have informed us that the
      cost of postage can in some cases make up to 50% of the total cost of
      delivering the magazine to the customer. This is however not generally itemised
      separately on a subscription invoice.

2.210 As such, the consumer is not necessarily aware of the delivery cost, especially
      for magazines where there is a cover price and subscriptions are discounted.
      This is also the case with controlled circulation where the magazine is provided
      free of charge. As a result, there may be a perception that postal subscriptions
      are relatively cheap. As the delivery cost is hidden from the consumers it is
      difficult to ascertain if they would change their purchasing decision based on
      postal price changes if they were aware of the price changes being related to
      postage.

2.211 One publisher mentioned that it may be possible, although as yet untried in the
      market, to run a two tier subscriptions service based around the delivery service
      of the magazine. An example would be for a premium to be paid to receive the
      magazine on the day of publication, rather than a standard price for receiving it
      a day or two later. This would allow publishers more flexibility in their offering
      and allow them to bring the delivery cost of subscription more inline with the
      revenue stream.

2.212 Many stated that their use of e-alternatives was limited due to the uncertainty
      around consumer reactions. Publishers consider that many consumers have a
      relationship and related reading experience with a magazine. Publishers were
      concerned that the relationship that people have with print magazines and the
      impact of magazines could not be replicated on a screen based product and
      were awaiting research to indicate that it was becoming a viable alternative.
      According to the PPA, a consumer magazine is read for an average of 50
      minutes. The ability to replicate this level of engagement for electronic
      alternatives will determine their success. However, there is currently a concern
      that a move to e-provision would risk alienating the publisher‟s readership, and
      would affect demand for the magazine. This would therefore constrain a
      publisher trying to move from print to e-alternatives.

2.213 The evidence on indirect substitution suggests that the market should not be
      defined more widely, for the following reasons:

           The price of distribution is hidden from the consumer. As such, the decision
           to purchase a subscription via post is not based on complete information.
           This is even more acute with regards to controlled circulation magazines
           which are provided free of charge.
           Consumers have a relationship with printed media that provides a level of
           interaction that is not currently replicated with e-alternatives.



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Price elasticity of demand

2.214 Evidence from Royal Mail on price elasticities is supportive of the evidence that
      we have collected, as it states that Publications mail is price inelastic ([]). The
      product specific elasticity for Presstream 1 appears to be more elastic than
      Presstream 2, however this reflects a high one-way cross-price elasticity to
      Presstream 2.148,149

Section 4.3. Provisional Conclusions

2.215 Postcomm considers that the evidence does not suggest that there should be a
      wider market including postal subscriptions for the following reasons:

                Postal subscriptions are complementary to other distribution rather than
                substitutes, and fulfil a need for the publisher to reach all its customers.
                Therefore postal price increases are likely (in the long-term) to be passed
                on to subscribers rather than causing a switch out of post.
                Indirectly due to the pricing structure of subscription there is a dilution effect
                with customers not being aware of postal price rise. Also customer loyalty to
                the printed product and the experience of reading preclude shifting from the
                postal subscription channel for a significant number of publications.
                Price elasticities indicate that publications mail is inelastic.


Consultation Question
Q3.       Do you agree that there is insufficient demand side substitution between
          publications mail and non-postal alternatives provide for them to be included in
          the same market?




148
    This means that as the price of Presstream 1 rises those using the service are more likely to move to Presstream 2 than other
services.
149
    Publications elasticity estimates obtained from Royal Mail‟s SPACE model.




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Section 5: Social

Section 5.1. Introduction

2.216 In this section of the retail market study we consider whether social mail should
      be seen as part of a wider market, including non-postal media such as email,
      telephone, text messaging and internet. We define social mail as all Letter and
      Large Letter mail originating from and paid for by residential customers. Social
      mail therefore includes items that are purely social in function such as personal
      letters, postcards and greeting cards as well as those that are more
      transactional like payments of bills and official mail. In 2009/10 social mail
      accounted for 10% of Royal Mail Retail‟s total revenue.150

2.217 We believe that this definition is appropriate for carrying out a demand side
      analysis as it accounts for the fact that the same group of consumers (i.e.
      residential customers) make the decision to purchase the postal services to
      send each of these types of items. The definition of social mail does not include
      special delivery or international mail products. The former falls within the PPS
      market defined in the November decision document while the latter will be
      considered in a later consultation.

2.218 The remainder of this section is set out as follows:

               The first section gives some background information on social mail. It sets
               out the different types of communication, the frequency of mailings, the
               postal services that are used and the non-postal alternatives available.
               The second section considers the extent of switching between post and
               non-postal media and the direct constraints acting on social mail.
               The final section contains our provisional conclusions on whether social
               mail should be seen as part of a wider market.


Background

2.219 In June 2010, Postcomm commissioned Ipsos MORI to undertake a survey with
      the aim of improving our understanding of retail mail markets.151 This study
      began with a residential survey which assessed usage of postal services, price
      awareness and sensitivity and switching to non-postal alternatives. Set out
      below are the different types of social mail that the survey considered and an
      example of each:



150
   Royal Mail RFI submission, 1 November 2010.
151
   Postcomm Retail Market Survey 2010, Report of Findings From Research with Business Mailers and Residential Customers, a
report for Postcomm by Ipsos MORI, December 2010




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               Payment of bills: a cheque sent by a resident to his or her utility company in
               order to settle a bill he or she has received.
               Official mail: a letter sent by a residential customer to a government agency
               or a letter of complaint to a business.
               Social and personal letters: a letter sent by a resident to a friend.
               Invitations, greeting cards and postcards: a wedding invitation, birthday
               card, Christmas card or postcard sent by a resident.

2.220 The Ipsos MORI survey found that on average social customers152 send
      approximately six letters per month. However, the average number of items sent
      by customers varies depending on their age, social grade and income. Mailers
      aged over 55 send over twice as many items on average as those aged 16 to
      24. Those with an income greater than £35,000 or in social grade AB also send
      above average amounts of social mail.

2.221 These findings are broadly consistent with those detailed in a further piece of
      research, published in November 2010,153 which TNS BMRB carried out for
      Postcomm and Consumer Focus. This survey found that on average social
      customers send 5 items per month and 38% send 1-2 items per month. Further,
      the survey indicates that retired customers and customers living in rural areas
      are more likely to be higher volume senders (sending six or more items in an
      average month). Social customers‟ average monthly volumes are detailed in
      table 10 below:

Table 10: Volume of letter mail sent by social customers in an average month
Number of items sent
                                    1-2                  3-5                  6+                 None             Don’t know
    per month


      Percentage of
                                     38                   22                  20                   15                   5
      respondents

Source: TNS BRMB survey


2.222 Both the surveys mentioned above found that social customers send personal
      communications154 more often than any other type of mail. Further, the TNS
      BRMB survey found that around half of respondents report sending cards,
      personal letters, invitations etc. on a monthly basis, while the Ipsos MORI
      survey found that around 70% send this type of mail at least once a month. A
      full breakdown of customers‟ propensity to send different types of social mail is
      set out in figure 18 below:

152
    The Ipsos MORI survey uses the term “residential customer”. We have substituted this with “social customer” although the
meaning of the two terms is identical. The Ipsos MORI survey also considered packets and parcels sent by residential customers.
These items are excluded here as they fall within the PPS markets as decided on in the November decision document.
153
    http://www.psc.gov.uk/documents/1182.pdf
154
    The term personal communications covers both the social/personal letters and invitations/greetings cards/postcards categories.




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Figure 18: Most frequently sent type of social mail (%)




Source: Ipsos MORI survey




Services used

2.223 As alternative operators do not offer services for single piece items, social
      customers typically use Royal Mail‟s stamped services to send all of their
      mail.155 The cost of purchasing and maintaining a franking machine means that
      it is unlikely to be a feasible alternative for most social mailers. Therefore, the
      following services are mainly used:

               Stamped First Class
               Stamped Second Class

2.224 Social customers can purchase stamped services through both post offices and
      a wide range of retail outlets. The Ipsos MORI found that the vast majority
      (87%) of stamps are bought as booklets or in multiples and that these are
      equally likely to be bought at retail outlets as from the post office.156 More
      recently, consumers have been given the choice of paying for stamped services
      via the internet through Royal Mail‟s Online Postage application and
      SmartStamp.157




155
    Due to the size of their mailings, social customers are not able to access Royal Mail‟s bulk mail services.
156
    Ipsos MORI survey, figure 17, shows that 44% of customers buy booklets of First or Second Class stamps from a retail outlet
and 43% buy booklets or multiples from the Post Office. Only 9% buy single stamps from the Post Office or a retail outlet.
157
    Both require a computer and a printer. SmartStamp is a service which requires a monthly fee in addition to the postage price.
Online Postage is a completely free service; the customer simply pays the equivalent price of a stamp. An online user can pay for
it securely using a prepay account, credit or debit card.




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2.225 Figure 19 below shows the volume of First and Second Class stamped services
      sold over time. It shows that First Class stamped volumes exceed Second Class
      stamped volumes but that this gap has narrowed over the last 5 years as total
      volumes have declined by 27%. Although business mailers are not considered
      in this chapter, stamped services are also used by this group of customers.
      Indeed the Ipsos MORI survey indicates that the vast majority of small business
      mailers (those sending less than 50,000 items per annum) use stamped
      services.158 As a result, we consider it likely that social mail volumes have
      reduced by less than stamped mail volumes. This is supported by Royal Mail‟s
      ILTM model which estimates the decline in social mail to be approximately 11%
      since 2005/06.

Figure 19: Volumes of stamped services sold




Source: Postcomm analysis of Royal Mail data


2.226 The Ipsos MORI survey considered the extent to which the following factors
      influenced customers‟ decisions whether to use First or Second Class services:

                   Speed of delivery;
                   Security / privacy;
                   Value of the item;
                   Cost of postage; and



158
      Ipsos MORI survey, figure 88, shows that 79% of small business mailers use stamped services for all of their letter traffic.




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                Perception.159

2.227 It found that customers overwhelmingly considered speed of delivery to be the
      most important factor.160 The cost of postage was considered to be relatively
      unimportant by customers possibly because it represents a very small
      proportion of their total spend. This is consistent with the survey‟s finding of low
      levels of price awareness among social customers (discussed in more detail
      below).


Non postal alternatives

2.228 The recent decline in social mail volumes has been mirrored by an increase in
      the level of new media penetration in the UK: from 2006 to 2010 household
      internet access increased from 57% to 73%,161 while more than 80% of
      households owned at least one mobile phone in 2009, up from 65% in 2001.162
      The range of non-postal alternatives available to social mailers include the
      following:

                Email;
                Internet:
                i     Social networking;
                ii    Instant messaging;
                Fax (particularly for sending official mail);
                Fixed line telephone;
                Mobile telephone;
                Text messaging; and
                Direct delivery (e.g. giving a birthday card to a friend in person).

2.229 The Ipsos MORI survey explored customers‟ preferences for some of these
      different media in more detail. Table 11 below sets out customers‟ preferences
      for different types of media when focussing on a particular aspect relevant to the
      decision making process.




159
    The survey asked customers whether they did not want the recipient to think that they were unwilling to use a First Class
stamp.
160
    81% of customers thought this was either fairly or very important according to the Ipsos MORI survey, figure 26.
161
    See http://www.statistics.gov.uk/pdfdir/iahi0810.pdf
162
    See http://www.statistics.gov.uk/cci/nugget.asp?id=868




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Table 11: Customer preferences for different media

Aspect                                   First choice                           Second choice

Cost                                     Email                                  Telephone

Convenience                              Telephone                              Email

Proof of contact                         Post                                   Email

Speed of delivery                        Telephone                              Email

Personal touch                           Telephone                              Post

Importance of the message                Telephone                              Post

Reach                                    Email                                  Telephone
Source: Postcomm analysis of Ipsos MORI information


2.230 The above table indicates that social customers prefer to use post when proof of
      contact is required, suggesting that post will remain an important medium for bill
      payments and official correspondence. Customers considered post an effective
      medium to a lesser extent when sending messages that are either important or
      personal; however customers are more likely to prefer using the telephone.

2.231 In terms of bill payments, consumers are increasingly offered a choice of non-
      postal payment channels including: direct debit, standing order, internet banking
      and telephone banking. The overall level of uptake of these non-postal
      alternatives will clearly depend on their availability. Consistent with the lower
      levels of broadband access in some rural areas, the Ipsos MORI survey found
      that a higher than average proportion of residential customers living in deep
      rural areas pay bills by post at least once a month. Further, the convenience
      offered by non-postal alternatives will depend on the characteristics of the
      sender. For example, a large mobile operator told us of a particularly high
      uptake of e-billing among its younger customers.

2.232 Social mailers can also send official mail by alternative means depending on the
      purpose of the communication. For example, the majority of consumer product
      packaging includes an email address to which customers can send queries or
      complaints, while many universities now accept faxed or scanned supporting
      documents from undergraduate applicants. However there remain some forms
      of official mail which cannot be sent by other means, including:

              A passport application – The IPS specifies that it must be signed and
              accompanied by an original copy of one‟s birth certificate.
              A driving licence application – The DVLA requires various supporting
              documents for proof of identity, such as a passport and a National Identity
              card issued by a member state of the European Union/European Economic
              Area (EU/EEA).




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                Planning permission – While the application process is primarily carried out
                online, a number of supporting documents must be sent to one‟s local
                council, including an air quality assessment, a flood risk assessment and a
                structural survey.

2.233 As regards greetings cards and invitations, the growth of online print-on-
      demand services163 offered by companies such as Moonpig.com,
      Funkypigeon.com and Hallmark has presented social mailers with new
      alternative methods by which to send these types of communications. The
      concept has proved popular among some consumers as it provides the
      following benefits:

                More choice than high street retailers;
                The ability to personalise items and include the sender‟s own pictures, text
                etc;
                The online retailer sends items to your chosen destination;
                The convenience of being able to do this from your home/office computer;
                and
                The recipient still receives a physical greetings card.

2.234 These online retailers are able to offer consumers bundled prices that are
      comparable with high street prices (when postage costs are added) as they
      send items via bulk mail products. As such, even if social mailers consider this
      channel to be a close substitute for sending greetings cards and invitations
      using stamped services, the competitive constraint is exerted by another postal
      service rather than a non-postal alternative.

Section 5.2. Market Definition

2.235 In this section we determine whether a demand side analysis suggests that
      social mail should be viewed as part of a wider market, including non-postal
      media such as email, telephone, text messaging and internet. In particular, we
      follow the hypothetical monopolist framework by assessing the direct and
      indirect constraints operating on social mail.


Direct constraints

2.236 A postal service can be seen as an intermediate good because it is an input into
      a final product or service. This means that there are two sets of customers –



163
  This involves the consumer selecting his or her item online. The online retailer then posts the item to the desired address on
behalf of the consumer. Consumers pay a bundled price that covers both the item and postage.




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         sending and receiving – who respectively exert direct and indirect constraints on
         postal prices.

2.237 We consider the direct constraints operating on social mail by firstly setting out
      the characteristics of social mail and the factors that influence customers‟
      decisions to switch to non-postal alternatives. Second, we report our findings on
      customers‟ price awareness. Third, we consider the evidence from the Ipsos
      MORI survey that relates to how customers would respond to a 5-10% increase
      in postal prices. Finally, we look at the reactions to historical price changes. By
      considering this evidence „in the round‟ we reach a view on whether the social
      mail application should be defined any wider than post based on direct
      constraints.


Characteristics of social mail

2.238 The likelihood that social customers will switch to a non-postal alternative in
      response to a 5-10% increase in price will partly depend on how much of the
      total cost of sending an item is made up of postage costs. The cost of postage
      will make up a varying proportion of the cost of the final mail piece depending
      on the price of the invitation, greeting card or postcard. The prices of birthday
      cards generally range from £1 to £6.164 Assuming a customer purchases a card
      for £2.50 and posts it using a First Class stamp, postage will account for about
      16% of the total cost. The cost of postage is likely to make up a similarly low
      proportion of the total cost of sending invitations, although items will cost more
      to post if sent via the Large Letter format (First Class and Second Class
      stamped services cost 66p and 51p respectively). Furthermore, some
      consumers might respond to a postage price increase by either purchasing
      cheaper greetings cards (given the wide range available) or trading down from
      First Class to Second Class stamped services.

2.239 The sending of social / personal letters has largely been replaced by
      correspondence via telephone, email and internet postings. As a result, the
      individuals who continue to send letters for this purpose are likely to be either
      loyal to the medium of post or not internet users. This is consistent with the
      Ipsos MORI survey which indicates that social/personal letters are typically sent
      by those aged over 65 years old and those earning less than £10,000 per
      annum. Therefore, despite the fact that postage represents the majority of the
      total cost of sending social/personal letters, it is unlikely that a 5-10% increase
      in the cost of post will result in a substantial amount of switching to non-postal
      alternatives.


164
  This is based on the prices charged by the following retailers as of 13/12/2010: Tesco - £0.99-£2.49; Hallmark - £2.00-£5.80;
Marks and Spencer - £1.99-£4.99; Asda - £1.99-£5.75.




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2.240 Moreover, further survey evidence suggests that post will always be used for
      some forms of social communication due to the sentimental value associated
      with sending certain mail items. Postcomm‟s 2009 customer survey found that
      92% of customers will always or mostly send Christmas / birthday cards by
      post.165 The TNS BRMB survey put customers‟ preferences for sending
      greetings cards by post down to the emotional significance of the
      communication. It noted that a hand written birthday card would often invoke
      greater emotional significance compared with the same message sent in a text
      or email because of the time spent choosing the card, money spent purchasing
      the card, and the effort in posting it.

2.241 With respect to bill payments, a 5-10% increase in the price of stamped services
      is unlikely to induce a significant amount of switching as it would represent a
      very small fraction of the bills they are paying. To illustrate, assuming
      consumers pay the average UK monthly household energy bill, which amounts
      to approximately £100 per month,166 a 4p (10%) increase in the price of a First
      Class stamp will represent just 0.04% of the total bill cost. We reach the same
      conclusion for official mail, where a large proportion of the social customers who
      send this type of mail are prevented from switching to non-postal alternatives
      due to the need to prove identity and/or authenticity (e.g. for passport
      applications, planning permission etc.).


Price Awareness

2.242 Price awareness among customers can act as a useful indicator for the
      purposes of market definition. If customers display low levels of price
      awareness it is unlikely that their purchasing behaviour will be significantly
      affected by a 5-10% price increase. Alternatively, if customers show high levels
      of price awareness, they are more likely to notice the price increase and take a
      conscious decision as to whether to continue purchasing the postal service or
      switch to an alternative service. However, we note the limitations to the use of
      such information when defining markets. In particular, even if on average price
      awareness is low, it is possible that a wider market will be implied under the
      hypothetical monopolist framework if there are enough marginal consumers who
      are more price aware and who will switch in response to small increases in
      price.




165
      Postcomm 2009 customer survey, http://www.psc.gov.uk/documents/51.pdf
166
      See http://www.electricityprices.org.uk/average-electricity-bill, [Accessed 13 December 2010].




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Figure 20: Price awareness of 2nd and 1st Class stamps




Source: Ipsos MORI survey


2.243 The Ipsos MORI survey found that a significant proportion of both single stamp
      and booklet buyers either did not know what the relevant price was or were
      unable to estimate it. Only 6% and 7% of people surveyed were able to
      accurately recall the price of a single First and Second Class stamp
      respectively. Around 70% of respondents either did not know or
      under/overestimated the price of Second Class postage by more than 10%. For
      First Class, this figure rises to 75%. Price awareness among booklet buyers
      was even lower with only 1% of customers being able to recall the price of a
      book of twelve First or Second Class stamps.

2.244 The very low levels of price awareness exhibited by customers suggest that the
      large majority would be unlikely to notice a 5-10% increase in stamp prices. In
      fact, 65% of customers confirmed that they post letters so rarely that they do not
      think about the cost. Hence, customers‟ decisions to switch away from post are
      unlikely to be driven by small changes in price. This evidence on price
      awareness therefore does not support the view that social mail is part of a wider
      market.


Responses to hypothetical price increases

2.245 The survey also asked customers how they would react to hypothetical
      increases in the price of a First and Second Class stamp. Customers‟
      responses are summarised below:



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Table 12: Customer responses to hypothetical increases in the price of 1st and
2nd Class stamps

                             2p (5%) increase                                   4p (10%) increase

1st Class
                             71% likely to              18% unlikely to         63% likely to            25% unlikely to
                             continue using             continue using          continue using           continue using

                             2p (6%) increase                                   3p (9%) increase

2nd Class
                             60% likely to              32% unlikely to         54% likely to            37% unlikely to
                             continue using             continue using          continue using           continue using
Source: Ipsos MORI survey


2.246 As shown above, the responses to the hypothetical price increase questions
      indicate that the majority of respondents state that, when faced with a 5-10%
      price increase, they would continue to use the same class of service they were
      using previously. We note that responses varied depending on the degree of the
      price rise and speed of delivery – 71% of respondents indicated that they would
      be likely to continue using First Class stamps in the event of a 5% price
      increase compared to just 54% who gave the same response when faced with a
      9% increase in the price of Second Class stamps.

2.247 As the prices of First and Second Class stamps would converge in the event of
      a stand-alone Second Class price increase, the apparent higher willingness to
      switch away from Second Class may be reflective of intra-medium switching
      (2nd Class to 1st Class) rather than inter-medium switching (post to a non-
      postal alternative). Further, we take account of the tendency of stated
      preference questionnaires to overestimate the reactions to hypothetical price
      increases.167 In light of these considerations, we consider that these findings
      are consistent with the view that social mail is not part of a wider economic
      market that includes non-postal media.


Responses to April 2010 price increases

2.248 In April 2010 the prices of both First and Second Class stamps increased by 2p
      per item. As this is equivalent to a sustained 5% and 7% increase in the price of
      First and Second Class stamps respectively, its impact on consumer behaviour
      is informative for market definition purposes. The Ipsos MORI survey examined
      how customers reacted to the recent price increase and found the following:




167
      Hurley, S., 2010,The Use of Surveys in Merger and Competition Analysis, Journal of Competition Law & Economics




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                74% of customers did not change their behaviour as a result of the price
                increase. The majority of these customers are still sending a similar number
                of letters. About a third of these respondents, however, reported that they
                use telephone and email more but this decision was not driven by the
                increase in postal prices.
                13% of customers did change their behaviour as a result of the price
                increase. Most of these customers are sending a similar number of letters
                but are now using more Second Class post.
                13% of customers were not aware of the recent price increase.

2.249 We note that the majority of customers did not change their behaviour. Of those
      who have changed their behaviour, only 3% claim to be sending fewer letters
      nowadays to save money. This suggests that, when faced with an actual rise in
      the price of post, there is only a small amount of switching away from post by
      social customers.


Price elasticity of demand

2.250 Royal Mail has estimated that the price elasticity of demand for social mail is -
      0.4.168,169 These elasticity estimates imply that a 10% increase in the price of
      social mail would lead to only a 4% drop in volumes. These elasticity estimates
      are therefore consistent with our finding that demand for social mail is relatively
      price inelastic and that the competitive constraints from non-postal substitutes
      are weak.

2.251 As discussed above, one of the main reasons for the apparent lack of price
      sensitivity is the low levels of price awareness of social mailers, and the fact that
      post makes up a low proportion of people‟s income and expenditure – our work
      on affordability indicates that postal services make up less than 0.15% (40p) of
      average household weekly expenditure and less than 0.25% of low income
      household weekly expenditure in the UK.170


 Indirect constraints

2.252 Indirect constraints are a function of the likelihood of mail recipients to switch to
      non-postal alternatives in the event of a sustained 5-10% increase in postal
      prices. We consider that indirect constraints do not apply to social mail because



168
    Detailed in Veruete-McKay et al., 2010, Letter Traffic Demand in the UK: An analysis by Product and Envelope Content Type
169
    Royal Mail‟s definition of social mail includes a small element of transactional mail sent by consumers to businesses. As
transactional mail has a lower elasticity of -0.2, our definition of social mail may have an elasticity which is marginally higher than
Royal Mail‟s estimates.
170
    The Living Costs and Foods (LCF) survey 2009, Office of National Statistics (ONS)




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      recipients are typically unaffected by any price rises as they do not bear any of
      the costs of sending the item.

Section 5.3. Provisional Conclusions

2.253 When considering whether the market for social mail should be widened to
      include non-postal alternatives, the relevant question within the hypothetical
      monopolist test framework is whether social mailers would switch in response to
      a 5-10% price increase. In response to such a price increase, the evidence
      reviewed above suggests that social mailers would not switch to non-postal
      media in sufficient numbers to support the view that social mailings should be
      seen as part of a wider market including non-postal media.

2.254 This conclusion is supported by the fact that, when stamp prices increased by 5-
      10% in April 2010, most customers did not change their posting behaviour.
      Furthermore, we consider that the very low levels of price awareness render it
      unlikely that social customers would switch from post to non-postal media in
      response to a small price increase. The evidence also shows that customers
      have a strong preference for sending more personal communications such as
      greeting cards by post and that direct constraints are not strong enough to
      support the view that social mailings are part of a wider market.

2.255 We recognise that some social customers have switched to non-postal media
      and that this has contributed to the decline in social mail volumes. However we
      consider that this is indicative of a change in preferences in response to the
      development of alternative ways of communicating rather than substitution
      based on price and thus does not support a wider market definition.


Consultation question
Q4.   Do you agree that there is insufficient demand side substitution between social
      mail and non-postal alternatives provide for them to be included in the same
      market?




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Section 6: Fulfilment

Section 6.1. Introduction

2.256 In this section we consider whether sending fulfilment items by mail should be
      seen as a part of a wider market, including non-postal alternatives such as
      electronic means of delivery (email, downloading files from the internet), and
      self-collection, e.g. from a „bricks and mortar‟ retail outlet.

2.257 We define fulfilment mail as Letters and Large Letters which deliver a tangible
      item that a customer has requested. We note that the Hooper Review defined
      fulfilment as goods ordered by mail, internet or telephone which need to be
      delivered to residential consumers and businesses.171 In line with the Hooper
      Report definition, we intend to focus on items ordered by both consumers and
      businesses. As this part of the market analysis is limited to the Letters and
      Large Letters format,172 we are considering fulfilment items that are generally
      able to fit through a letter box.

2.258 The remainder of this section is set out as follows:

                The first section provides some background information on fulfilment mail. It
                sets out the types of customers who send fulfilment mail, the postal services
                that are used and the non-postal alternatives available;
                The second section considers the extent to which non-postal alternatives
                provide demand side substitutes for fulfilment mail; and
                The final section sets out our provisional conclusions on whether fulfilment
                mail should be seen as part of a wider market.


Background

2.259 We conducted interviews with thirteen fulfilment mailers to explore the following
      issues: who sends fulfilment mail, the postal services used, and the non-postal
      alternatives available.


Senders of fulfilment mail

2.260 Our interviews with fulfilment mailers indicated that the main Letter and Large
      Letter items sent by post are:


171
    Hooper, R., et al, 2008, Modernise or decline: Policies to maintain the universal postal service in the United Kingdom , pg 26
172
    PPS items are not covered. This is because, in the May and November 2010 documents, we have already defined the market
for Packet and Parcel services (PPS) as all packets and parcels weighing up to 32kg and all Letters and Large Letters which are
not subject to the licensing requirements, but excluding those Letters and Large Letters conveyed using vanilla services.




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                Government documents;
                Brochures and catalogues (following requests from customers);
                Tickets for travel and entertainment and sports events, e.g. Ticketmaster
                and thetrainline.com;
                Small items, such as books, CDs, games, jewellery, and gadgets sent out
                by online and mail order retailers, e.g. Amazon, Play.com and Argos; and
                Bank or credit cards being sent on the prior request of the customer. This
                therefore excludes mail sent automatically to the customer e.g., as part of a
                contractual arrangement (such as the renewal of expired credit card).173


Postal Services

2.261 Most fulfilment mail is delivered through Royal Mail„s foot based delivery
      network.

2.262 The Royal Mail services which were typically identified by fulfilment senders in
      our survey were First and Second Class services for Packetpost, Cleanmail,
      Mailsort and Standard Tariff Letters. Fulfilment Letters and Large Letters
      services are estimated to represent approximately 4% of Royal Mail‟s total
      Letters and Large Letters revenues.174

2.263 Access operators also carry fulfilment mail within the mail services that they
      provide.175 We have not been able to obtain detailed information on whether
      fulfilment mailings represent a substantial proportion of the volumes carried by
      alternative operators. However, of the 13 fulfilment mailers we interviewed, only
      two (a travel company and a financial services provider176) have switched
      significant volumes to alternative operators. Both stated price as their main
      reason for doing so.




173
    Cards sent out automatically, e.g. when previous cards expire, are classified as transactional mail.
174
    Royal Mail Letters and Large Letters total revenue data, 2009/10. Source: Royal Mail.
175
    Alternative operators use their Downstream Access arrangements to inject mail into Royal Mail‟s network, but currently do not
offer a product dedicated to fulfilment mail.
176
    This company also stated that it used more expensive tracking services when sending out credit cards in higher risk areas.
However, since these services are not subject to licensing requirements (on the basis that they are likely to cost more than £1 to
send) and are not conveyed using vanilla services they fall within the scope of the PPS market, rather than the Letters and Large
Letters markets. See November decision document.




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Non-postal alternatives

2.264 Research carried out by Frontier177 on behalf of Postcomm suggests that, for
      fulfilment mail, the following can be considered potential alternatives to postal
      services:

               Collection point services:178 These allow customers to request their items to
               be dropped off at a convenient location rather than delivered to their
               address. For example, DX operates a network of collection points around
               the UK. Other providers of these services are Bybox and Kiala.
               Email: Some companies are able to send items ordered by customers via
               email. For example, some airlines such as British Airways send e-tickets to
               their customers. Other companies such as the thetrainline.com have also
               introduced e-ticketing179 alternatives such as Print your own and Mobitix. In
               addition, several hotels now send out booking confirmations by email.
               Electronic downloads: For some items, for example, CDs and DVDs, it is
               possible to download an electronic version of the item directly through the
               internet using a computer or mobile device. Examples of this would include
               iTunes and Lovefilm‟s Watch Online service which enable customers to buy
               media content in electronic format. Spotify allows customers to stream
               music directly to their mobile phone or computer over the telephone
               network.180 Amazon‟s Kindle and Apple‟s iPad allow individuals to download
               and read books.181
               Self-collection: Senders could allow customers to collect items ordered
               from a retail outlet instead of posting to an address. For example, tickets for
               an event can be collected from the venue box office or train tickets can be
               collected from self service machines or ticket offices in stations.
               Self-supply: Senders may choose to operate their own delivery network to
               supply items to customers.
               Retail outlet: Companies have the option of retailing items in outlets so
               customers can purchase items directly from the point of sale.
               PPS: Companies have the option of sending items to customers using
               packet and parcel services.

Section 6.2. Market Definition

2.265 In this section we consider whether the competitive constraints from non-postal
      alternatives to fulfilment mail are sufficiently strong for those alternatives to be
      considered as part of the relevant economic market. We consider both the
      willingness of the senders of fulfilment mail to switch to non-postal alternatives

177
    Frontier Economics, March 2010, Research on the Wider Market for Packets/Parcels Services, a report prepared for
Postcomm,Table 1, [Online], http://www.psc.gov.uk/consultations/may_2010_consultation
178
    Parcelpark offers CPS for just £1 per parcel,http://www.parcelpark.com/customer/welcome.html, [Accessed January 2011]
179
    http://www.thetrainline.com/about-us/product_and_innovation.shtml
180
    http://www.spotify.com/uk/mobile/overview/, [Accessed August 2010]
181
    http://www.amazon.co.uk/Kindle-Wireless-Reader-Wifi-, [Accessed August 2010].




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          (direct constraints), and the extent to which price increases would induce
          switching by the final consumer (indirect constraints) non-postal.

2.266 The degree of competitive constraint imposed on post by non-postal substitutes
      is likely to vary depending upon the type of fulfilment item. In particular, the
      constraints are likely to differ depending upon whether an item is purely
      physical, or whether it can also be transformed and sent in electronic form. For
      example, a ticket sent by post may also be collected from a retail outlet, sent by
      text as a reference number or sent in an email to be printed (sometimes with an
      electronic barcode) for use as the ticket. By contrast, a physical item, such as a
      bank card sent by post, has no electronic substitutes. Postal delivery of such
      items can only be substituted by a collection point or self collection at a branch.
      We have therefore considered the substitution possibilities for these two broad
      categories of fulfilment items separately.

2.267 In addition, whilst it may be technically possible for any one of these alternatives
      to be used by senders, in terms of assessing the potential substitutability with
      post, the key issue for market definition purposes is whether sufficient
      substitution would occur in response to a 5-10% increase in prices to justify
      including these alternatives in the same market.

2.268 We also consider the evidence provided by Royal Mail on the price elasticity of
      demand for fulfilment mail.


Direct constraints


Items which can be sent in physical form only

2.269 These fulfilment items include SIM cards, bank/credit cards182 and certain
      government documents, e.g. vehicle licence discs and certificates for birth,
      marriage and death.183 One fulfilment mailing house noted that, for certain items
      where physical products are being provided, there is no real alternative to mail.

2.270 For these items, it may be possible for senders to switch from offering postal
      delivery to distributing them in a retail outlet, or providing a collection point for
      customers to pick up the items. However these direct substitution possibilities
      are likely to be limited as switching to an alternative business model is likely to
      incur significant sunk costs.



182
   Some bank and credit cards are sent by Special Delivery which is part of the PPS markets.
183
   Certificates are despatched by post as by law, information supplied by the General Register Office can only be given in the
form of a certificate,www.gro.gov.uk/gro/content/certificates, [Accessed January 2011]




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2.271 Businesses may also wish to promote post as the option for customers if this
      means that they incur fewer distribution costs elsewhere in their business. For
      example it may be more cost effective to use postal distribution than to
      distribute through retail outlets.

2.272 In addition, many businesses wish to offer their customers the option of postal
      delivery, because it is often more convenient and less costly for the customer to
      request fulfilment items to be sent to their home or work address, rather than
      incurring the costs of self-collection or visiting a retail outlet. Thus businesses
      will offer a range of options to reflect the fact that their customers have different
      preferences. For example, customers requesting a vehicle licence disc from the
      DVLA are offered a range of options: including post, purchase from the Post
      Office, or from DVLA retail outlets.184

2.273 Senders often have a preference for post. This is supported by findings from our
      Ipsos MORI retail market survey.185 The survey evidence indicates that the
      majority of fulfilment items are always sent by post, compared with other types
      of mail. Figure 21 presents responses when businesses were asked what mail
      they sent most by post.186 During our interviews, a large fulfilment mailer and a
      ticket vendor said that they would look into switching to another postal operator
      in response to a hypothetical increase of 5-10% in the price of the mail service
      rather than switching to non-postal alternatives.




184
   http://www.taxdisc.direct.gov.uk/EvlPortalApp/application?origin=vnav_bar.jsp&event=bea.portal.framework.internal.refresh&pa
geid=Apply+for+a+tax+disc+NOW
185
    Postcomm Retail Market Survey 2010, Report of Findings From Research with Business Mailers and Residential Customers, a
report for Postcomm by Ipsos MORI, December 2010
186
    Organisations were asked the type of correspondence they send and indicate for each whether their organisation always does
this by post, mostly by post, half by post and half electronically, mostly electronically or always electronically.




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Figure 21: Methods of sending types of correspondence




Source: Ipsos MORI survey




Items which can be sent in physical and e-formats

2.274 For other types of fulfilment mail, it is possible to transform the item sent into
      electronic forms, e.g., CDs, tickets, computer software. Retailers like HMV offer
      CDs, DVDs and games as physical goods online and also in electronic formats
      via download. These items can alternatively be provided purely as electronic
      versions, e.g. Apple‟s ITunes store offers downloadable media only. Senders
      could also choose to supply these goods using retail outlets.187 As such, there is
      a wider range of potential substitutes to post.

2.275 Most retailers are able to, and do, offer both physical and electronic alternatives
      to customers. It may be that they offer these alternatives because customers
      have different preferences. In addition, shifts in consumer preferences can
      influence whether particular formats are preferred or promoted over others.

2.276 One fulfilment mailer, a major retailer, has begun to offer a download service
      but it still offers customers postal delivery and retail outlets as alternatives.188
      Some businesses, notably airlines and coach operators, predominantly offer e-
      ticket options. This switch to electronic alternatives could represent a form of
      rebranding (to enable the retailer attract or retain certain types of customer)
      rather than direct substitution from post. A mailer confirmed that even a 10%


187
    thetrainline.com offers its customers a range of options for receiving tickets: by post with First Class delivery; at a collection
point from a Self Service Ticket Machine; by Next Day Delivery187 and also electronic format to Print Your Own Tickets.
188
    Whilst some senders offer electronic formats only, brick and mortar retailers that have switched entirely to electronic
alternatives are relatively rare. For example, Dixons.co.uk, Woolworths.co.uk and Zavvi.com are now online only business but
these retailers have closed their retail outlets as a result of other commercial issues.




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       price increase would not influence it to move totally to online. It said this was not
       an option because it could not forecast how it would switch 1 million customers
       to an online only service and such a switch would mean it would have to review
       its business model.


Indirect constraints

2.277 Fulfilment mail is an input into a final product or service; it is a postal service
      purchased by retailers in order to provide goods or services to their customers.
      Therefore its demand is derived from the consumption of goods such as events,
      journeys, music and other items by final customers.

2.278 Following a price increase, a sender may choose to continue to send items via
      post but pass on the higher cost of postage to customers. Customers may
      respond by switching to non-postal alternatives to obtain the item. For example,
      customers could, purchase a CD from a retail outlet or buy a digital download,
      or they could self-collect in response to an increase in the price of post. This
      substitution by final consumers is referred to as “indirect substitution”.

2.279 The indirect constraints imposed on fulfilment mail will depend on the following
      two factors, which we focus on in our analysis:

           The proportion of the total cost of providing the retail service that is
           accounted for by the price of post (“dilution effect”); and
           The extent to which increases in the costs of the postal service are passed
           on to consumers.


Items which can be sent in physical form only

2.280 For indirect constraints to be effective, the postage cost needs to be transparent
      to the customer, e.g., stated separately to the price of the product or service.
      Retailers like Argos and Firebox.com offer standard delivery services from
      Royal Mail for small items and may charge up to £2 for delivery. Customers
      could potentially switch by purchasing these items from a retail outlet in
      response to an increase in the price of post.

2.281 We note here that the retailer‟s business model determines whether postage
      costs are applied at all for items sent by fulfilment mail, or absorbed in the cost
      of the item. A few senders of fulfilment mail stated that they rarely account for
      postage costs in the price of fulfilment mail items because this is insignificant.
      This may explain why a separate postal charge is not often levied to customers.




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2.282 It is not unusual for items to be subject to free postal delivery or without explicit
      postage charges. Financial services companies do not typically charge postage
      for credit or bank cards; this is even the cases where premium services such as
      proof of delivery are used. Some of the fulfilment mailers we spoke to indicated
      that they did not explicitly charge separately for post; a government department
      told us that it did not charge customers postage costs as these are recouped in
      the cost of providing the entire service. In such circumstances where the postal
      charges are not separately passed on to the customers, indirect constraints are
      not applicable.

2.283 For some items, however, customers are charged for postage. A large retailer
      estimated that for small items the cost of postage represents on average 3-8%
      of the value of the item. Notwithstanding that retailers do not typically charge
      explicitly for post and so may be unable to fully pass through the increase, even
      when postage costs are paid by customers, a 5 -10% increase in postage prices
      would be significantly diluted by the value of the item. To illustrate, consider a
      £25 item which costs £1.95 to receive by post. If the price of postage increased
      by 10%, it would represent less than a 1% increase in the total cost of the item
      (total cost is now only £0.20 more). This is unlikely to be sufficiently significant
      (in and of itself) to influence customers to switch from the postal alternative.


Items which can be sent in physical and e-formats

2.284 For some fulfilment items, such as tickets, CDs and DVDs, alternative formats
      are in direct competition with the physical format. Alternative formats are
      generally available to customers at the same price point. Major retailers such as
      HMV, Tesco, Play.com, sell a physical CD, either from the retail outlet or online,
      at a similar price. Sometimes, this price is the same for a download format.
      Hence, the price of postage is not transparent to customers ordering online and
      therefore there is little incentive to switch away from post.

2.285 We acknowledge that some items incur postage costs, e.g., customers are
      charged to receive tickets by post. Information provided by a ticket retailer
      suggested that the average face value of a ticket was around £35 and that
      standard postage cost was less than 25p.189 However, even assuming that the
      postage charge is stated as £2, representing approximately 5% of the value of
      the ticket, a 5-10% increase passed through fully to the customer would
      represent less than 1% of the total cost of the ticket.




189
  Whilst the postage charge advertised is usually higher we note here that the cost of postage paid by customers is typically
bundled with other charges, e.g., a booking fee or handling charge.




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2.286 Some customers may choose to switch to a download version and print out the
      ticket. However, we do not believe that this size of price increase would be
      sufficient to influence a significant portion of customers to switch to non-postal
      alternatives and effectively constrain the price of post. Moreover, in most
      instances the saving available for switching from post is minimal; the transaction
      charge (usually bundled with post) is still applied regardless of how the ticket is
      received. Therefore even though a price increase may prompt customers to
      switch from post, other available alternatives incur the same cost so this would
      dampen their competitive constraint on post.

2.287 Occasionally, when purchasing items online, the postage price is not often
      evident to customers at the start of the transaction and may only be displayed or
      added on at the end of the transaction. Recent research by the Office of Fair
      Trading suggests this type of pricing may reduce customers‟ price sensitivity
      and make them less willing to switch to alternatives.190

2.288 We recognise that, in its decision on the HMV/Ottakers merger, the Competition
      Commission found that „bricks and mortar‟ and online retailers were in the same
      market.191 We do not believe that this finding is inconsistent with our views on
      market definition. An increase in the price of books sold online may lead
      consumers to switch to the high street. However, in that scenario, the price of a
      book is likely to represent a considerable proportion of the cost of the purchase.
      This contrasts with the price of post for Letters and Large Letters, which is only
      likely to represent 5-10% of the cost. Therefore an increase in the price of post
      is much less likely to cause consumers to switch to the high street.

2.289 Although businesses may not readily directly substitute to non-postal
      alternatives, they may nonetheless promote a preferred channel, e.g., e-
      alternatives at the expense of postal services. However, one retailer told us
      that, even though it prefers for customers to obtain their travel documents from
      its website, it will provide these by email or by post if that is what the customer
      requests.


Price elasticity of demand

2.290 Further evidence on the non-postal constraints on postal prices is provided by
      the price elasticity estimate for fulfilment mail. Royal Mail has estimated the
      long-run market price elasticity to be approximately [].192 This indicates that


190
    Office of Fair Trading, March 2010,Pricing Practices: Their Effects on Consumer Behaviour and Welfare,. [Online],
www.oft.gov.uk/shared_oft/business_leaflets/...prices/Pricing-Practices.pdf, [Accessed 18 December 2010]
191
    Competition Commission, HMV Group plc and Ottakar‟s plc, 12 May 2006, Proposed acquisition of Ottakar‟s plc by HMV Group
plc through Waterstone‟s Booksellers Ltd.
192
    Fulfilment elasticity estimate obtained from Royal Mail‟s SPACE model.




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      demand for fulfilment mail is highly inelastic and is in line with our view that
      substitution to non-postal alternatives provides weak constraints on post as
      switching away from post to other alternatives will not be significant in response
      to a small price increase. This implies that a price increase would be profitable.

Section 6.3. Provisional Conclusions

2.291 Our analysis suggests that the competitive constraints from non-postal
      alternatives to fulfilment mail are not sufficient to make a 5-10% price increase
      unprofitable. Although there may be a number of alternatives to post, the degree
      to which senders and recipients are able and willing to switch to alternatives is
      limited.

2.292 Our provisional conclusion is that the evidence does not support the view that
      fulfilment mailings should be considered part of a wider market that includes
      other non-postal alternatives. This is primarily because of the following:

2.293 The evidence from our interviews with fulfilment mailers suggests that in
      response to a 5-10% price increase they would not switch significant volumes to
      non-postal alternatives:

           There is limited switching in practice;
           Direct substitutes are not effective constraints. In some cases, mailers
           cannot readily switch because of the type of items they send. In other cases
           where switching is possible, mailers generally need to offer both postal and
           non-postal alternatives to cater for a diverse customer base;
           Indirect substitutes are not effective constraints as the price of post is often
           significantly diluted by the value of the good, so there is little incentive to
           switch away; and
           The price elasticity estimates suggests that a price increase would be
           profitable indicating that switching to potential substitutes is not a sufficient
           constraint on post.


Consultation question
Q5.    Do you agree that there is insufficient demand side substitution between
       fulfilment mail and non-postal alternatives provide for them to be included in the
       same market?




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Section 7: Conclusion on applications

2.294 Our demand side analysis suggests that mail fulfils two purposes that are hard
      to replicate: physical delivery and contacting named individuals. While mail is
      losing volume to other non-postal alternatives, our analysis suggests that this is
      primarily due to non-price rather than price reasons. Therefore these non-postal
      alternatives only exert a limited competitive constraint on the price of retail mail
      services.

2.295 The reasons for this vary by postal application.

                For transactional mail, customers continue to express a strong preference
                for paper copies, while senders of mail are often unable to charge for paper
                copies for commercial reasons (e.g. “free banking”).
                For advertising mail, the campaign is often complementary and the
                characteristics of direct mail are difficult to replicate. Email campaigns are
                less targeted, are often blocked by filters, and those that get through have a
                very poor customer response rate. Advertising (direct mail) is however the
                application with the strongest price constraint from non-postal alternatives.
                Publishers have a strong preference for postal subscriptions as it enhances
                customer loyalty and is more attractive for advertisers.
                For social mail, a lack of price awareness means that consumers are largely
                insensitive to price.
                Much fulfilment mail involves items such as credit cards, membership cards
                and SIM cards for which there is no real alternative but to use postal
                services. The postal cost is often a small proportion of the overall cost of the
                item.

2.296 On the supply side, the mail service offered to transactional, fulfilment,
      advertising and publishing customers is identical and operators supplying mail
      services for one application can easily offer a similar service for other
      applications.193 Supply side substitution for social mail is more limited, as social
      mail services are provided using a Low volume network. However, the need for
      simple payment channels such as stamps and meters, means that all
      applications of Low volume unsorted mail are sold at a single price, and are
      therefore bound by a common pricing constraint. We therefore included all mail



193
   We note that Royal Mail offers Presstream products which are restricted to publications and plans to introduce a new product
specifically for advertisers, called Royal Mail Advertising Mail®. While this indicates that it is possible to price discriminate
between different applications (there may not be demand side substitution) it does not imply that publications or advertising mail
form a separate market. This is because if an operator attempted to increase the price of (say) advertising mail by 5-10% above
the competitive price, then other operators could rapidly introduce a competing advertising mail product at lower prices, making
the price rise unprofitable (i.e. there would be supply side substitution).




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      applications in our Candidate retail markets in our May and November
      documents.

2.297 For these reasons we continue our analysis of retail markets within post, in the
      next section considering all applications of mail together.


Consultation question
Q6     Do you agree with our provisional conclusion not to widen the market beyond
       post?




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Section 8: Demand side analysis of Post

Section 8.1. Introduction

2.298 The retail mail markets can potentially be segmented by a number of different
      characteristics, the most important of which are:

                  Sortation (pre-sorted, unsorted)
                  Speed of mail (D+1, D+2, later than D+2)
                  Format (Letters, Large Letters)
                  Size of mailing (High volume, Low volume)
                  Different mail applications (transactional, advertising, publications, fulfilment
                  and social)
                  Geographical location of senders and receivers

2.299 Potentially each combination of mail characteristics could be a separate
      economic market, (e.g. unsorted, D+1, transactional, Large Letters to High
      volume mailings in the UK). However, if there is sufficient demand or supply
      side substitution between different characteristics then the relevant market
      could be wider.

2.300 In our May consultation document and November decision document we
      considered the extent of supply side substitution between different mail
      characteristics. As a result of that analysis we concluded that there were ten
      Candidate retail markets (see figure 22 below), and that the geographic market
      was the UK.194




194
      We used the term "Candidate retail market”to refer to a market that is defined on the basis of supply side analysis only.




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Figure 22: Summary of findings on market definition and market power within
retail postal markets




2.301 In this section we complement and complete our previous (supply side) analysis
      by considering whether there is sufficient demand side substitution between the
      different mail characteristics for them to be included in the same relevant
      economic market. For example, if a 5-10% increase in the price of Large
      Letters caused significant numbers of customers to switch to Letters, then it
      might be appropriate to include all mail formats in the same economic market.

2.302 We begin our assessment by considering the extent of demand side substitution
      between different levels of mail sortation. We then consider demand side
      substitution between D+1, D+2 and later than D+2 mail services, Letters and
      Large Letters, different sizes of mailings, and different mail applications. Finally
      we consider the relevant geographic market from a demand side perspective.


Level of Sortation

2.303 Mail can be sorted to the requirements of the inward mail centre either by the
      customer (pre-sorted mail) or by the mail operator that collects the mail
      (unsorted mail).

2.304 Mail can be pre-sorted in house or by mailing houses which print and sort mail
      on their clients‟ behalf. In order to use most pre-sorted mail services, customers
      have to apply a Customer Barcode (CBC) or produce item addresses capable of




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          supporting Optical Character Recognition (OCR).195 Mail can then be sorted to
          different levels, with the lowest tariffs offered for mail which is sorted at delivery
          round level (e.g. Royal Mail‟s Walksort product).

2.305 The main advantage of pre-sorted mail is that it is often less costly for the
      customer to pre-sort mail than it is for the mail operator – as mail is sorted using
      computer software which allows mail to be printed in sortation order.196 As a
      consequence, pre-sorted mail tariffs are often significantly lower than for
      unsorted services. For example, Walksort, Royal Mail‟s lowest price pre-sorted
      tariff, is priced at 20% below Cleanmail Plus / Cleanmail Advance, its lowest
      price unsorted mail tariff (see table 13 below).197

Table 13: Royal Mail Pre-sorted and Unsorted Mail Tariffs 2010-11
  Product                     Type                             1st Class (<100g                 2nd Class (<100g
                                                               Letter)                          Letter)
  Walksort                    Pre-sorted bulk                  23.6p                            16.6p
  Cleanmail Plus /            Unsorted bulk                    29.6p – 31.3p                    20.6p – 21.8p
  Cleanmail Advance
  Meter                       Unsorted single piece            36.0p                            25.0p
  Stamps                      Unsorted single piece            41.0p                            32.0p


2.306 Pre-sorted mail is used by businesses who either send very large volumes of
      mail throughout the U.K. or who send bulk mail to specific locations. As the
      minimum collection size is 4,000 items, pre-sorted mail is most widely used by
      businesses for planned mailings, e.g. a bank informing all their credit card
      customers of a change in terms and conditions. However, even the largest
      mailers have to make extensive use of unsorted mail for more discretionary
      mailings, e.g. a bank informing individual customers that they have exceeded
      their overdraft limit.198

2.307 Most unsorted mail is sent by customers using single-piece First and Second
      Class public tariffs.199 Customers who can offer larger collection volumes, and
      have mail which can be easily read by machine, can choose to use a bulk
      product such as Royal Mail‟s Cleanmail service.200




195
    Optical Character Recognition (OCR) and Customer Bar Code (CBC,) allow sorting machines to read the data in an address.
196
    Some alternative operators offer downloadable sort software to assist the process. See, for example
http://www.tntpost.co.uk/Mail/09Customer_Downloads.html#tnt_sort_software
197
    Royal Mail‟s price of a letter <100g at 14th February 2010. The Cleanmail tariff cited assumes that customers achieve the
maximum 5.5% volume discount. Volume rated discounts are not available on Royal Mail‟s Walksort product.
198
    Some mailing houses have sophisticated software which allows businesses to use pre-sorted mail even for more targeted
mailings.
199
    We estimate that 73% of unsorted mail volumes in 2009/10 were single-piece.
200
    Royal Mail‟s requirements include complete and accurate addresses and postcodes and mail which is printed clearly (not
handwritten)




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2.308 In terms of market definition, the closest substitute to pre-sorted mail is likely to
      be bulk unsorted mail products such as Royal Mail‟s Cleanmail. As the costs of
      pre-sorting mail appear to be low, there do not appear to be any significant
      technical barriers to switching between unsorted and pre-sorted mail. However,
      as set out above, pre-sorted and unsorted mail have different characteristics
      which limits the ability of mailers to switch between them, with pre-sorted mail
      being used primarily for planned mailings, and unsorted mail for more
      discretionary mailings.

2.309 In addition, the minimum volumes that are required to qualify for pre-sorted mail
      are larger than those for unsorted mail. In particular, Cleanmail, the main Royal
      Mail product for unsorted bulk mail, requires a minimum of 1000 items per
      collection, compared to 4,000 items for pre-sorted mail.201 Access operators
      offer unsorted bulk mail products with lower limits. For example, UK Mail offers
      a bulk mail service for customers with a minimum collection size of 200 items
      and who can guarantee 2,000 or more items per week. This suggests that only
      a limited number of Cleanmail customers could potentially switch to pre-sorted
      mail were the price of unsorted mail to increase by 5-10%.

2.310 We also note that the number of customers who currently use bulk unsorted
      products is very low. Most bulk mail (78%) is pre-sorted, while most unsorted
      mail (73%) is single piece.202 We estimate that only 14% of mail volumes are
      accounted for by unsorted bulk mail (see figure 23 below).

2.311 This suggests that most firms who meet the criteria for pre-sorted mail choose
      to take advantage of this service, and that unsorted bulk mail is used either as a
      substitute for single piece (where volumes are large), for more discretionary
      mailings, or for planned mailings of less than 4,000 units. There therefore
      appear to be relatively few customers who could potentially switch from
      unsorted to pre-sorted mail.




201
      Royal Mail‟s ASTLL service has a minimum requirement of 250 Large Letters
202
      Postcomm estimates for 2009/10 mailings based on information supplied by mail operators.




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Figure 23: Mail Volumes 2009/10




Source: Postcomm estimates based on data from mail operators


2.312 In contrast, there appear to be many customers who could potentially switch
      from pre-sorted to unsorted mail. There are also no apparent barriers to
      switching from pre-sorted to unsorted mail. However, as set out above, Royal
      Mail‟s lowest priced pre-sorted product retails at a 20% discount to its lowest
      price unsorted product. As there appear to be limited cost savings in switching
      from pre-sorted to unsorted mail, this suggests that the price of pre-sorted mail
      is unlikely to be constrained by unsorted bulk mail products.

2.313 Elasticity evidence from Royal Mail is also consistent with substitution between
      unsorted and pre-sorted mail being relatively weak. For example, in its response
      to the May Consultation Document, Royal Mail stated that, “Our internal
      analysis shows that the cross price elasticity between Cleanmail Second Class
      and Mailsort Second Class is low”.203


Provisional Conclusion

2.314 For the above reasons we therefore believe that demand side substitution
      between pre-sorted and unsorted mail is likely to be weak and insufficient, on a
      demand side analysis alone, for pre-sorted and unsorted mail to be included in
      the same economic market.


Consultation Question
Q7.         Do you agree that the costs of pre-sorting mail are relatively low?




203
      Paragraph 165




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Q8.       Do you agree that there is insufficient demand side substitution between pre-
          sorted and unsorted mail for them to be included in the same economic market?

 Section 8.2. Speed of Mail

2.315 In this section we consider whether, on a demand side analysis, different
      speeds of mail should be included in the same or in separate economic
      markets. We first consider the willingness of customers to switch between D+2
      and later than D+2 services in response to changes in relative prices, and then
      consider substitution between D+1 and D+2 / later than D+2 services.


D+2 and later than D+2

2.316 Royal Mail‟s D+2 services aim to deliver mail by the third working day after
      posting. However, some D+2 items are conveyed using Royal Mail‟s D+1
      network, which means that D+2 mail is often delivered earlier.

2.317 Alternative operators are only active in the supply of bulk mail. As a
      consequence their collection and trunking networks are often less complex than
      Royal Mail‟s. This can provide them with an opportunity to delivery on the
      second day after posting (this is often referred to as a Day C service) or to
      provide more certainty as to when their mail is delivered.204 For example, UK
      Mail offers a guaranteed 3 day delivery service.

2.318 Royal Mail also offers a later than D+2 service, Mailsort 3, which offers delivery
      within 7 days. This service is only available for pre-sorted mail and is primarily
      used by direct mailers. Downstream access operators do not offer a 7 day
      service.

2.319 The prices of Mailsort 2 and 3 services are shown in the Table 14 below.205 It
      shows that for all prices other than Mailsort 1400, Royal Mail‟s Second Class
      prices are 14.4% more expensive than Third Class.




204
    Provided alternative operators can trunk their mail to the inward mail centre by the appropriate time window, under the terms of
the access agreement, Royal Mail aims to deliver on the next day.
205
    Based on a posting of 100,000 Letters




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Table 14: Mailsort Postage Rates for Letters (Pence)
Mailsort Product                                     Second Class              Third Class          Percentage
                                                     (Mailsort2) Price         (Mailsort3) Price    difference in price

Mailsort 70 (OCR)                                    18.2                      15.9                 14.4%

Mailsort 70 (CBC)                                    18.1                      15.9                 14.4%

Mailsort 120 (OCR)                                   18.7                      16.3                 14.4%

Mailsort 120 (CBC)                                   18.5                      16.2                 14.4%

Mailsort 700 (CBC)                                   18.1                      15.9                 14.4%

Mailsort 1400                                        21.1                      17.6                 20.4%

Source: Royal Mail pricing calculator assuming full discounts, February 2011


2.320 However, although there is a significant price difference between Royal Mail‟s
      Mailsort 2 and Mailsort 3 services, our evidence suggests that substantial
      numbers of customers have switched from Royal Mail‟s Mailsort 3 service to
      competing downstream access operators providing D+2 services. As illustrated
      in Figure 24 below, Mailsort 3 volumes declined by 62% between 2005/6 to
      2009/10, while D+2 services grew by 65% over the same period.

Figure 24: D+2 and D+7 Letter and Large Letter volume changes 2005-6 to 2009-
10




 Source: Postcomm estimates based on data from mail operators




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2.321 The customers of Mailsort 3 are predominantly direct mail advertisers, and
      some of the decline in Mailsort 3 volumes can be attributed to the decline in
      direct mail advertising between 2004/5 and 2008/9. However, as illustrated in
      Figure 25 below, expenditure on Mailsort 3 declined at a much faster rate than
      the decline in direct mail expenditure over the period. In 2004/5 Mailsort 3
      revenues were equivalent to 90% of advertising postage expenditure, whereas
      by 2008/9, this percentage had declined to 70%. This suggests that many direct
      mail advertisers have switched from Mailsort 3 to other operators‟ D+2 mail
      services.

Figure 25: Mailsort 3 revenues and direct mail advertising postage




 Source: Royal Mail Regulated Accounts and Advertising Statistics Yearbook 2009


2.322 We have only limited information on the reasons why direct mail advertisers and
      others have switched from Third Class to Day C services. One possible reason
      is that downstream access operators may have more flexibility in pricing
      compared to Royal Mail. The price paid by advertisers for downstream access
      services may therefore be more comparable to Royal Mail‟s Third Class mail
      products. Another possible explanation is that direct mail advertisers are
      becoming more sophisticated in their campaigns and that there is a growing
      preference for the faster and guaranteed delivery day that downstream access
      providers services can offer.

2.323 We note that Royal Mail‟s Sale in March-April 2010 offered lower rates for a
      limited period on its Third Class products only (Mailsort 3 and Sustainable
      Mailsort 3). This further suggests that Third Class services face greater



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         competitive pressure than First and Second Class services, albeit this pressure
         could come from other advertising media, as well as from downstream access
         providers‟ services.206

2.324 This evidence is also consistent with Royal Mail‟s internal product elasticity
      estimates which suggest that there is both significant competition between
      Mailsort 3 and downstream access providers‟ services, and between Royal
      Mail‟s Mailsort 2 and Mailsort 3 products.


Responses to November Decision Document

2.325 UK Mail, in its response to our November document, challenged our view that
      supply side substitution between D+2 and later than D+2 services was relatively
      easy. We reached that view mainly on the basis of evidence which suggested
      that D+2 services are largely provided as infill between the processing of more
      urgent mail. UK Mail feels this may ignore the fact that the majority of operators
      competing with Royal Mail in the retail market are doing so through use of
      existing parcel networks and that those parcel networks are organised and
      resourced on the basis of providing D+1 service. It points out that unlike Royal
      Mail‟s network, which has two outbound movements or "waves" of mail in each
      24 hour cycle, these other operators‟ networks have only one outbound
      conveyance of mail. As a result, UK Mail considers that there is a very limited
      opportunity to infill, store or defer mail without mail collected on one day
      interfering with the timely handling of mail collected the next day.

2.326 We accept that competitors to Royal Mail who use D+1 parcel networks for D+2
      mail, would not be able to readily switch to proving a D+2 or later service.
      However, as UK Mail recognised, many of the more recent entrants into the mail
      market are not D+1 parcel operators and so could provide D+2 and later
      services in the way we suggested (i.e. in a similar way to how Royal Mail
      provides D+2 and later services). In addition, our demand side analysis
      suggests that there has been considerable substitution between D+2 and later
      than D+2 mail services, and, that in practice, operators have been able to
      compete successfully for Mailsort 3 services from their existing D+2 services
      without needing to offer a later than D+2 service.




206
  Royal Mail‟s Sale was only applicable to incremental Mailsort 3 volumes. Traffic that had switched from DSA operators or
Royal Mail‟s other products were not eligible for the discount.




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Provisional Conclusions

2.327 After considering the evidence on demand side substitution Postcomm‟s
      provisional conclusion is that D+2 and later than D+2 services are in the same
      product market.


Consultation Question
Q9.         Do you agree that there is sufficient demand side substitution between D+2 and
            later than D+2 postal services for them to be included in the same market?


D+1 and D+2 / later than D+2


Characteristics of mail services

2.328 The Ipsos MORI survey considered the extent to which D+1 and D+2/later than
      D+2 services are substitutable for each other. This survey explored the
      motivations underpinning the choice between D+1 and D+2/later than D+2
      service, and also the extent to which these choices would be affected by a
      change in the relative price of First and Second Class mail.

2.329 For Small Business Mailers207, delivery speed is the key driver for choosing First
      Class, with 88% of respondents considering that this was an important factor
      influencing their decision (see Figure 26 below). However, respondents also
      perceived First Class to be a higher quality product (80% of respondents
      indicated that quality was important or very important, compared to 50% for
      Second Class), and one that is more suitable for sending high value items.
      Customer preferences for First Class were also cited as an important driver of
      demand for First Class services (34% of respondents).

2.330 In contrast, Second Class was perceived by respondents to be more of an “all
      round” product, with no one criteria being particularly important in determining
      customer choice. The lower cost of Second Class was the most important
      factor. However this was cited as being important or very important by only 57%
      of respondents. Overall, the results suggest that Second Class offers a lower
      cost product, which offers sufficient speed and quality of service for many
      customer needs, but particularly for lower value, less time-sensitive post.




207
      Companies sending less than 50,000 items per annum




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Figure 26: Importance of factors in decision to send mail by First Class post
(Small Business Mailers)




Source: Ipsos MORI survey



Figure 27: Importance of factors in decision to send mail by Second Class post
(Small Business Mailers)




Source: Ipsos MORI survey




2.331 Our interviews with Large mailers revealed broadly similar results, with
      respondents indicating that First Class mail was used primarily for higher value
      and time-sensitive documents or where customers had a preference for First
      Class mail. Second Class mail was used for lower value, less time-sensitive
      items, and where the cost of post was a more important factor.




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2.332 Most of the customers that we spoke to noted that there was also an element of
      consumer choice and/or expectation over the mail service that they used. For
      example, some financial service companies stated that they used First Class
      post on all correspondence with their most valued clients. Another mailer we
      spoke to who offered customers a choice of service noted that more than 9 in
      10 customers requested and paid for the D+1 option. Charities also told us that
      there is some evidence that First Class mail elicits a higher customer response
      rate.

2.333 Our interviews also suggested that the motivations for using First and Second
      Class mail varied by application. For example:

               Fulfilment purchasers, where D+1 services were used, felt that the nature of
               their mail and customer preference dictated the use of a D+1 service. One
               financial institution stated that they sent all new account cards by D+1 so
               that the consumer could use them straight away, whereas subsequent
               cards went D+2 or later.
               Publications customers also had similar views: monthly magazines, where
               the deadlines were not as pressing, were sent D+2 or later while weekly
               magazines required a D+1 service to ensure that the content remained
               current.
               Transactional customers made limited use of D+1 services. However where
               they did, this, it tended to be for a specific reason, either time sensitivity or
               to fulfil regulatory requirements.

2.334 The evidence above suggests that the characteristics of D+1 and D+2/later than
      D+2 services are perceived to be significantly different by customers, with
      D+2/later than D+2 services used for general mailings, and D+1 for time
      sensitive and important documents or where otherwise customers have a
      marked preference for a D+1 service.


Price sensitivity and customer switching

2.335 Our surveys also sought to determine how sensitive consumers‟ choices are
      between D+1 and D+2/later than D+2 mail services to changes in relative
      prices.

2.336 As regards Small Business Mailers, responses to our survey suggested that
      price awareness amongst this group of customers is low208 with only around




208
   This is roughly in line with Postcomm‟s Customer Survey 2009, which found that less than 20% of SMEs were aware of the
First and Second Class stamp price for a standard letter




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            10% of respondents able to give the correct price for either a First or Second
            Class Royal Mail stamped service.209

2.337 Our survey also asked Small Business Mailers about how they would respond if
      the price of First Class mail services increased by 5-10%. Responses indicated
      that 19% to 22% of customers would switch to a Second Class mail service,
      while 3-7% of customers would reduce their overall consumption of mail. In
      response to a 5-10% increase in the price of Second Class mail, only 1-2% of
      respondents indicated that they would trade up to First Class, with 4-7%
      indicating that they would reduce their mail volumes or leave mail altogether.

2.338 The above results suggest that there is some degree of substitution between
      First and Second Class mail, but that the effect is likely to be asymmetric, with
      consumers more willing to trade down in response to an increase in First Class
      Mail, than to trade up in response to an increase in Second Class mail. Survey
      responses to hypothetical questions do however need to be treated with caution
      as stated preferences can often overstate likely switching, particularly, where,
      as here, customers appear to have low awareness of the price of mail services.

2.339 Our own interviews with Large Mailers found that some respondents had
      switched mailings from First to Second Class over time in order to reduce their
      postal costs, but that this switching had slowed more recently perhaps because
      most mail volumes which could be switched from First Class to Second Class
      has already done so (First Class accounts for approximately 3.5% of bulk mail
      volumes). Our evidence is broadly consistent with data on bulk mail volumes
      which show that Second Class volumes remained relatively stable between
      2005/2006 and 2009/10, while First Class volumes declined (see figure 28
      below).




209
      Questions were asked on price awareness for standard tariff stamp and meter mail.




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Figure 28: Index of First Class vs. Second Class Bulk Mail Volumes (2005/6 =
100)




Source: Postcomm estimates based on data from mail operators


2.340 The relative price of First and Second Class mail products have remained
      relatively constant over time. Indeed, the percentage gap between Royal Mail
      First and Second Class single piece items has actually declined slightly over
      time (see Figure 29 below). This switching therefore appears to represent a
      slight trend away from First Class to Second Class, perhaps driven by a desire
      to economise on postage costs, rather than as a result of any significant change
      in relative prices.




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Figure 29: Royal Mail’s Public Tariff First and Second Class Letter Prices




Source: Royal Mail price data


2.341 In contrast, for single piece mail items, there is no evidence of any significant
      switching between First Class and Second Class with mail volumes (see Figure
      30 below). Volumes of First and Second Class single piece mail are similar in
      magnitude which suggests that significant numbers of customers are prepared
      to pay a premium for a faster postal service.




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Figure 30 Royal Mail’s Volumes of Public Tariff First and Second Class




Source: Royal Mail Regulated Accounts


2.342 Royal Mail has estimated that the price elasticity of unsorted First Class mail
      products is -0.77, and that the cross-price elasticity of First Class and Second
      Class unsorted mail is 0.31.210 Unsorted mail accounts for more than 90% of
      First Class volumes, so these estimates are likely to provide a reasonable proxy
      for overall First Class mail elasticities.

2.343 These elasticities suggest that Second Class mail is the closest substitute to
      First Class mail and that the overall demand for First Class mail is inelastic.
      These estimates are therefore consistent with there being a separate market for
      First Class mail.


 Provisional Conclusions

2.344 The above analysis suggests that the characteristics of First Class and Second
      Class mail remain distinct, and while there is some evidence that bulk
      customers may be prepared to switch from First Class to Second Class in
      response to a change in relative prices, overall demand for First Class post
      appears to be relatively price inelastic.




210
      Veruete-McKay et al., 2010, Letter Traffic Demand in the UK: An analysis by Product and Envelope Content Type




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2.345 After considering the evidence on demand side substitution, Postcomm‟s
      provisional conclusion is that D+1 is in a separate product market to D+2 and
      later than D+2 mail services.


Consultation Question
Q10. Do you agree that there is insufficient demand side substitution between D+1
     and D+2 and later postal services for them to be included in the same economic
     market?

Section 8.3. Letters and Large Letters

2.346 The Letter and Large Letter formats are defined by Royal Mail as:

          Letter – any item up to length: 240mm, width: 165mm and thickness: 5mm,
          weighing no more than 100g.
          Large Letter – any item larger than a Letter and up to 353mm in length,
          250mm in width (that is the B4 paper size) and 25mm in thickness, with a
          maximum weight of 750g.

2.347 As indicated by figure 31 below, Royal Mail Retail‟s Large Letters volumes are
      considerably lower than its Letters volumes. Both formats have declined since
      2004-05, although Large Letter volumes have displayed a sharper drop in
      percentage terms, representing approximately 28% of Letters volumes in 2008-
      09, down from 35% in 2004-05.




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Figure 31: Royal Mail Retail Letter and Large Letter volumes




Source: Royal Mail RFI response


2.348 These volume shares are broadly consistent with our research which shows that
      Large Letters make up a relatively low proportion of the total mail sent by most
      organisations. The Ipsos MORI survey found that while all Small Business
      mailers211 send at least some Letters, 35% do not send any Large Letters, and
      that Large Letters make up only 11% of Small Business Mailers‟ traffic.

2.349 The Large Letter format is however used more frequently by larger businesses
      – our survey found that, for a fifth of Large Business Mailers,212 Large Letters
      make up approximately 30% of their total mail volumes while another fifth send
      roughly equal proportions of Letters and Large Letters. The Ipsos MORI survey
      identified firms operating in the following sectors as being more likely send
      Large Letters:

                 Financial services
                 Education
                 Government
                 Publishing
                 Travel



211
      Companies sending less than 50,000 items per annum
212
      Companies sending more than 50,000 items per annum




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2.350 One reason why mailers send the majority of items via the Letter format as
      opposed to Large Letter is because the prices of Letters services are
      considerably lower than the equivalent Large Letters services. Table 15 below
      compares Royal Mail‟s current Letter and Large Letter prices for account and
      franking customers net of discounts Royal Mail‟s Large Letter prices are on
      average 25% higher than those of Letters.

Table 15: Royal Mail Retail Letter and Large Letter tariffs
                Service                          Letter price            Large Letter price        Price differential

  Standard Tariff on account 1st                                36p                       50p                      39%

  Standard Tariff on account 2nd                                25p                       40p                      60%

  Mailsort 1400 1st                                             31p                       38p                      21%

  Mailsort 1400 2nd                                             22p                       28p                      25%

  Mailsort 1400 3rd                                             18p                       23p                      28%

  Walksort 1st                                                  24p                       29p                      21%

  Walksort 2nd                                                  17p                       21p                      25%
  Source: Royal Mail Prices 2010, December 2009


2.351 In some instances, customers may be willing to pay the premium for Large
      Letter services. For example, some firms sending out advertising are reluctant
      to fold promotional packs down to A5 because they believe that response rates
      would drop as a result, while others send out financial documentation by Large
      Letter services in order to meet customer expectations.213

2.352 In general however, given the 25% difference in price between formats, we
      would expect most mailers to send items by Letter whenever it was physically
      possible to do so. While it is possible that if the price of Letters were to increase
      by 5-10% some customers may choose to trade up to the Large Letter format,
      we would expect such switching to be limited and insufficient to make the price
      rise unprofitable.

2.353 Conversely, as most users of the Large Letter format are unable to physically fit
      the contents into a Letter format, if the price of Large Letters were to increase
      by 5-10%, we would expect that only limited numbers of customers would
      switch to the Letter format. While some customers may have the option to
      redesign their mailing so that it will fit a Letter format, we would not expect
      sufficient numbers to switch to make such a price increase unprofitable.



213
  Obtained from the response of an interest group representing UK advertisers during the consultation on Pricing in Proportion in
2005 - http://www.psc.gov.uk/documents/1525.pdf




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Provisional Conclusions

2.354 After considering the evidence on demand side substitution Postcomm‟s
      provisional conclusion is that Letters and Large Letters are in separate product
      markets.


Consultation Question

Q11. Do you agree that there is insufficient demand side substitution between Letters
     and Large Letters for them to be included in the same economic market?

Section 8.4. Low Volume and High Volume Mailings

2.355 In our November document, our supply side assessment led us to define
      separate Candidate markets for Low volume mailings (<250 items per day) and
      High volume mailings (>250 items per day).

2.356 On the demand side, if the price of Low volume unsorted mail was to increase
      by 5-10%, a customer could only switch to a High volume unsorted mail tariff if
      they were able to able to increase their mailing volumes beyond 250 items.
      While there may be some marginal customers for whom this might be an option,
      for the overwhelming majority of customers this is likely to be unrealistic or
      would involve significant costs, e.g. in changing business practices.


Provisional Conclusions

2.357 After considering the evidence on demand side substitution Postcomm‟s
      provisional conclusion is that Low volume unsorted mail and High volume
      unsorted mail are in separate product markets.


Consultation Question
Q12. Do you agree that there is insufficient demand substitution between Low volume
     and High volume unsorted mail for them to be included in the same economic
     market?



Section 8.5. Different mail applications

2.358 On the supply side, the mail service offered to transactional, fulfilment,
      advertising and publishing customers is identical and operators supplying mail



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       services for one application can easily offer a similar service for other
       applications. Supply side substitution for social mail is more limited, as social
       mail services are provided using a Low volume network. However, the need for
       simple payment channels such as stamps and meters, means that all
       applications of Low volume unsorted mail are sold at a single price, and are
       therefore bound by a common pricing constraint. We therefore included all mail
       applications in our Candidate retail markets in May and November documents.

2.359 On the demand side, different mail applications are, by definition, supplied to
      different customer groups, and there is therefore no possibility of switching
      between them.


Provisional Conclusions

2.360 After considering the evidence on demand side substitution Postcomm‟s
      provisional conclusion is that different mail applications are in the same
      economic market.


Consultation Question
Q13. Do you agree that different mail applications are in the same economic market?



Section 8.6. Geographic Markets

2.361 In November we set out our conclusion that all the Candidate retail markets
      should be defined as national (UK) markets based on how services are offered
      and priced. We are not aware of any demand side evidence that would suggest
      different geographical markets.


Provisional Conclusions

2.362 After considering the evidence on demand side substitution Postcomm‟s
      provisional conclusion is that the geographical market is the UK in each of the
      markets we have defined.

Consultation Question

Q14. Do you agree that each of the markets we have defined should be national (UK)
     markets?




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Section 9: Provisional conclusions on market definition

2.363 In this section we set out our provisional conclusions on market definition based
      on our demand side evidence above, and the supply side evidence contained in
      our May consultation document and November decision document.

2.364 To define the relevant economic markets we have followed the approach
      adopted by both UK and EU competition authorities.214 In broad terms, a
      relevant market includes products which are close substitutes for each other.
      More specifically, products are included in the relevant market where they are
      sufficiently strong substitutes that they are capable of acting as a constraint on
      each other‟s prices. A relevant market has both a product and a geographic
      dimension.

2.365 To identify whether products are sufficiently close substitutes to each other to
      be included in the same market, we use the “hypothetical monopolist test”.215
      Starting from the focal product, usually the narrowest feasible market definition,
      the test asks whether it would be profitable for a hypothetical monopoly supplier
      of the product to raise its prices by 5-10% above the competitive level. If the
      answer to this question is yes, the focal product is then defined as the relevant
      market definition. If the answer is no, then further substitute products are added
      to the group until it would be profitable for a hypothetical monopolist to raise
      prices of the products in that group 5-10% above competitive levels.

2.366 We began our analysis by selecting the appropriate focal products. To do this
      we first noted that retail mail markets could potentially be segmented by a
      number of characteristics, the most important ones of which are:

               Mail applications (transactional, advertising, publications, fulfilment and
               social);
               Speed of mail (D+1, D+2, later than D+2);
               Format (Letters, Large Letters);
               Sortation (pre-sorted, unsorted); and
               Size of customer mailings (High volume, Low volume)

2.367 Potentially each combination of these characteristics could be a relevant
      economic market.216 As this implies 90 separate focal products217 to make our



214
    Office of Fair Trading Market Definition Guideline (“Understanding Competition Law”), OFT 403, December 2004
(http://www.oft.gov.uk/OFTwork/publications/publication-categories/guidance/competition-act/); Commission Notice on the
definition of relevant markets for the purposes of Community competition law (OJ C372, p. 5)
215
    This is alternatively known as the SSNIP test (Small, but Significant, Non-transitory, Increase in Price).
216
    For example, in our November decision document we concluded that Low volume, unsorted, D+1, large letters was a relevant
economic market.




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          market definition analysis more manageable, we employ the hypothetical
          monopolist test for each characteristic at a time.


Mail applications

2.368 In our May consultation document we noted that, on the supply side, the mail
      service offered to transactional, fulfilment, advertising, social and publishing
      customers is identical. We therefore included all mail applications in our
      candidate retail postal markets.

2.369 On the demand side, it may be possible for mail operators to offer lower prices
      to certain types of mail customer, e.g. those with relatively more elastic demand.
      We consider that this in itself does not provide evidence that separate markets
      exist by application, rather that operators can price discriminate to maximise
      revenues. Further, as we found no apparent barriers to supply side substitution,
      our provisional conclusion is that all mail applications should be included in the
      relevant economic market.


Unsorted / Pre-sorted

2.370 Our demand side assessment above concluded that there was relatively weak
      substitution between unsorted and pre-sorted mail, largely because of the
      significant price and minimum volume threshold differences between the two
      services. As set out in our November 2010 decision document, supply side
      substitution is also limited due to the different network configurations and
      investments in sorting equipment necessary to provide an unsorted mail
      service.

2.371 We therefore provisionally conclude that unsorted and pre-sorted mail are in
      separate markets.


D+2 / later than D+2

2.372 In our November decision document we concluded that there were no apparent
      barriers to supply side substitution between D+2 and later than D+2 services as
      an operator could provide a later than D+2 service using a D+2 access service.
      Some respondents challenged our view. However, our demand side analysis




217
   For unsorted mail, there are 60 potential markets (5 applications * 3 speeds * 2 formats * 2 mailing sizes). For pre-sorted mail
there are 30 potential markets (since it is only for high volume mailings).




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       above indicates that customers are prepared to switch between D+2 and D+2
       and later services in response to changes in relative prices.

2.373 Our provisional conclusion is therefore that D+2 and D+2 and later mail services
      are in the same economic market on both the demand and supply side.


D+1 / D+2 and later

2.374 On the demand side, although we observed some switching from D+1 to D+2
      and later services, our analysis suggests that most users of D+1 services place
      a relatively high value on speed of delivery, and that insufficient numbers of
      users would switch to D+2 and later services in response to a change in relative
      prices. The cross-price elasticity of First Class with respect to Second Class is
      also low suggesting that a 5-10% price increase would be profitable. On the
      supply side, our May and November documents noted that there were very
      significant barriers to supply side substitution, most notably the network
      infrastructure required to support such a service.

2.375 Our provisional conclusion is that there are separate markets for D+1 and D+2
      and later mail services on the basis of limited demand and supply side
      substitution.


Letter / Large Letter

2.376 On the demand side our analysis suggested that there is no effective
      substitution between Letters and Large Letters as, for the most part, customers,
      choose the smallest (and lowest price) letter format available. While there are
      exceptions – there is some evidence that Large Letters may provide a better
      response rate from the customers being mailed – we believe that such demand
      side substitution is likely to be weak. On the supply side, in our November
      decision document, we concluded that for unsorted mail, the investment costs in
      sortation equipment represented a barrier to supply side substitution. However,
      for pre-sorted mail, as sacks of sorted Letters and Large Letters are
      indistinguishable and processed in the same way, Letters and Large Letters are
      in the same relevant market.

2.377 Our provisional conclusion is therefore that, in pre-sorted mail, Letters and
      Large Letters are in the same economic market. For unsorted mail, our
      provisional view is that there are separate markets for Letters and Large Letters.




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Low volume / High volume

2.378 There is no meaningful demand side substitution as a customer can be
      identified only as either a High or a Low volume mailer. On the supply side, as
      set out in our May consultation document, for Low volume mail there are
      significant economies of scale in collection, which present a significant barrier to
      supply side substitution for unsorted mail (for pre-sorted mail, customers are all
      High volume).

2.379 Our provisional conclusion is that there are separate markets for Low and High
      volume unsorted mail.


Summary

2.380 Table 16 below summarises our demand and supply side and overall market
      definition provisional conclusions. „Strong‟ means that the potential substitutes
      exert a sufficient constraint on each other to place them in the same market;
      „Weak‟ implies that the constraint is insufficient. Note that potential substitutes
      should be included in the relevant market where they exert either a sufficient
      demand or a supply side constraint (or both).




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Table 16: Summary Diagram

                              Demand side                       Supply side                        Market Definition
                              Constraints                       Constraints                        Provisional
                                                                                                   Conclusion

Non-Postal                    weak                              weak                               Non-postal substitutes
Substitutes                                                                                        lie outside the relevant
                                                                                                   market

Postal Substitutes

Mail Applications             weak                              strong                             All applications in same
                                                                                                   market

Unsorted / Pre-               weak                              weak                               Separate markets for
sorted                                                                                             pre-sorted and unsorted

D+2 / D+2 and later           strong                            strong                             D+2 and D+2 and later
                                                                                                   in same market

D+1 / D+2 and later           weak                               weak                              Separate markets for
than D+2                                                                                           D+1 and D+2/later than
                                                                                                   D+2

Letter / Large Letter         weak                              strong (pre-sorted)                Letters and Large
                                                                weak (unsorted)                    Letters in same market
                                                                                                   for pre-sorted and
                                                                                                   separate markets for
                                                                                                   unsorted mail

Low volume / High             weak                              weak                               Separate markets for
volume                                                                                             Low volume and High
                                                                                                                   218
                                                                                                   volume mailings


2.381 Our demand side analysis has found that demand side constraints are generally
      weak. In particular, our provisional view is that the competition from non-postal
      alternatives is limited, and, within postal markets, the only significant demand
      side substitution is between D+2 and later than D+2 mail services. In this
      instance, as we previously concluded in our November decision document that
      these services were in the same market on the supply side, our demand side
      evidence does not affect our conclusions set out in our November decision
      document.

2.382 For the reasons set out above, our provisional conclusion is that our demand
      side analysis does not change the conclusions we reached in our November
      decision document on the basis of supply side considerations alone.

2.383 We therefore provisionally conclude that the relevant economic markets are:

                Pre-sorted D+1 mail services;


218
  Applies to unsorted mail only. In pre-sorted mail all mailings fall within our definition of high volume (more than 250 items per
posting).




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           Pre-sorted D+2 and later mail services;
           Unsorted High volume D+1 Letters;
           Unsorted High volume D+1 Large Letters;
           Unsorted High volume D+2 and later Letters;
           Unsorted High volume D+2 and later Large Letters;
           Unsorted Low volume D+1 Letters;
           Unsorted Low volume D+1 Large Letters;
           Unsorted Low volume D+2 and Later Letters;
           Unsorted Low volume D+2 and later Letters;


Non-postal substitutes

2.384 In our demand side analysis we find that non-postal alternatives are likely to
      provide only a relatively weak constraint on the price of mail. The reasons for
      this vary by postal application:

           For transactional mail, customers continue to express a strong preference
           for paper copies, while senders of mail are often unable to charge for paper
           copies for commercial reasons (e.g. “free banking”).
           For advertising mail, the campaign is often complementary and the
           characteristics of direct mail are difficult to replicate. Email campaigns are
           less targeted, are often blocked by filters, and those that get through have a
           very poor customer response rate. Advertising (direct mail) is however the
           most application with the strongest price constraint from non-postal
           alternatives.
           Publishers have a strong preference for postal subscriptions as it enhances
           customer loyalty and is more attractive for advertisers.
           For social mail, lack of price awareness means that consumers are largely
           insensitive to price.
           Much fulfilment mail involves items such as credit cards, membership cards
           and SIM cards for which there is no real alternative but to use postal
           services. The postal cost is often a small proportion of the overall cost of the
           item.

2.385 Our provisional conclusion is therefore that the relevant markets should not be
      widened to include non-postal substitutes.




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Geographic markets

2.386 In November we set out that our conclusion that all the Candidate retail markets
      should be defined as national (UK) markets based on how services are offered
      and priced. We are not aware of any demand side evidence that would suggest
      different geographical markets.


Consultation Question
Q15. Do you agree with our provisional conclusions on market definition?




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Section 10: Assessment of Market Power

Section 10.1.           Introduction

2.387 Following our May consultation document,219 our November decision
      document220 set out our decision on whether Royal Mail had market power in
      the ten Candidate Letters and Large Letters retail markets. This analysis was
      based on a supply side assessment only, and considered the following factors:

               Market shares;
               Barriers to entry and expansion; and
               Regulation (including an assessment of the effectiveness of regulated
               wholesale access).

2.388 In this section we complete our market power assessment by conducting a full
      demand and supply side market power analysis of the ten retail mail services
      markets defined in Section 9 above. As these markets are identical to the
      Candidate retail markets set out in our November decision document, our
      supply side market power analysis remains relevant, and we provide a summary
      of this analysis only, with cross-references to our previous work.

2.389 We then complete our market power analysis by considering the following
      demand side competitive constraints:

               Competition between operators in the market;
               Buyer power; and
               Competition from demand side substitutes which lie outside our market
               definition.

2.390 As the potential demand side competitive constraints are additional to the
      supply side constraints previously considered, if these constraints are significant
      then Royal Mail may have less market power than that set out in our November
      decision document.

2.391 As explained in the November decision document, to avoid circularity of
      reasoning, we have not taken into account the effect of current regulation that is
      in place to address market power.221 This is because the key purpose of our
      market power assessment is to inform our analysis as to whether there is a


219
    Postcomm, 2010, „Laying the foundations for a sustainable postal market; May consultation document. (May 2010) -
http://www.psc.gov.uk/documents/155.pdf
220
    Postcomm, 2010, „Laying the foundations for a sustainable postal market; November decision document. (November 2010) -
http://www.psc.gov.uk/documents/1158.pdf
221
    We follow this approach because market power cannot be said to be absent from the relevant market if its absence is the
result of regulation which is in place specifically to address market power.




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       continuing need for retail regulation. We therefore need to conduct our market
       power analysis of the retail mail services markets on the basis that there is no
       retail regulation. This includes the headroom controls in the current regulatory
       framework (since these are inter-dependent with the retail price cap regulation),
       price notification requirements and price cap regulation itself. We have however
       taken into account the existence of wholesale market power regulation and
       regulatory obligations that exist independently of any finding of market power,
       for example, to ensure the USO.

2.392 Figure 32 below illustrates the retail markets where we consider Royal Mail to
      have market power based on our provisional conclusions on retail market
      definition.

Figure 32: Summary of findings on market power within the retail postal markets




2.393 Our market definitions are segmented by speed of delivery, letter format,
      volumes per posting, and degree of sortation. This results in 10 separate
      markets in which we need to conduct a market power assessment. We
      recognise that there is variation in the level of competition within these ten
      different retail markets. In particular, competition is likely to be more developed
      for certain types of postal applications (such as advertising, where post faces
      competition from alternative advertising media) and is likely to have a greater
      impact on some of the ten retail postal markets than others.

2.394 To simplify our analysis, we have assessed three groups of markets where we
      consider the structure and nature of competition are broadly similar and from
      our previous work, there appears to be broad consensus that this is the case.



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      We first consider whether Royal Mail has market power in all five D+1 markets.
      We then consider the three D+2 and later markets for pre-sorted and High
      volume unsorted Letters and Large Letters, and finally the D+2 and later Low
      volume unsorted Letter and Large Letter markets. Within these three groups, we
      indicate whether and to what extent our market power assessment may vary in
      individual markets within the group concerned.

Section 10.2.   D+1 retail Letters and Large Letters markets

2.395 There are five separate D+1 markets we need to consider: pre-sorted Letters
      and Large Letters, High volume unsorted Letters, High volume unsorted Large
      Letters, Low volume unsorted Letters and Low volume unsorted Large Letters.


Summary of supply side market power assessment

2.396 We concluded in May and November that Royal Mail had market power in all
      five of these D+1 markets. This was based on the following evidence:

          Royal Mail has a market share of close to 100% in all D+1 markets (May
          consultation document, para. 3.128);
          There are significant barriers to entry to providing a D+1 end-to-end service.
          In particular, investment costs in providing a high speed national
          transportation network are very high relative to the size of the market (May
          consultation document, para. 3.142);
          Although there is a D+1 access product, access operators do not consider
          that they are given enough time to deliver the mail to the Inward Mail
          Centres (IMCs) under the existing terms of the access agreements.
          According to mail operators, this prevents them from offering D+1 services
          at a national level (May consultation document, para. 3.150);
          Any access providers wishing to provide a national D+1 service would also
          need to invest in a high speed national transportation network to ensure
          mail from around the country arrived by the acceptance time (May
          consultation document, para. 3.142);
          Royal Mail services in these markets are currently regulated (by their
          inclusion in the universal service and/or price control) and accordingly are
          exempt from VAT, whereas rival operators have to charge VAT on their final
          prices. This creates a competitive distortion (May consultation document,
          para. 3.134).




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Demand side analysis of market power in D+1 markets


Competition between operators in the market

2.397 Royal Mail faces only very limited competition at the national level for D+1
      Letters and Large Letters services. There are no end-to-end operators currently
      offering a nationwide D+1 mail service, and while there is a First Classaccess
      product available, there has been no significant take-up of this service.

2.398 The only D+1 mail services that are offered by alternative operators are hybrid
      mail solutions whereby mail is sent electronically from a customer‟s premises to
      a location close to a Royal Mail inward sortation centre, thus reducing the time
      needed for both collection and trunking. Although this innovation has been
      available for a number of years, our research indicates that hybrid mail take-up
      has been slow and appeals to a limited customer base (e.g. estate agents), and
      that the overall volume of mail carried by hybrid operators is presently
      negligible. Nevertheless, we note that the recent inclusion of a hybrid mail
      provider in the Buying Solutions Framework222 suggests that hybrid mail could
      potentially be used by a wider audience in the future.

2.399 At the local level, we have observed some end-to-end operators providing a
      D+1 delivery service within a limited number of postcodes. However, to utilise
      these services, customers either need to send mail to a very limited geographic
      area, or to split their D+1 requirements between a local operator and Royal
      Mail. Discussions with customers suggest that the costs involved in splitting
      their mail profile would be likely to outweigh any cost saving and that there have
      been only limited occurrences in which local D+1 services have been used.

2.400 There appears to be very limited customer awareness of alternative providers of
      D+1 products. For example, our own research, conducted by Ipsos MORI,223
      found that less than 10% of respondents could name an alternative D+1
      supplier.

2.401 For the above reasons we do not believe that competition from rival D+1
      operators is capable of providing an effective competitive constraint on Royal
      Mail‟s D+1 services.




222
    Buying Solutions is the national procurement partner for all UK public services and is part of the Efficiency and Reform Group
within the Cabinet Office.
223
    Postcomm Retail Market Survey 2010, Report of Findings From Research with Business Mailers and Residential Customers, a
report for Postcomm by Ipsos MORI, December 2010




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Buyer power

2.402 In D+1 markets there is only likely to be limited buyer power due to the lack of
      credible alternative operators available to customers. Some very high volume
      customers may be able to secure a more favourable price by threatening to
      switch to a D+2 or later alternative or to non-postal alternatives. However, Royal
      Mail offers services against a set tariff and only negotiates on a very limited
      range of services.


Competition from demand side substitutes which lie outside the relevant market

2.403 As set out in section 9, our provisional conclusion is that the relevant retail
      markets are limited to D+1 mail services. However, other services that lie
      outside these relevant markets may be capable of imposing some competitive
      constraint on Royal Mail‟s prices, particularly when considered in conjunction
      with other competitive constraints, such as, for example, buyer power. In this
      context, we examine the two key potential demand side substitutes: D+2 and
      later mail services, and non-postal alternatives, including electronic forms of
      communication.


D+2 and later mail services

2.404 In section 8 above we observed that, from a demand side perspective, most
      customers who continue to use D+1 services do so because they are prepared
      to pay a premium for a faster service and are unlikely to switch to D+2 and later
      services in response to an increase in the relative price of D+1 services.
      Responses to our questionnaire suggested that an increase in the price of D+1
      services could induce some customers to switch further traffic to D+2 or later
      but not to such an extent as to make it appropriate to widen the definition of the
      relevant market. However, such demand side substitution could in principle
      provide some constraint on Royal Mail‟s D+1 services.

2.405 Nonetheless, when consumers switch from D+1 to D+2 and later services,
      Royal Mail is likely to retain a substantial amount of revenues. First, of those
      customers who do switch, many might be expected to remain with Royal Mail
      given that Royal Mail retains a 40-50% share of D+2 and later markets (see
      market share discussion below). Second, Royal Mail‟s competitors in D+2 and
      later markets are almost exclusively access operators who utilise Royal Mail‟s
      downstream network. So, if customers switch away from Royal Mail, Royal Mail
      will retain access revenues. Downstream revenue accounts for approximately
      []% of Royal Mail‟s total revenue, meaning that Royal Mail will retain the
      overwhelming majority of the value of the mail concerned.



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2.406 The fact that Royal Mail is likely to retain a substantial proportion of the value
      from any business that diverts to D+2 and later services were they to increase
      the price of D+1 services suggests that such demand side substitution provides
      only a weak constraint on Royal Mail‟s prices.

2.407 This is broadly consistent with Royal Mail‟s market elasticity estimates by
      product detailed in Veruete-McKay et al. (2010) which indicate that a 10% rise
      in the price of First Class unsorted mail will lead to a loss in First Class unsorted
      traffic of about 8%, of which 3% will switch to Second Class unsorted traffic.
      These elasticity estimates suggest that, while Second Class represents the
      closest substitute to First Class, the extent to which D+1 prices are constrained
      by the prices of D+2 and later services is limited.


Non-Postal alternatives

2.408 If customers switch to non-postal alternatives, this is potentially more damaging
      to Royal Mail financially as it will lose both upstream and downstream revenues.

2.409 We have seen significant switching from post to non-postal alternatives. Since
      2004, overall mail volumes have declined by approximately 3.5% per annum.
      However, as described in section 1, for the most part this switching appears to
      reflect consumers adapting to changes in the type of communication services
      now made possible by changes in technology (e.g. greater broadband access,
      3G mobile phones, digital downloads), rather than switching in response to
      changes in relative prices.

2.410 While this non-price substitution is capable of imposing some constraint on
      Royal Mail‟s pricing, our evidence is that the overall demand for mail is relatively
      price inelastic. For example, Royal Mail‟s ILTM model estimates the following
      long-run price elasticities of demand by application:

Table 17: Royal Mail’s ILTM model elasticity estimates224

                      Direct mail               Commercial               Social

  Market price
                      -1.0                      -0.2                     -0.4
  elasticity
Source: Royal Mail ILTM model, Veruete-McKay et al. (2010)




224
   These elasticities relate to the change in demand for post with respect to a change in the prices of all postal operators (i.e. not
just Royal Mail‟s prices)




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2.411 These price elasticities relate to all mail services and do not differentiate
      between D+1 and D+2 and later. However our research indicates that very little
      direct mail, (the most elastic of mail applications), is sent using D+1 services.
      So assuming that the majority of D+1 traffic falls within the more inelastic mail
      applications (commercial and social), this suggests that the extent to which D+1
      prices are constrained by non-postal alternatives is likely to be limited.

2.412 These estimates indicate that the demand for post as a whole is relatively price
      inelastic, implying that the competitive constraint imposed by non-postal
      alternatives is likely to be weak.225 However we recognise that elasticities may
      change over time. In particular, elasticities may become unstable where, as
      here, the postal market is in a period of transition. For example, a significant
      increase in postal prices may cause businesses to bring forward plans to
      implement non-postal communications systems (e.g. paperless bank
      statements). While this may cause customers to become more price sensitive in
      the short-run, if the only effect of the price rise is to bring forward existing plans,
      then the long-run price elasticity may be unchanged.

2.413 Price elasticities can also change when a market is in structural decline.
      However, it is not clear whether the demand for post will become more elastic or
      less elastic if demand continues to decline. For example, if customers become
      more willing to switch to and from post and non-postal alternatives as the
      market declines, then demand can become more price elastic. On the other
      hand, post may become less price elastic if the customers who are currently
      switching are relatively price sensitive or have a low valuation for post, and what
      remains is a rump of more captive customers who either have a high valuation
      of post or for whom non-postal media do not represent viable alternatives –
      particularly where there is a „ratchet effect‟ so that customers once lost to post
      are very difficult to switch back.

2.414 Royal Mail has announced significant increases in the price of Basket B mail
      services from April 2011, suggesting that the competitive constraint imposed by
      non-postal alternatives is still currently perceived to be relatively weak.


Provisional conclusions on D+1 markets

2.415 Royal Mail has close to a 100% market share of all D+1 markets. In addition,
      there are very significant barriers to entry to end-to-end competition, while
      access competition is severely limited by the relatively low volumes of mail, and
      the fact that access operators cannot ensure that mail arrives for inward
      sortation within the acceptance time without a high speed national

225
      A possible exception is direct mail, where the price elasticity is -1.0




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         transportation network. While there may be some constraints on Royal Mail‟s
         pricing from D+2 and later products, such constraints are likely to be relatively
         weak given Royal Mail‟s share of the D+2 and later markets and their control of
         downstream infrastructure.

2.416 Elasticity evidence also suggests that non-postal alternatives currently provide
      only a relatively weak constraint on Royal Mail‟s prices. While in principle the
      long-run effects may be more significant, there is no evidence that this is
      influencing Royal Mail‟s current pricing behaviour. For these reasons, we
      provisionally conclude that Royal Mail has market power in all D+1 markets.
      Market power is likely to be greatest in the Low volume unsorted market due to
      the high collection costs per unit (November decision document, paragraph
      3.144), and in the Large Letter format, on account of the additional investments
      that are required in sortation equipment (May consultation document, paragraph
      7.33).

Section 10.3.          D+2 and later retail Letters and Large Letters markets


Pre-sorted mail, High volume unsorted Letters, High volume unsorted Large
Letters


Summary of supply side market power assessment

2.417 In our November decision document we concluded that there was increasing
      competition in the Candidate D+2 and later pre-sorted and High volume
      unsorted mail markets, but that Royal Mail continued to have market power. Our
      assessment was based on the following:

               Royal Mail continues to have high market shares by revenues: 44% pre-
               sorted mail, 58% High volume unsorted Letters, 75% High volume unsorted
               large Letters226 (November decision document, Table 9);
               While Royal Mail‟s market share has been declining significantly as a result
               of increased entry and competition from access operators, the take-up of
               access has been facilitated by the headroom requirements in Royal Mail‟s
               licence that have allowed other operators an apparently more than sufficient
               margin within which they can operate and constraining Royal Mail‟s ability to
               compete with them, (November decision document, para. 7.64);
               In the absence of retail regulation, Royal Mail‟s retail market share may
               therefore be likely to be higher than it currently is (November decision
               document, para. 7.62);


226
  2009/2010. Postcomm calculation based on Royal Mail data. Its shares by volume are 40% pre-sorted mail, 48% high volume
unsorted Letters, 63% high volume unsorted Large Letters.




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           We have concerns that the lack of appropriate equivalence between
           wholesale and retail terms may allow Royal Mail to use its market power in
           wholesale mail services to place additional costs on access operators while
           not placing those costs on itself (November decision document, para. 7.64);
           and
           Relevant Royal Mail services in these markets which remain in the universal
           service and/or subject to price controls are exempt from VAT, whereas rival
           operators have to charge VAT on their final prices. This creates a
           competitive distortion (November decision document, para. 7.64).


Demand side analysis of market power in D+2 and later pre-sorted and High
volume unsorted mail services markets.


Competition between operators in the market

2.418 Royal Mail faces competition from two main access operators, TNT and UK
      Mail, and a number of smaller access operators, across both pre-sorted and
      High volume unsorted markets. There is no significant competition from end-to-
      end operators.

2.419 For the D+2 and later retail markets in question, we have estimated Royal Mail‟s
      market shares by revenues and volumes from 2006/07 to 2009/10 based on
      data submitted by Royal Mail. In response to our November decision document,
      UK Mail questioned our methodology of calculating Royal Mail‟s share for D+2
      and later pre-sorted mail in terms of retail revenues only, rather than both retail
      and wholesale revenues. We continue to follow this approach as this is an
      assessment of market power in retail markets. However, as in November, we
      consider the implications of Royal Mail‟s market power at the wholesale level on
      the development of competition in the relevant retail markets.

2.420 As shown in Figure 33 below, in the pre-sorted mail market Royal Mail has a
      market share of approximately 37% by volume and 44% by revenue. Royal
      Mail‟s share has fallen from over 75% in 2006/07 as competition from access
      operators has continued to increase. However, this has occurred over a period
      when there have been regulatory safeguards for other operators in place in the
      form of access headroom.




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Figure 33: Royal Mail’s share in the D+2 and later pre-sorted Letter and Large
Letter market - 2006/07-2009/10




Source: Postcomm calculation based on Royal Mail data


2.421 We have found the market structure of the High volume unsorted markets to be
      more concentrated than the pre-sorted market but otherwise similar. Royal
      Mail‟s market share of the unsorted High volume Large Letter market (63% by
      volume, 75% by revenues) is significantly greater than that for Letters (48% by
      volume, 58% by revenues).227 However, both markets show a similar pattern of
      increasing competition from access operators over time (see figure 34 and
      figure 35 below).




227
      2009/10. Postcomm estimates based on Royal Mail data.




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Figure 34: Royal Mail’s share in the D+2 and later High volume unsorted Letter
market 2006/07-2009/10




Source: Postcomm calculation based on Royal Mail data



Figure 35: Royal Mail’s share in the D+2 and later High volume unsorted Large
Letter market 2006/07-2009/10




Source: Postcomm calculation based on Royal Mail data


2.422 Although Royal Mail‟s market share has declined significantly across all three
      relevant retail markets (pre-sorted, High volume unsorted D+2 and later Letters
      and Large Letters markets), Royal Mail‟s market share and the level of market



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            concentration remain high. For example, in the pre-sorted D+2 market, the least
            concentrated of the three, the three largest postal operators account for more
            than 90% of the market.

2.423 We consider that some characteristics of the markets, notably low barriers to
      switching and reasonable awareness of alternative suppliers to Royal Mail, have
      contributed to helping new entrants win market share from Royal Mail relatively
      quickly and this is a countervailing factor which we take into account in
      assessing market power.

2.424 As regards the costs associated with switching operators, our interviews with
      business customers indicated that the service quality of Royal Mail and access
      operators is now perceived to be broadly similar and does not appear to
      represent any barrier to switching. Contracts between customers and mail
      operators are relatively short, typically of one to three years in duration, and
      most customers we spoke to conduct regular reviews of their postal needs. The
      main switching costs identified by our survey are those associated with
      stationery changes and project management fees. For the most part, customers
      indicated that these costs were easy to manage and did not represent a
      significant barrier to switching.

2.425 Our evidence indicates that a significant proportion of pre-sorted and High
      volume unsorted customers have switched from Royal Mail to access operators
      at some point. This evidence is supported by findings in the BCS survey
      (2009)228 where one in ten mailers spending less than £500,000 on post have
      switched from Royal Mail, compared to one in three for those spending over
      £500,000 per annum. Further, our interviews with business customers suggest
      that of those who have switched away from Royal Mail, the majority have
      switched all of their D+2 and later traffic to one access operator.

2.426 Customers‟ awareness of competitors to Royal Mail appears to be moderate to
      good. For example, responses to our survey of businesses spending less than
      £50,000 per annum on post, suggested that the majority of customers were
      aware of alternatives to Royal Mail.229 Postcomm‟s BCS (2009) found that
      customer awareness was generally good and had increased significantly since
      2007 as competition has developed. This suggests that the level of customers‟
      awareness of Royal Mail‟s rivals does not of itself represent a barrier to effective
      competition.

2.427 However, as set out in paragraph 7.62 of the November decision document, we
      consider that the primary reason that entry has occurred is the operation of


228
      Postcomm Business Customer Survey 2009 - http://www.psc.gov.uk/documents/51.pdf
229
      Ipsos MORI (2010) Small Business Mailer Study on behalf of Postcomm




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          access regulation and in particular the headroom control. The headroom
          requirements currently in Royal Mail‟s licence have allowed other operators an
          apparently more than sufficient margin within which they can operate. Without
          the headroom control (and specifically one at the level in the current price
          control230), Royal Mail would have had greater flexibility to compete in retail
          markets and, we have no doubt would have retained higher market shares.

2.428 Indeed the headroom control may have the effect of dampening price
      competition between Royal Mail and its rivals. If Royal Mail were to choose to
      reduce retail prices, the headroom control obliges Royal Mail to reduce access
      prices, lowering the costs of Royal Mail‟s rivals and allowing them the
      opportunity to retain market share. This may therefore reduce the incentive for
      Royal Mail to react to competition by lowering prices.231

2.429 In addition, Royal Mail‟s market power in downstream services, and the
      absence of end-to-end competition, means that if Royal Mail increases retail
      prices, while it may lose retail volumes, it will retain access volumes and
      revenues. As noted above, downstream costs account for approximately []%
      of Royal Mail‟s total costs so the potential losses in revenues associated with
      loss of retail market share are relatively limited.

2.430 In the absence of access regulatory controls, however, Royal Mail is likely to be
      able to exercise market power to an even greater extent due to a lack of
      equivalence. We consider that the vertical links between Royal Mail‟s retail and
      wholesale operations remain sufficiently strong to allow Royal Mail to distort
      competition at the retail level. Royal Mail could achieve this by placing extra
      costs on access operators via the imposition of dissimilar terms and conditions
      in access contracts. While these issues will be addressed in the separate
      Access Review, we cannot assume that any changes to the access regime will
      ultimately prevent Royal Mail from exercising market power in the retail markets.

2.431 We therefore continue to believe that it would be reasonable not to place too
      much emphasis on Royal Mail‟s declining market share and the current level of
      take-up of access contracts. The evidence nevertheless supports our decision
      to reduce the level of headroom for Second Class letters in 2011-12.


Buyer Power

2.432 In pre-sorted and High volume unsorted mail markets, customers are likely to
      enjoy a degree of buyer power as there are currently a number of credible

230
  To the end of the 2010-11 financial year.
231
  We note that Royal Mail retains greater flexibility to compete on the basis of price for Mailsort 3 as this service is not headroom
controlled.




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            alternative suppliers to Royal Mail. However, as in D+1 markets above, Royal
            Mail offers services against a set tariff and only negotiates on a very limited
            range of services which is likely to limit the degree of buyer power.


Competition from demand side substitutes which lie outside the relevant
markets


a) D+1 mail services

2.433 While we have seen customers switching from D+1 to D+2 and later services,
      we have not observed switching in the opposite direction. This, together with the
      fact that Royal Mail has nearly a 100% share of D+1 services (and would thus
      retain a customer‟s business) suggests that D+1 services are unlikely to provide
      a competitive constraint on Royal Mail‟s pricing in pre-sorted and High volume
      unsorted D+2 later markets.


b) Non-Postal Alternatives

2.434 As noted in the discussion on non-postal alternatives in D+1 markets above,
      while we have seen significant switching away from mail, our evidence suggests
      that much of this substitution has been for non-price reasons and that the price
      elasticity of demand for post remains inelastic.

2.435 However the constraint imposed by non-postal alternatives on the price of Royal
      Mail‟s D+2 and later pre-sorted and High volume unsorted services is likely to
      be greater for some applications compared to others. For example, a fulfilment
      mailer such as a bank sending out a credit card has no electronic substitute
      while an advertiser could replace direct mail with an email communication.

2.436 Indeed, the application with the highest price elasticity of demand is advertising
      (-1).232 Direct Mail advertising is almost exclusively conveyed using D+2 and
      later that D+2 mail services, and there is evidence that Royal Mail is responding
      to competition from downstream access operators and other advertising media
      by seeking to lower prices for direct mail services. For example, Royal Mail‟s
      Sale in March 2010 was a special promotion which aimed to offer lower prices
      for Mailsort 3 (which is predominantly used for Direct Mail) for new business to
      mail. Although our evidence indicates that this promotion appears to have been
      primarily taken up by direct mailers sending mail to a higher proportion of their
      database (own-price effect), rather than new customers switching to post from


232
      Royal Mail ILTM model, Veruete-McKay (2010)




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      other advertising media (cross-price effect), we consider that this may reflect the
      fact that it is easier and cheaper for Royal Mail to target their existing
      customers.

2.437 Therefore, given the inelasticity of mail generally we consider that non-postal
      alternatives provide only a limited demand side constraint on Royal Mail‟s prices
      in the relevant D+2 and later retail markets.


Provisional conclusions on D+2 and later pre-sorted, and High volume unsorted
mail services markets

2.438 Our supply side assessment of market power set out in our November decision
      document found that competition was developing in D+2 and later pre-sorted
      and High volume unsorted mail markets but that Royal Mail retained market
      power. This assessment acknowledged that access operators had been winning
      significant market share from Royal Mail, but noted that Royal Mail continued to
      have high market shares, particularly in unsorted mail, and that these market
      shares were likely to have been higher in the absence of retail regulation.

2.439 In addition we were concerned that the lack of appropriate equivalence between
      wholesale and retail terms might allow Royal Mail to use its market power in
      wholesale mail services to raise the costs of rival access operators. While we
      will seek to address any issues arising out of a lack of equivalence in our
      Access Review, until the new regulatory framework is fully embedded, we
      cannot assume that it has dealt with the underlying competition concerns.

2.440 Our demand side analysis of market power has analysed potential additional
      competitive constraints on Royal Mail. However, our provisional conclusion is
      that additional demand side constraints are relatively limited. In particular,
      headroom controls, and Royal Mail‟s market share in wholesale services,
      provide Royal Mail with relatively weak incentives to compete aggressively with
      access operators for market share. Our evidence also suggests that the
      competitive constraints from services outside the relevant market (both postal
      and non-postal), are relatively weak, with the possible exception of alternative
      advertising media. While there is the potential for buyer power, currently Royal
      Mail does not generally negotiate with customers on an individual basis.

2.441 For the above reasons, our provisional conclusion is that while competition is
      developing in pre-sorted and High volume unsorted mail markets, Royal Mail
      continues to have market power.




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D+2 and later Low volume unsorted mail services markets


Summary of supply side market power assessment

2.442 In our November decision document (para. 7.67) we concluded that Royal Mail
      had market power in Low volume unsorted Letters and Large Letters markets.
      We based this decision on the following:

          Royal Mail had a market share of approximately 100%;
          There are significant barriers to entry to providing mail services to Low
          volume customers resulting from economies of scale and density in
          collecting mail; and
          Royal Mail services in these markets are currently regulated (by their
          inclusion in the universal service and/or price control) and accordingly are
          exempt from VAT, whereas rival operators have to charge VAT on their final
          prices. This creates a competitive distortion.


Demand side analysis of market power in D+2 and later pre-sorted and High
volume unsorted mail services markets


Competition between operators in the market

2.443 We have not been able to calculate detailed shares for the Low volume
      unsorted mail markets. However, evidence from Royal Mail and other operators
      suggests that Royal Mail‟s share of these Candidate markets is close to 100%.
      There is therefore no effective competitive constraint arising from competition
      between operators in the market.


Buyer Power

2.444 There is unlikely to be any significant buyer power in Low volume unsorted D+2
      mail due to the lack of credible alternative operators available to consumers,
      and the small volumes of mail demanded.




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Competition from demand side substitutes which lie outside the relevant market


a) D+1 and later mail services

2.445 There is unlikely to be any significant competitive constraint imposed by
      demand side substitution from D+1 mail services for the same reasons
      described in relation to pre-sorted and High volume unsorted markets above.


b) Non-Postal Alternatives

2.446 The analysis of competition from non-postal alternatives is similar to that
      contained in our analysis of the High volume unsorted D+2 market where we
      concluded that competition from non-postal alternatives is likely to be limited. It
      is possible that such constraints could be greater for some small customers, for
      example, it may be more credible for a small company who is targeting a
      particular market niche to only offer electronic forms of communication.
      However, switching to non-postal alternatives often involves significant
      investment costs, e.g. in IT, so for many small companies it may be more
      difficult to switch to non-postal alternatives.


Provisional Conclusions

2.447 Royal Mail has a market share of close to 100% in both the Letter and Large
      Letter Low volume unsorted markets. While access regulation reduces the
      barriers to entry to provide upstream services, operators seeking to serve Low
      volume mail customers are unable to achieve the volumes or customer
      densities necessary to be able to obtain similar costs to Royal Mail. With limited
      buyer power and constraints from services outside the relevant market, there
      are few apparent constraints on Royal Mail‟s pricing. We therefore provisionally
      conclude that Royal Mail has market power in the Low volume unsorted D+2
      and later Letter and Large Letter markets.


Consultation Question
Q.16 Do you agree with our market power assessment?




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          Other services


Introduction: Defining scope of market study in relation to other products and
services

3.1       This chapter considers the other services that Royal Mail supplies which are not
          included in the packet and parcel services (PPS) or Letters or Large Letters
          retail or wholesale market studies. These were considered in the May
          consultation document 2010 and the November decision document 2010233 as
          well as this present consultation. We refer to these Royal Mail services
          collectively as “other services” and have grouped them into three categories:
          response services (including returns services), redirections services and data,
          and business collection services.

3.2       The structure of this chapter is:

                We discuss how we have selected the services considered for this
                consultation.
                For each service category, we provide:
                      a brief overview of the Royal Mail services within the category;
                      an analysis of potential supply side and demand side substitutes;
                      initial views on market definition and on whether Royal Mail has market
                      power in the market identified; and
                      consultation questions on market definition and market power.

3.3       This analysis is being presented in the form of an open consultation rather than
          a comprehensive study as is the case for Retail Letters and Large Letters to
          reflect the fact that we have relatively less information about these services at
          present.


Background

3.4       In the May consultation document, we noted that Royal Mail currently offers
          hundreds of products, services and sub-services. Therefore, we needed to
          consider both whether it was proportionate to include all these products and
          services within the scope of our market analysis and, if not, which products and
          services we should prioritise. We selected the products and services to be

233
   Postcomm‟s „Laying the foundations for a sustainable postal market; May consultation document. (May 2010) and November
decision document (November 2010). In the May consultation document, Annex 2: Analysis of markets, Appendix B: products
included in the scope of the analysis of markets, p 177. In addition, table 11, p 38, Annex 4: Price control and access, states that
Packetpost Returns First and Second Class and Mail Order Returns will be reviewed as part of the Retail market study.




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          included in our market analysis based on the principles of prioritisation that we
          published in January 2010, which we had set by reference to our statutory
          duties. We took into account the following considerations:

                The impact of regulation of that particular service on users and operators,
                including whether a service is already regulated, and how.
                The strategic significance of the service in the market place including its
                importance to users and operators, its volume and revenue and its
                relationship with other services.
                The value to be gained from including a service within the scope of the
                market study.
                The resources needed to complete this piece of work, in other words,
                whether the benefits are likely to justify using the resources and whether we
                will be able to obtain necessary information to undertake our analysis.

3.5       Since November, we have reflected further on the services that we consider
          should be included as part of our further work on the market study. This has led
          us to change the scope of the other products considered in this market study.

3.6       In particular, we have decided to bring two services into the scope of the market
          study: Redirections (including Redirections data) and Business Collections. We
          considered that it would be helpful to publish our views for consultation on these
          services in conjunction with our consultation on the universal service.234 In the
          universal service consultation, we confirm our views,235 and formally seek to
          amend Royal Mail‟s licence to clarify, that Redirections (up to 12 months) and
          Business Collections (among other support services)236 should be provided as
          part of the universal service. Therefore the views set out here may help to
          inform responses to that consultation.237

3.7       We have, however, decided not to consider at this stage the services that are
          either provided free or, while being important support services for users,
          generate limited revenue overall.238

3.8       In addition, there are three services that were listed in the May consultation
          document and November decision document as falling within the scope of the


234
    Postcomm‟s Clarification of certain services in the universal service: a consultation dated (28 February 2011).
235
    These views were set out in our decision in June 2004 (see Decision document: the UK‟s universal service, June 2004).
236
    The other support services that we confirm should be provided as part of the universal service are Recorded Signed For,
Certificate of Posting, Poste Restante and Keepsafe.
237
    Furthermore, given the focus of the legislative framework envisaged by the Postal Services Bill on the regulation of the
universal service and the provision of access, our views on these services (assuming that the universal service consultation
results in the proposed clarification to Royal Mail‟s licence being made) will inform how regulation is to be applied to these
services.
238
    On this basis, we have decided not to bring Certificate of Posting and Poste Restante within the scope of the market study. So
far as concerns the two other support services that we confirm should be provided as part of the universal service, Recorded
Signed For has already been considered as part of the PPS market analysis and Keepsafe is being considered in this document
as part of Redirections.




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       market study which have not been considered yet. The first is outbound
       international services. We intend to consult on these services in May 2011. The
       other two services are Door to Door and PO Boxes. Given the considerations
       outlined above, it is no longer our priority to review these services at this stage.
       However, we will keep that decision under review.

3.9     Table 23 in Appendix C lists all products and services that now fall within the
       scope of the market study.

3.10   Table 18 below provides an overview of the services which we cover in this
       consultation. These cover all item formats (Letter, Large Letter and packets)
       and accounted for []% of Royal Mail‟s regulated revenues in 2009-10.

Table 18: Clarification of the services considered in this consultation

Services considered that were previously         Services considered that were previously
within the scope of the market study             outside the scope of the market study

                                                 Redirections Services
Response Services

Business Reply Standard Plus, First and Second
                                                 Redirections
Class

Freepost Standard (two variants) and Freepost
                                                 Keepsafe
Plus, First and Second Class


Freepost Name, First Class only                  Do not Redirect


Special Delivery with Response                   NCOA Suppress and Update

Returns Services                                 Redirect Check

Packetpost Returns                               The Home Movers‟ Mailing Service


Mail Order Returns                               Business Change File


                                                 Business Collections Services

                                                 Customer Collect




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Section 1: Response and Returns services

3.11         Response and returns services provide a receiving consumer (business or
             residential) the opportunity to send items back to the sender for free because
             the sender bears the postage costs. This is sometimes referred to as reverse
             logistics. Response services are mainly used to convey Letters and Large
             Letters. Customers must pay a licence fee239 in addition to a per-unit price for
             every item that is returned to them. Returns services are mainly used for the
             packet and parcel (PPS) format and are priced on a per-unit basis.

3.12         Table 19 below sets out the current Royal Mail prices of response and returns
             services.

Table 19: Prices of 0-100g Royal Mail response and returns services 2010/11

  Response services                         Licence       1st Class                 2nd Class
                                            fee

  Business Reply – Standard                 £76.55        39p                       28p

  Business Reply – Plus                     £76.55        35p                       24p

  Freepost Standard                         £76.55        39p                       28p

  Freepost Plus                             £76.55        35p                       24p

  Freepost Name                             £185.85       46p                       N/A

  Special Delivery                          £79.55        £4.87                     N/A

  Returns services

  Packet post returns                       -             £1.21                     £1.01
Source: Royal Mail website and information provided to Postcomm




Response services

3.13         Response services provide a consumer (business or residential) the opportunity
             to send items back to a business with the postage costs of the reply paid by the
             business rather than by the consumer. These services include:

                   Business Reply Standard: This service allows the receiving customer to
                   respond to the sending customer using pre-printed and postage paid
                   envelopes and cards. The terms and conditions require the response
                   card/envelope to be pre-printed with the sending customer's address,
                   licence number and indicia (postage mark). Responses are able to be made
                   in any of Royal Mail‟s formats up to 1kg for Second Class. There is no
                   weight limit on the First Class service.

239
      This is an annual subscription fee.




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                  Freepost Standard: This service is also available as Handwritten where the
                  receiving customers hand write the return address (Standard Handwritten)
                  for their replies to the sender and Pre-printed where the receiving
                  customers use either a pre-printed card or envelope. Responses are able to
                  be made in any of Royal Mail‟s formats up to 1kg for Second Class. There is
                  no weight limit on the First Class service.
                  Business Reply Plus and Freepost Plus:240 These are variants of the
                  Business Reply Standard and Freepost Standard services described above.
                  The main distinction is that items sent via this service must also satisfy
                  Royal Mail‟s machineability specifications and there is a maximum weight of
                  100g allowed with only letter format being accepted.
                  Freepost Name: This service provides a single line address for customers to
                  put on the envelope, for example „FREEPOST Royal Mail‟. Responses are
                  restricted to First Class only and can be sent in any format with no weight
                  limit.
                  Special delivery with Response: This is a guaranteed, fast return service for
                  valuables which enables customers to return items urgently and securely. It
                  guarantees delivery back to the business by 1.00pm the next working day.

3.14        We note that some of the response services described above may be used to
            send packets or parcels (PPS) as well as Letters and Large Letters. However,
            for the purpose of simplifying the analysis we consider Letters and Large Letters
            under response services and packets and parcels under return services. We do
            not consider that this will affect our analysis of these services because we
            consider the volumes of packets and parcels sent using response services to be
            low. However we invite views on this question.

3.15        By covering the costs of postage, and in many cases providing an envelope,
            firms use response services in an attempt to solicit a response from the end-
            customer. Firms will mainly use response services for the following reasons:

                  Where there is a need for documents to be returned with a signature.
                  Examples include insurance and mortgage papers.
                  Where a payment is required or sought, for example, in order to make a
                  store card payment or to donate to a charity.
                  Where the sender is trying to gather information for marketing purposes, for
                  example, through the return of a questionnaire.

3.16        From the point of view of the receiving customer, response services operate in a
            similar way to social mail in that items are entered into the postal pipeline via
            pillar boxes and Post Offices. Similarly, the logistics involved in providing
            response services are identical to those that are required to provide Low volume
            unsorted services. As a result, our initial view is that the scope for supply side

240
      Response Plus (Business Reply / Freepost) services are only available for letters 0-100g.




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            substitution is limited in line with our initial views on these markets in our
            November decision document. In particular, we consider that the collection
            network necessary to provide a response service would be costly to replicate
            such that it would not be economically feasible for operators to start supplying
            such services in response to a 5-10% increase.

3.17        On the demand side, there are non-postal alternatives that can be used to illicit
            responses from customers in the form of email, internet, telephone and text
            messaging. The substitutability of such media for postal response services will
            vary as it is largely dependent on the purpose of the communication. For
            example, firms will have to use a postal response service where a signature is
            required while responses to a questionnaire could be collected via the internet.
            Recent research by Ipsos MORI indicates that consumers prefer to
            communicate with firms by post rather than non-postal alternatives.241 In
            addition, many firms will use a range of response channels to account for the
            heterogeneity of their customers‟ preferences, suggesting that post and non-
            post response services could be complementary as well as substitutable. In light
            of these considerations, we consider it unlikely that there would be sufficient
            switching to non-postal alternatives to render a 5-10% price rise unprofitable.

3.18        Furthermore, we consider that there is unlikely to be demand side substitution
            between response services and other Low volume unsorted services as only
            response services provide businesses with the facility of offering their
            customers free postage upon reply. We acknowledge that there is a supply side
            argument that response services could fall within the Low volume unsorted
            Letters and Large Letters markets as the collection network needed to provide
            such services is identical. However we do not consider supply side substitution
            to be relevant to this analysis as Royal Mail is essentially the only operator with
            the capability of providing Low volume unsorted services. As a result, we come
            to the initial view that the relevant market is for postal response services.

3.19        In line with our market power assessment for Low volume unsorted Letters and
            Large Letters markets as set out in Chapter 2 section 10 of this consultation
            document, we consider that there exist economic barriers to entry, expansion
            and exit for response services. As collection costs per item are high for Low
            volume customers, a significant investment in a collection point network that
            would allow the consolidation of mail items would be necessary to provide
            response services. We have no evidence to suggest that it is economically
            viable for operators to establish collection points at sites with commercial
            partners such as newsagents or supermarkets. We recognise that the prices
            Royal Mail can charge for response services may be constrained to a limited



241
      Ipsos MORI survey, section 4.12




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            degree by non-postal alternatives that lie outside the relevant market (e.g.
            internet, telephone).

3.20        In conclusion, taking both demand and supply side considerations into account
            we come to the initial view that the relevant market is for postal response
            services and as the only provider, Royal Mail has market power.


Consultation Questions
Q17. Do you agree with our initial view that the market is that for response services?

Q18. Do you have evidence to suggest that significant PPS volumes are sent using
     response services?

Q19. Do you agree with our approach to limiting our analysis for response services to
     Letters and Large Letters and considering packet and parcels (PPS) under
     returns services?

Q20. Do you have any evidence to suggest that response services fall within the Low
     volume unsorted markets?

Q21. Do you have any evidence to suggest that a 5-10% increase in the prices of
     response services will lead to switching to non-postal alternatives?

Q22. Do you agree with our initial assessment that Royal Mail has market power for
     response services?


Returns services

3.21        Returns services enable customers to return unwanted items they have
            received back to the sender free of charge (i.e. the sender bears the cost).
            Returns services differ from response services in that they are used to return
            items that are too large to fit within the dimensions of a pillar box – items must
            be either brought to a collection point such as a Post Office or collected from a
            customer‟s premises (the Y2X242 PPS collection network).

3.22        The main customers of returns services are likely to be online retail or mail-
            order companies, such as Amazon and Lakeland. Research indicates that
            returns services play an important role in the business models of such retailers.
            For example, online clothing retailers can compete with high-street retailers by
            allowing customers to try on clothes at home and bearing the cost of returns.
            According to the Home Tracker Survey 2009, 34% of home shoppers surveyed


242
      Items sent by either consumers or businesses from an access point (e.g. Post Office) to a consumer or business.




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         had returned items in the previous 12 months. However, 79% who had difficult
         returns experiences were unlikely to use the retailer again.243

3.23     Royal Mail‟s returns service product, Packetpost Returns, provides consumers
         the facility to return their unwanted Large Letters or packets and parcels (PPS)
         via a Post Office. Royal Mail charges customers a flat rate price based on the
         average weight of the packages returned. Discounts are offered to customers
         who receive over 2,000 returns a year. The maximum weight for First Class is
         20kg and 5kg for Second Class. Royal Mail offers greater volume discounts to a
         limited number of retailers with very high returns volumes via its Mail Order
         Returns product. Large Letter returns fall within the response service analysis
         above.

3.24     Other operators, such as City Link and DPD UK, offer returns services whereby
         they collect return items from addresses to which they are making a delivery.
         There are also returns services available from Hermes244 and Yodel245 who will
         collect items from designated „safe-places‟ at customer addresses. Additionally,
         in 2009, Yodel launched its own nationwide collections network for PPS returns
         known as Collect+ which currently consists of collection points in over 3000
         convenience stores.

3.25     A customer wishing to return an unwanted item they have bought online has two
         options: via the returns package or label (usually included in the initial
         delivery)246 or returning it to the retailer‟s outlet. We do not consider the return to
         retail store to be a viable alternative to return by post because:

               retail stores are often located far from the recipient; and
               there may be no physical retail outlets.

3.26     Further, an increase in the price of the return service of 5-10% may not always
         be transparent to the customer who typically pays a standard postal charge
         (covering both the delivery and returns elements). We concluded in our
         November decision that the markets for PPS were not constrained by non-
         postal channels and therefore that it was not appropriate to identify a wider
         market including non-postal alternatives. It follows therefore that, as returns
         services are used to convey physical items back to the sender, non-postal
         channels do no not constrain the price of returns services. Our initial view is
         therefore that the returns services markets are no wider than post.




243
    Home Tracker Survey 2009, commissioned by Royal Mail - ftp://ftp.royalmail.com/Downloads/public/ctf/rm/trend.pdf
244
    Hermes, 2010, http://www.hermes-europe.co.uk/services.html [Accessed 20 September 2010]
245
    HDNL, 2010, http://www.hdnl.co.uk/Press-Room/Latest-News/HDN-Lite/ [Accessed 20 September 2010]
246
    This is a free service if the provider is Royal Mail




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3.27    As regards other possible demand side substitutes, we do not consider that a 5-
        10% price rise in the price of returns services would cause a significant number
        of customers to switch to other postal services. Whereas response services are
        similar in that they are used to convey items back to the initial sender, such
        services are not viable substitutes as they can only be used for conveying
        Letters and Large Letters.

3.28    As set out above, the choice of whether items are returned via either response
        services or returns services depends on the format of the item. Response
        services are mainly provided using a Low volume unsorted Letter and Large
        Letter collection network while returns services are mainly provided using the
        PPS Y2X collection network. Although it is conceivable that an operator that
        provides a response service could start to supply a returns service in the event
        of a 5-10% price increase, we consider that supply side substitution is unlikely
        to constrain the prices of returns services as Royal Mail is the only operator with
        this capability (and already provides returns services).

3.29    Therefore, based on demand side and supply side considerations, our initial
        view is that the relevant market is for returns services.

3.30    The Ipsos MORI survey suggests that Royal Mail‟s returns services are more
        frequently used than any other. Figure 36 below indicates that approximately
        half of consumers usually use Royal Mail to return goods, a similar proportion
        return items depending on the policy of the retailer, while only 2% of
        respondents have arranged for another provider to pickup.

Figure 36: Returning goods and the methods used when returning goods




 Source: Ipsos MORI survey




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3.31   This is likely to be reflective of the fact that alternative PPS operators in general
       do not provide returns services for third party items: alternative operators offer
       returns only for items which they have delivered, whereas Royal Mail provides
       returns for items that it does not deliver. The choice retailers are presented with
       when choosing a returns service therefore depends to a large extent on the
       operator that has been used to send the good out in the first place. For
       example, a retailer that sends goods out via Royal Mail has no choice but to use
       a Royal Mail returns service while one that uses an alternative operator can in
       some cases use either the alternative operators‟ returns service or Royal Mail‟s.
       We are inviting views on whether returns services for third party items could be
       made widely available and whether it would be commercially viable to offer such
       services.

3.32   We consider that the competitive conditions in the market for returns services
       are largely dependent on the competitive conditions of the underlying PPS B2X
       markets. We therefore take the initial view that Royal Mail will have market
       power in the returns services market for items below 2kg in line with our findings
       for the B2X PPS Light market (below 2kg) as set out in November. Furthermore,
       if Royal Mail‟s Packetpost Returns is the only service that is also used to return
       items that are delivered via other operators, Royal Mail is likely to have even
       greater market power in the returns services market.

3.33   Although we note that alternative operators who are mainly active in the PPS
       B2X Heavy market (above 2kg) also offer returns services, we have not
       gathered sufficient evidence to evaluate the competitive conditions in operation
       for the return of items above 2kg. We therefore leave this issue open and invite
       views from interested parties.


Consultation Questions
Q23. Do you have evidence to suggest that retailers‟ returns policies are important to
     the customers of online and mail-order retailers?

Q24. Do you have evidence of alternative operators offering returns service for third
     party items?

Q25. Are retailers who offer a returns service able to offer this service through a
     provider that is different from the one used for the initial delivery? Q26.    Do
     you consider there to be separate markets for the return of items on the basis of
     weight as in PPS B2X markets (i.e. below and above 2kg)?

Q27. Do you agree with our initial view that given our market definition Royal Mail is
     likely to have market power within the market for returns services below 2kg?




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Q29. Do you have any evidence that shows that Royal Mail has market power for the
     return of items above 2kg?




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Section 2: Redirections services and data


Redirections services

3.34     Royal Mail‟s Redirections is a service that is used by people who move house
         or by businesses relocating their premises. It enables the customer to continue
         to receive mail that is sent to an address at which they no longer reside – the
         mail is forwarded to their current address. The price paid for Redirections
         depends on the duration of the service required – customers can choose to
         redirect their mail for 1, 3, 6 or 12 months247 and renew these up to a maximum
         of 2 years. In 2009-10, Royal Mail earned approximately [] of revenues from
         Redirections.

3.35     Royal Mail also offers the following two redirections services:

               Keepsafe: a service designed for people or businesses who want their mail
               held securely while they are away, for delivery on their return. Mail items
               received are held by for up to two months.
               Do not Redirect: a service whereby a sending customer can request that
               particular items are not redirected but are processed according to the
               sender‟s instructions.

3.36     All redirections of mail take place at the delivery office level of Royal Mail‟s
         pipeline. Given that Royal Mail delivers in excess of 99% of all mail, it is the only
         company able to interrupt the normal flow of mail in order to redirect mail
         through its pipeline to offer these services. As a result, a prima facie supply side
         analysis suggests that a competitor to Royal Mail could not start supplying a
         substitute service in response to a 5-10% price increase.

3.37     On the demand side, many people do not redirect their mail when they change
         their address (they choose to inform contacts or businesses of the move
         themselves), suggesting that a 5-10% increase may cause even more people to
         avoid using redirections services. However since there do not appear to be any
         demand side substitutes available our initial view is that the relevant market is
         for redirections services.

3.38     In terms of market power, we consider it unlikely that customers are particularly
         price sensitive for the following reasons:

               There is little price awareness as the service is used very rarely (only when
               people change their address);

247
   Even where the move is only temporary or to an overseas address, a redirection service can be provided.
http://www.royalmail.com/portal/rm/jump2?catId=400040&mediaId=600008




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               It is a potentially valuable service even though it may be cheap to supply;
               and
               There are no obvious substitutes.

3.39     Furthermore, even if end-to-end competition becomes viable and alternative
         operators become capable of providing redirections services, customers are
         likely to want to continue purchasing a redirections service from the operator
         that delivers the majority of the mail they receive (i.e. for the foreseeable future,
         Royal Mail). As a result, our initial view is that Royal Mail has market power in
         the provision of redirections services.


Consultation Questions
Q30. Do you agree that the market for redirections services should be no wider than
     the market for forwarding mail on to a new address?

Q31. Is there any evidence of other operators providing a competitive constraint on
     Royal Mail‟s redirections service?


Redirections data

3.40     By providing a redirections service, Royal Mail is able to collect and collate data
         on customers‟ current addresses. In order to apply for a redirections service,
         customers are required to complete an application form that includes details of
         their name, old address, new address, email and telephone numbers. All
         applications are ID verified for security purposes, which also means that the
         data is reliable.

3.41     As a result, redirections data is valuable to businesses and mailing houses who
         have a need to maintain up-to-date customer address databases. Royal Mail
         sells this information via its National Change of Address Update (NCOA)
         Suppress service. Firms wishing to resell the data (e.g. marketing database
         firms) can do so by becoming a Reseller Licensee248 (a wholesale service),
         while they can purchase the data from Royal Mail without the ability to resell it
         by becoming direct licensees (a retail service). Royal Mail provides NCOA
         Suppress customers with frequent updates of their customer address databases
         via an add-on service known as NCOA Update.

3.42     Royal Mail also offers the following services that use redirections data:



248
   The total cost of becoming a NCOA® Update Reseller consists of three main elements: Annual Licence Fee, Security
Review Fee, and Royalty Fees (in certain circumstances, such as for high usage customers, discounted fixed prices may
be offered instead of the royalty fees).




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           Redirect Check: a service targeted at financial institutions to reduce identity
           fraud. It matches redirections applicants against the customer‟s own data,
           improving their fraud scoring and providing a more robust view of the
           individual when consolidated with other industry wide credit referencing
           data.
           The Home Movers‟ Mailing Service: a service whereby Royal Mail supplies
           name and address details of home movers to relevant companies who
           provide products and services that recent home movers are most likely to
           need.
           Business Change File: a business suppression tool that can also update
           addresses for businesses that have moved. It has been specifically
           designed for B2B direct mail customers who rely on targeting accurate
           records.

3.43   Royal Mail is currently the only undertaking able to produce up-to-date
       redirections data as a consequence of being the postal operator that delivers
       over 99% of all mail. If the prices of redirections services were to rise by a
       sustained 5-10%, we do not consider that another firm could react by beginning
       to offer an equivalent service. For example, although utilities companies will
       hold information about their customers‟ addresses, there is no single company
       that supplies the entirety of the UK since industry liberalisations. Similarly, TV
       licensing databases will not provide full information since they only provide
       address details of the licence holder as opposed to all occupants of a particular
       address.

3.44   We reach the same conclusion for demand side substitution, finding that the
       unique characteristics of redirections data limit the substitutability of alternative
       sources of data. Whereas it would be theoretically possible for businesses and
       mailing houses which need up-to-date customer address databases to
       undertake survey research or access census data in response to a 5-10%
       increase in the price of redirections data, such data is unlikely to be as up-to-
       date or as granular to act as close substitutes for redirections data.

3.45   We therefore come to the initial view that there is a market for redirections data
       and that as the only provider, Royal Mail has market power.


Consultation Questions
Q32. Do you consider that there are alternative data sources that can be used to
     maintain up-to-date customer address databases?

Q33. Do you have any evidence that indicates that there are competitive constraints
     acting on Royal Mail‟s redirections data service?




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Section 3: Business Collections

3.46     In our May consultation document we described the upstream postal pipeline as
         involving collection, outward sortation, and trunking. We grouped these
         upstream activities together in our definition of the Candidate retail markets in
         the May and November documents. However, we did not rule out the possibility
         that these inputs could be provided by third parties separately or as part of a
         bundle of services.249 As explained above, we have now confirmed our view250
         that business collections services are services provided as part of the universal
         service and have been brought into the scope of this consultation for this
         reason.

3.47     Royal Mail‟s business collection service, Customer Collections, allows
         customers to have their mail collected from their premises at a pre-arranged
         time either on a one-off or a regular daily basis. Customers can use this service
         to send all types and formats of mail. As such, it covers all domestic and
         international Letter, Large Letter and packet and parcel (PPS) mail. Royal Mail
         provides business collections for free for customers spending more than
         £15,000 per annum across all of Royal Mail services. For customers spending
         less than £15,000 per annum, Royal Mail offers a range of collection services
         which they charge for. A spend of £15,000 equates to a daily posting of 160
         First Class or 230 Second Class Letters.251 Table 20 below provides a
         summary of these services.

Table 20: Royal Mail Business Collections services and charges 2010/11
Spend per annum on                     Service                     Time of Collection                 Price
Royal Mail Products
More than £15,000                      Weekday                     Mutually agreed by RM              FREE
                                       collection                  and Customer
Less than £15,000                      Weekday                     Allocated by RM                    £500 per annum
                                       Collection
                                       Timed Weekday               Chosen by Customer                 Additional £800
                                       Collection                                                     per annum
                                       Saturday                    Allocated by RM                    £150 per annum
                                       Collection
                                       Timed Saturday              Chosen by Customer                 Additional £200
                                       Collection                                                     per annum
                                       Single Collection           Allocated By RM                    £12.50 per
                                                                                                      collection
Source: www.royalmail.com accessed 27th January 2011




249
    Postcomm, 2010, Laying the foundations for a sustainable postal market,
http://www.psc.gov.uk/consultations/may_2010_consultation - para. 3.71; http://www.psc.gov.uk/documents/1158.pdf - para. 7.43
250
    See Postcomm‟s Clarification of certain services in the universal service: a consultation dated 28 February 2011.
251
    Assuming 260 working days for STL on account. A less frequent posting could increase the posting to above 250 items.




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3.48      Whilst it may be more practicable for companies with very low volumes of mail
          to go to a collection point such as a pillar box or Post Office, we do not consider
          that this method of entering mail into the postal pipeline is a sufficiently strong
          restraint on the price of business collections. This is because for firms with more
          significant volumes there are likely to be costs involved with taking mail to the
          collection point in terms of staff time and disruption that outweigh the costs of
          business collections services. We therefore take the initial view that the market
          is that of paid-for business collections services.

3.49      On the supply side, we consider that it would not be feasible for operators to
          supply collection services to customers who send items which fall within the
          markets in which Royal Mail has market power. The November decision
          document describes how Royal Mail‟s market power for Low volume Letters and
          Large Letters and Low volume light B2X deferred packets and parcels services
          is a consequence of alternative operators‟ inability to replicate Royal Mail‟s
          economies of scale and scope in collections.252

3.50      Accordingly, we consider that the level of choice customers face for collections
          services depends on the type of mail being sent in terms of volume, format,
          speed of delivery and sortation in line with our market power analyses for retail
          Letters and Large Letters detailed in section 10 of Chapter 2 and our analysis of
          the PPS markets as set out in our November decision document. For example,
          a customer sending only D+1 Letters is restricted to using Royal Mail‟s
          collection service regardless of the volume being sent (such customers are
          captive), while another customer sending High volume unsorted D+2 Letters will
          have the option of using alternative operators for this traffic (these customers
          are non-captive).

3.51      Apart from the £15,000 threshold for a free collection service, collection services
          are not specific to the speed, format, level of sortation or volume. Therefore the
          extent to which Royal Mail collection services face competition from alternative
          operators would depend on the number of non-captive customers. That is the
          number of paying customers who only send items that fall within the retail
          markets for Letters, Large Letters or PPS where there is effective competition or
          where Royal Mail retains market power but we have identified as increasingly
          competitive.253

3.52      Even if the number of non-captive customers is sufficiently large to prevent
          Royal Mail from increasing its overall price of collection services then we would


252
    Postcomm, 2010, Laying the foundations for a sustainable postal market - http://www.psc.gov.uk/documents/1158.pdf; paras.
4.30 & 5.59
253
    For Letters and Large Letters this includes all the markets that have been identified as increasingly competitive. For PPS this
includes all the markets where Royal Mail does not have market power or where we have identified that there is developing
competition and also possibly where competition is fragile.




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         need to consider whether Royal Mail could price discriminate between captive
         and non-captive customers, by, for example, offering lower prices to high
         volume customers.

3.53     Given that Royal Mail already price discriminates between high volume and low
         volume customers we consider that it would be able to price discriminate
         between captive and non-captive customers.254 The implication is that Royal
         Mail has the ability to retain the non-captive customers by charging them a
         relatively low price while charging its captive customers higher prices. Indeed
         the recent proposals to put the price up for the Weekday Collection a weekday
         service from £500 to £650 (an increase of 30%) suggests an absence of
         competitive constraints. However in the absence of detailed cost information we
         are unable to take a definitive view on this.

3.54     Our initial view is therefore that Royal Mail has market power in the market for
         paid-for business collections.


Consultation Questions
Q34. Do you currently use a business collection service? Are you currently charged
     for this service or is it provided free of charge? How much are you charged and
     on what basis?

Q35. If you pay for a collection service, would you start entering mail directly into the
     postal pipeline via the Post Office Ltd. or pillar boxes in the event of a sustained
     5-10% price rise?

Q36. Do you agree that at the market for business collections is a separate market?

Q37. Do you consider that Royal Mail face sufficient competition for its business
     collections to prevent it from increasing prices by 5-10%?




254
  This is because in both the PPS and the Letters and Large Letters markets the captive customers tend to be in the Low volume
markets and the non-captive customers tend to be in the High volume markets.




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Section 4: Summary of initial views on the market for Other services

3.55   Our initial view is there is a separate market for postal response services and
       that Royal Mail has market power in this market.

3.56   Our initial view is that there is a separate market for returns services and that
       Royal Mail has market power for the return of items below 2kg. We are inviting
       views on the competitive conditions above 2kg.

3.57   Our initial view is that there are separate markets for redirections services and
       redirections data and that Royal Mail has market power in both these markets.

3.58   Our initial view is that there is a separate market for paid-for business collection
       services and that Royal Mail has market power in this market.




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                                         0 Summary of Provisional Conclusions and Initial Views



      Summary of Provisional Conclusions and Initial Views

Section 1: Introduction

4.1   This Chapter sets out the provisional conclusions and initial views that we have
      reached as a result of the analysis that we have undertaken as set out in this
      consultation document. Our provisional conclusions cover the retail Letters and
      Large Letters markets considered in Chapter 2 and our initial views cover the
      other products and services considered in chapter 3.

Section 2: Retail Letter and Large Letter market study

4.2   Our provisional conclusion is that the market definitions and market power
      assessments for the retail Letters and Large Letters markets are identical to
      those reached in our November decision document in respect of the Candidate
      retail markets. We therefore segment the retail Letters and Large Letters
      markets by the following characteristics:

          Speed of mail (D+1, D+2 and later than D+2)
          Format (Letters, Large Letters)
          Sortation (pre-sorted, unsorted)
          Size of mailing (High volume, Low volume )

4.3   We also confirm our view that the geographic market is UK wide.


Demand side substitution within the postal markets

4.4   We considered five broad mail applications:

          transactional
          advertising
          social
          publishing
          fulfilment

4.5   A major part of our analysis focused on whether each application faces a
      constraint from non-postal alternatives and if so, whether that constraint is
      sufficient to define markets that are wider than post. We have found narrow
      postal markets for each of the applications.




                                      The building blocks for a sustainable postal service   167
                                                               0 Summary of Provisional Conclusions and Initial Views



4.6       Table 21 below summarises our demand and supply side and overall market
          definition provisional conclusions. „Strong‟ means that the potential substitutes
          exert a sufficient constraint on each other to place them in the same market;
          „Weak‟ implies that the constraint is an insufficient constraint. Potential
          substitutes should be included in the relevant market where they exert either a
          sufficient demand or a supply side constraint (or both).

Table 21: Summary Diagram
                     Demand side                           Supply side                           Market Definition
                     Constraints                           Constraints                           Provisional Conclusion
  Non-Postal         weak                                  Weak                                  Non-postal substitutes lie
  Substitutes                                                                                    outside the relevant
                                                                                                 market
  Postal
  Substitutes

  Mail               weak                                  strong                                All applications in same
  Applications                                                                                   market
  Unsorted /         weak                                  Weak                                  Separate markets for pre-
  Pre-sorted                                                                                     sorted and unsorted
  D+2 / D+2          strong                                Strong                                D+2 and D+2 and later in
  and later                                                                                      same market
  D+1 / D+2          weak                                   Weak                                 Separate markets for D+1
  and later                                                                                      and D+2/later than D+2
  than D+2
  Letter /           weak                                  strong (pre-sorted)                   Letters and Large Letters
  Large Letter                                             weak (unsorted)                       in same market for pre-
                                                                                                 sorted and separate
                                                                                                 markets for unsorted mail
  Low volume         weak                                  Weak                                  Separate markets for Low
  / High                                                                                         volume and High volume
                                                                                                          255
  volume                                                                                         mailings



Market Power

4.7       Having conducted a full demand and supply side market power assessment.
          We have reached the same provisional conclusions as set out in our November
          decision document, and find that Royal Mail has market power in all D+1 and
          Low volume unsorted markets where it has a market share of almost 100%.

4.8       As set out in the November 2010 document Royal Mail has lost significant
          volumes to access operators in the D+2 and later pre-sorted and High volume


255
  Applies to unsorted mail only. In pre-sorted mail all mailings fall within our definition of high volume (more than 250 items per
posting).




                                                           The building blocks for a sustainable postal service                 168
                                         0 Summary of Provisional Conclusions and Initial Views



      unsorted Letters and Large letters markets. Competition from access operators
      has to some extent been facilitated by retail (headroom) regulation. In order to
      avoid circularity of reasoning, we have not taken into account the effect of
      current retail regulation as that is in place to address market power. It is our
      view that Royal Mail‟s market shares would be higher without headroom
      controls, price notification requirements and price caps. The evidence we have
      received suggests that there is a lack of appropriate equivalence between
      wholesale and retail terms (including lack of full accounting separation) which
      may allow Royal Mail to use its market power in wholesale services to place
      higher costs on access operators than it faces itself. In addition, the continued
      VAT advantage remains a significant barrier to competition at the retail level.

4.9   Our further analysis adds weight to our November conclusions that Royal Mail
      has market power in these markets, but that they are increasingly competitive.

Figure 37: Provisional conclusions on market power within retail postal markets




                                      The building blocks for a sustainable postal service   169
                                                 0 Summary of Provisional Conclusions and Initial Views



Section 3: Other products and services

4.10   The table below summarises the products and services which we are
       considering in this consultation.

Table 22: Services considered in this consultation

Services considered that were previously           Services considered that were previously
within the scope of the market study               outside the scope of the market study

Response Services                                  Redirections Services

Business Reply Standard Plus, First and Second
                                                   Redirections
Class

Freepost Standard (two variants) and Freepost
                                                   Keepsafe
Plus, First and Second Class


Freepost Name, First Class only                    Do not Redirect


Special Delivery with Response                     NCOA Suppress and Update

Returns Services                                   Redirect Check

Packetpost Returns                                 The Home Movers‟ Mailing Service


Mail Order Returns                                 Business Change File


                                                   Business Collections Services


                                                   Customer Collect




Response services

4.11   Our initial view is that there is a single market for response services. In addition,
       our initial view is that Royal Mail is likely to have market power in this market as
       it is the only operator to have a UK-wide collection network able to offer a
       comprehensive national service.


Returns services

4.12   Returns services also rely on a large collection point network, but other
       operators are able to provide a returns service for items that they deliver. Our
       initial view is that there is a separate market for returns services and that



                                            The building blocks for a sustainable postal service   170
                                           0 Summary of Provisional Conclusions and Initial Views



       competitive conditions in this market will have similarities with the deferred B2X
       PPS markets (given that returns services involve the return of items that were
       likely to have been delivered by operators active in the deferred B2X PPS
       markets). In addition, our initial view is that Royal Mail is likely to have market
       power in returns services below 2kg by virtue of its market power in the B2X
       PPS market below 2kg. We have not gathered sufficient evidence to evaluate
       whether Royal Mail is likely to have market power for return services over 2kg
       and invite views from interested parties on this issue.


Change of address and redirections services and data

4.13   Royal Mail delivers nearly all mail and therefore is the only operator that could
       provide a redirections service. Our initial view is that the relevant market is the
       provision of redirections services (including change of address) and that Royal
       Mail has market power in this market.

4.14   Royal Mail is also the only operator that could generate redirections data. Our
       initial view is that the relevant market is the provision of redirections data and
       that Royal Mail has market power in this market.


Business Collections

4.15   Our initial view is that the relevant market is that for paid for business
       collections. Our initial view is that Royal Mail has market power in the paid for
       business collections market.




                                        The building blocks for a sustainable postal service   171
                                           0 Summary of Provisional Conclusions and Initial Views



Section 4: Views Invited

4.16   We welcome views on the provisional conclusions set out in this consultation
       document from any interested parties and in particular on the consultation
       questions we have set out.

4.17   If you would like to discuss any points raised in this document, please contact
       Nancy Race, telephone 020 7593 2165 or email Nancy.Race@psc.gov.uk.

4.18   Postcomm will make public all responses to this consultation document, subject
       to individual requests for confidentiality. If you do not want all or part of your
       response to be read by anyone outside Postcomm, please ensure that you
       clearly indicate which part is confidential. If you are happy for your contribution
       to be made public, but do not want the name of the organisation or the
       individual who signed it to be revealed, please indicate this by adding the
       following: “Name of organisation/sender NOT to be published




                                        The building blocks for a sustainable postal service   172
                                                                              Appendix A: Glossary




Appendix A: Glossary

Access                Allowing other companies operating in the postal market, or other
                      users of postal services, to use Royal Mail‟s facilities for the partial
                      provision of a postal service. Access to Royal Mail‟s postal facilities
                      could in principle be at any point in the pipeline activity (e.g. a mail
                      centre or delivery office). Condition 9 of Royal Mail‟s licence enables
                      mail users and postal operators to make commercial agreements
                      with Royal Mail allowing them to use the company‟s facilities to carry
                      mail for part of its journey
Advertising           A form of communication intended to persuade an audience, to
                      purchase or take some action upon products or services
Asymmetric market     This refers to a case where there are two relevant markets (A and B)
                      where there is a competitive constraint from market A on market B,
                      but the reverse is not the case
B2X                   Items sent by businesses to either businesses or consumers (where
                      the item is collected from the sender‟s premises)
Business Change       A business redirections service offered by Royal Mail that can update
File                  addresses for businesses that have moved. It has been specifically
                      designed for B2B direct mail customers who rely on targeting
                      accurate records
Business Reply        This response service allows the receiving customer to respond to
Standard              the sending customer using pre-printed and postage paid envelopes
                      and cards. The terms and conditions require the response
                      card/envelope to be pre-printed with the sending customer's address,
                      licence number and indicia (postage mark). Responses are able to
                      be made in any of Royal Mail‟s formats up to 1kg for Second Class.
                      There is no weight limit on the First Class service

Business Reply Plus   These are variants of the Business Reply Standard and Freepost
and Freepost Plus     Standard services also described in this glossary. The main
                      distinction is that items sent via this service must also satisfy Royal
                      Mail‟s machineability specifications and there is a maximum weight of
                      100g allowed with only Letter format being accepted
Candidate retail      A retail market that has been defined on the basis of supply side
market                analysis only
CATI                  Computer assisted telephone interview
Cellophane fallacy    Under the SSNIP test (see below) the prevailing market price of the
                      service in question is often used as a proxy for the competitive price.
                      The cellophane fallacy results where the prevailing price already
                      reflects monopolistic pricing and is therefore not at the competitive
                      level. Under such a situation the use of the monopolistic prices would
                      result in an incorrect market definition - it would suggest that the
                      price cannot be profitably raised by 5-10% without customers
                      switching to alternative services and therefore that the market should
                      be incorrectly widened
CBC                   This refers to Customer Barcode. A barcode applied to mail
                      containing postcode and delivery point information that allows for the
                      automated sorting of mail



                                         The building blocks for a sustainable postal service   173
                                                                                Appendix A: Glossary



Critical loss          The quantity of sales that would have to be lost to make a
                       hypothetical price increase unprofitable
Cross docking          A logistics process whereby items are unloaded from an incoming
                       vehicle and loaded directly into outbound vehicles, with little or no
                       storage in between. This activity may be to sort items intended for
                       different destinations, or to combine items from different origins into
                       vehicles with the same destination
Customer Collect       A Royal Mail service that allows customers to have their mail
                       collected from their premises at a pre-arranged time either on a one-
                       off or a regular daily basis
D+1                    A retail service that aims to deliver the next working day after
                       collection, for example Royal Mail First Class stamped mail
D+2                    A retail service that aims to deliver two working days after collection,
                       also known as a day C service
D+7                    A retail service that aims to deliver within seven days of collection, for
                       example Royal Mail Mailsort 3
Delivery point density The proximity of different delivery points
Do not Redirect        A Royal Mail service whereby a sending customer can request that
                       particular items are not redirected but are processed according to the
                       sender‟s instructions
Downstream             The activities of inward sortation and delivery
Drop density           The number of items per delivery point
DSA                    Downstream access
End-to-end (e2e)       Operators other than Royal Mail that provide a full postal service
                       from collection to delivery
Fulfilment             delivery of a tangible item that a customer has requested
Freepost Name          This response service provides a single line address for customers to
                       put on the envelope, for example „FREEPOST Royal Mail‟.
                       Responses are restricted to First Class only and can be sent in any
                       format with no weight limit
Freepost Standard      This response service is available as Handwritten where the
                       receiving customers hand write the return address (Standard
                       Handwritten) for their replies to the sender and Pre-printed where the
                       receiving customers use either a pre-printed card or envelope.
                       Responses are able to be made in any of Royal Mail‟s formats up to
                       1kg for Second Class. There is no weight limit on the First Class
                       service
Hypothetical           Test used in competition analysis to define a market in terms of size
monopolist test        and scope. Its alternative name is the Small but Significant Non
                       Transitory Increase in Price (SSNIP) test. A market is defined as the
                       smallest product or group of products (and geographical area) in
                       which a hypothetical monopolist can profitably sustain a small but
                       significant non transitory increase in price. Please also see SSNIP
                       test below
Keepsafe               A Royal Mail service designed for people or businesses who want
                       their mail held securely while they are away, for delivery on their



                                           The building blocks for a sustainable postal service   174
                                                                              Appendix A: Glossary



                      return. Mail items received are held by for up to two months
Letter/Large Letter   This refers to Royal Mail‟s definition for Letter and Large Letter. A
                      letter is any item up to length: 240mm, width: 165mm and thickness:
                      5mm, weighing no more than 100g. A Large Letter is any item larger
                      than a Letter and up to 353mm in length, 250mm in width and 25mm
                      in thickness , with a maximum weight of 750g
Licensed mail area    This is the range of services for which a licence under The Postal
                      Service Act 2000 is required, broadly to send letters weighing less
                      than 350g and/or costing less that £1 to send


Mail Order Returns    A Royal Mail returns service. It is available only to a limited number
                      of customers who have high returns volumes
Market                A market has both a product and geographic dimension. The product
                      dimension includes all products and/or services that are regarded as
                      interchangeable or substitutable. The geographic dimension is the
                      area where operators are involved in the supply and demand of the
                      product and/or services and where the competitive conditions are
                      reasonably similar, and are different from neighbouring areas
National Change of    NCOA Suppress and Update use redirections data to provide
Address (NCOA)        information on people who have moved in the UK, allowing
Suppress and          businesses to flag or delete customer records that are no longer
Update                valid. The information provided by these services includes the name
                      of the individual who has moved, email addresses, telephone
                      numbers, the address from which they have moved and the address
                      to which they have moved
Packet and parcel     Services used to convey items up to 32kg which are not within the
services (PPS)        licensed mail area (see above), whether they are handled by mail or
                      parcel operators, express or courier companies or any other
                      operator. This excludes Letters and Large Letters for services without
                      any tracking or other premium attribute
Packetpost Returns    Royal Mail‟s returns service which provides consumers the facility to
                      return their unwanted Large Letters or packets and parcels (PPS) via
                      a Post Office. Royal Mail charges customers a flat rate price based
                      on the average weight of the packages returned. Discounts are
                      offered to customers who receive over 2,000 returns a year. The
                      maximum weight for First Class is 20kg and 5kg for Second Class
Price elasticity of   Price elasticity measures how much the demand for a good changes
demand                when its price changes. If a 10% increase in the price of a good
                      causes demand to fall by less than 10%, the good is inelastic; if it is
                      more it is elastic
OCR                   This refers to Optical Character Recognition. It is the printing
                      standard compatible to Royal Mail‟s sorting machines which can read
                      addresses printed in certain typefaces, provided that the print quality
                      is of a sufficiently high standard
Pre-sorted            Products where the sender has sorted their mailing items to a
                      predetermined level before handing them to the operator
Premium               Services where value-added features are present, such as tracking,
                      proof of delivery, or additional insurance




                                         The building blocks for a sustainable postal service   175
                                                                                Appendix A: Glossary



Publications            A printed publication published as part of a series and circulated at
                        least twice a year, but less often than daily
Redirect Check          A Royal Mail service targeted at financial institutions to reduce
                        identity fraud. It matches redirection applicants against the
                        customer‟s own data, improving their fraud scoring and providing a
                        more robust view of the individual when consolidated with other
                        industry wide credit referencing data.

Redirections            A Royal Mail service that is used by people who move house or by
                        businesses relocating their premises. It enables the customer to
                        continue to receive mail that is sent to an address at which they no
                        longer reside – the mail is forwarded to their current address
Retail                  A postal service serving a final customer
Return on Investment This is a measure of the effectiveness of an advertising medium (or
(ROI)                mix of media) for a specific advertising campaign. It is usually
                     qualitative and compares the level of result (in terms of revenue or
                     awareness) obtained for a given level of spend
Royal Mail              Royal Mail Letters (different from Royal Mail Group, which includes
                        Royal Mail Letters, Royal Mail Wholesale, Post Office Ltd. and
                        Parcelforce Worldwide)
SSNIP test              Small but Significant and Non-Transitory Increase in Price (SSNIP)
                        test, also known as the Hypothetical monopolist test (see above).
                        Test used in competition analysis to assess the size and scope of the
                        relevant market for investigation. The SSNIP test begins by
                        considering the products or services of the type supplied by the firm
                        under investigation. It asks whether a hypothetical monopolist with
                        control over all these products would be able to profitably raise the
                        price of those products permanently by 5-10% above the competitive
                        level, assuming that the price of all other goods remained constant. If
                        the answer to that question is yes, then this set of products defines a
                        relevant market and competition between suppliers of those products
                        provide the main sources of competitive constraint. If the answer is
                        no, this implies that suppliers of other products also provide
                        important competitive constraints.
Social                  Items that are purely social in function such as personal letters,
                        postcards and greeting cards as well as those that are more
                        transactional like payments of bills and official mail
Special Delivery with    This is a guaranteed, fast return service for valuables which enables
Response                 customers to return items urgently and securely. It guarantees
                         delivery back to the business by 1.00pm the next working day
The Home Movers‟        A service whereby Royal Mail supplies name and address details of
Mailing Service         home movers to relevant companies who provide products and
                        services that recent home movers are most likely to need
Transactional           Communication between companies or between companies and
                        individuals relating to the ongoing provision of goods or services
Transpromotional        Transpromotional mail is transactional mail where advertising
mail                    leaflets are either inserted in the same envelope or where
                        advertising is printed on the transactional mail piece
Unsorted                Service where the mailing items handed to the operator are not pre-
                        sorted.



                                           The building blocks for a sustainable postal service   176
                                                                    Appendix A: Glossary



Upstream    The activities of collection, outward sortation (where necessary –
            pre-sorted mail may not require further outward sortation) and
            trunking
Wholesale   Postal activities that are sold as intermediary products to provide a
            retail service
Y2X         Items sent by either consumers or businesses from an access point
            (e.g. Post Office) to a consumer or business




                               The building blocks for a sustainable postal service   177
                                         Appendix B: Format definitions and Royal Mail Products




Appendix B: Format definitions and Royal Mail Products


Definitions of Letters and Large Letters

B.1   We follow Royal Mail‟s format specifications by defining Letters as items going
      through the post that weigh up to 100g and that have a maximum size of
      240mm x 165mm x 5mm.

B.2   On the same basis we define Large Letters as items exceeding the Letter
      dimensions that weigh up to 750g and that have a maximum size of 353mm x
      250mm x 25mm.

B.3   We specifically exclude any premium Letters and Large Letters which are not
      subject to licensing requirements as they fall within the scope of our packets
      and parcels (PPS) definition. That would, for example, exclude items that meet
      the Royal Mail Large Letter size and weight threshold (i.e. less than 353mm x
      250mm x 25mm and between 100g and 750g) but are sent using a premium
      service (i.e. costing more than £1).


Overview of Royal Mail products

B.4   In Chapter 2 we discuss the ability of customers to switch between different
      postal products in response to sustained price increases of 5-10%. However the
      decision to switch between products will not be purely based on price reasons.
      Other factors, such as the ability to change formats, minimum volume
      requirements, presentation standards and minimum spends will influence the
      ability of senders to switch between different postal products.

B.5   As a result, we consider it useful to summarise the conditions attached to the
      following Royal Mail postal products:

           Mailsort;
           Walksort;
           Cleanmail;
           Standard Tariff products.


Mailsort

B.6   Mailsort is a suite of pre-sorted products that (in 2010-11) offer discounts on the
      base Mailsort price for sortation, presentation and volume. A variety of delivery



                                       The building blocks for a sustainable postal service   178
                                         Appendix B: Format definitions and Royal Mail Products



      speed options are available to customers in the form of First, Second and Third
      Class Mailsort products (Mailsort 1, Mailsort 2, Mailsort 3). These products are
      accessible only when sending at least 4000 letter item.

           Format: All Mailsort products can be used for Letters weighing up to 100g,
           with a maximum size of 240mm x 165mm x 5mm. Only Mailsort 1400 can
           take large letters. To qualify as a Large Letter, the weight must be no
           greater than 750g and the maximum size is 353mm x 250mm x 25mm.
           Volume/Sortation: Mailsort can be sorted 70, 120, 700, or 1400 ways,
           each offering different levels of discounts. 4,000 Letters per posting are
           needed to qualify for both Mailsort 120 and Mailsort 1400, 10,000 for
           Mailsort 700, and 20,000 for Mailsort 70. However, if all Letters are for
           delivery within the same Postcode area in which they are mailed, the entry
           requirement falls to 2,000.For Large Letters Mailsort 1400 requires a
           minimum of 1000 items.
           Presentation: For the Mailsort 70, Mailsort 120, and Mailsort 700 products
           only machinable Letters are accepted. These Letters can either be OCR or
           CBC readable. For items using Mailsort 1400 there are no requirements for
           machineability and address accuracy.


Walksort

B.7   Walksort is a pre-sorted product that only accepts mail sorted to a level that is
      capable of being handed straight to delivery staff to take out on their rounds.
      Customers have the option of First or Second Class delivery with this product.

           Format: Letters must be no heavier than 100g and the maximum size is
           240mm x 165mm x 5mm. Large Letters qualify if they weigh 750g or less
           and their dimensions do not exceed 353mm x 250mm x 25mm.
           Volume/Sortation: The minimum mailing volume is 4000 Letters and 1000
           Large Letters. If mailing to and from a specific single postcode area, the
           minimum mailing size is just 2000 Letters.
           Presentation: As items using Walksort are pre-sorted to the delivery walk
           level, the key presentation requirement is that mailings must be presented
           to 100% postcode accuracy.


Cleanmail

B.8   Cleanmail is Royal Mail‟s product offering for unsorted bulk mailings. Cleanmail
      offers item based discounts based on letter machineability and address
      accuracy, and additional volume related discounts. Customers have the option
      of First or Second Class delivery with this product.




                                      The building blocks for a sustainable postal service   179
                                                        Appendix B: Format definitions and Royal Mail Products



              Format: Cleanmail can be used for Letters with minimum dimensions of
              90mm x 140mm x 0.25mm and maximum dimensions of 240mm x 165mm x
              5mm.
              Volume/Sortation: Cleanmail does not require the customer to carry out
              any sorting. Volumes of at least 1000 Letters per posting are needed to
              qualify. The volume related discount starts from 1000 items.
              Presentation: Cleanmail must be machinable when it is presented to mail
              centres for sorting. Royal Mail accepts both CBC and OCR. There are two
              Cleanmail products available – Cleanmail & Cleanmail Plus256 and
              Cleanmail Advance.257 The difference between the two is that items sent
              via Cleanmail & Cleanmail Plus go through an accreditation process where
              the standard of accuracy for the address is checked in order to determine
              whether customers achieve discounts.


Standard Tariff Products

B.9      Standard Tariff products are available to all customers. Mail can be sent as
         either First or Second Class. They can be paid for by Stamp, Meter or PPI. The
         Automated Standard Tariff Large Letter product can be used for mailings of
         Large Letters in excess of 250 items to earn a discount and is only available via
         PPI payment methods.258

              Format: stardard tariff products can be used for Letters weighing up to
              100g, with a maximum size of 240mm x 165mm x 5mm. Large Letters must
              weigh no more than 750g and the maximum size is 353mm x 250mm x
              25mm. The same criteria are applied for Large Letters sent using the
              Automated Standard Tariff Large Letter product; however these can only be
              a maximum of 10mm thick.
              Volume/Sortation: There is no minimum volume required. A 5.5% volume
              discount can be earned when sending in excess of 20,000 letters and in
              excess of 5,000 Large Letters. To qualify for the Automated Standard Tariff
              Large Letter product, mailings of large letters must exceed 250 items.
              Discounts depend on weight and delivery speed and can go up to 20.6%.
              Presentation: There are usually no particular presentation requirements for
              public tariff accounts. However, the Automated Standard Tariff Large
              Letter.




256
    See for information about Cleanpostal & Cleanpostal ,
Plus.ftp://ftp.royalpostal.com/Downloads/public/cmwalk/doc/active/doc28800004/Cleanpostal%20&%20Cleanpostal%20Plus%20U
ser%20Guide%20March%202010.pdf
257
    See ftp://ftp.royalpostal.com/Downloads/public/cmwalk/doc/active/doc20100003/User%20Guide%202009%20-
%20Cleanpostal%20Advance.pdf for more information about Cleanpostal Advance.
258
    See http://www.royalpostal.com/portal/rm/jump2?catId=400047&mediaId=43700683 for more information about the Automated
Standard Tariff Large Letter product.




                                                     The building blocks for a sustainable postal service          180
                             Appendix C: Products included in the scope of the Analysis of Markets




Appendix C: Products included in the scope of the Analysis of
Markets

C.1   Below is a list of Royal Mail products and services that now fall within the scope
      of the market study.


Table 23 Products included within the scope of the market study


1C Mail

2C Mail

1C Prepaid stationery

2C Prepaid stationery

Access 1400

Access 120 Letter

Access 120 Large Letter and Packet

Access 120 OCR

Access 120 CBC

Access 700 CBC

Access Walksort

Access Mixed weight

Access Responsible Mail

Access Advertising Mail

Access Mail Centre Extraction

Access Post Office Collect

Access 1C 120

Admail

Airmail

Airsure




                                        The building blocks for a sustainable postal service   181
                                                 Appendix C: Products included in the scope of the Analysis of Markets




 Automated STLL 1C Account

 Automated STLL 2C Account

 Big Book

 Business Change File

 Business Mail Secure

 Business Reply Plus

 Business Reply Standard

 Cleanmail 1C CBC

 Cleanmail 1C OCR

 Cleanmail 2C CBC

 Cleanmail 2C OCR

 Cleanmail Plus 1C OCR

 Cleanmail Plus 1C CBC

 Cleanmail Plus 2C OCR

 Cleanmail Plus 2C CBC

 Cleanmail Advanced 1C

 Cleanmail Advanced 2C

 Customer Collections

 Door to Door259

 Do not Redirect

 Express 9

 Express 9 Saturday

 Express 10

 Express 10 Saturday

 Express AM



259
      As explained in Chapter 3, it is no longer our priority tor review this service at this stage.




                                                                The building blocks for a sustainable postal service   182
                             Appendix C: Products included in the scope of the Analysis of Markets



Express AM Saturday

Express PM

Express 24

Express 24 Saturday

Express 48

Express 48 Saturday

Freepost Plus

Freepost Standard

Home Movers‟ Mailing Service

International No Sort

International No Sort Plus

International Unsorted Economy

International Unsorted Priority

International Format Sort Economy

International Format Sort Priority

International Bulk Mail Economy

International Bulk Mail Priority

International Destination Sort Economy

International Destination Sort Priority

International Destination Sort Standard

International Business Reply

International Stamped Response

International Admail

International Redirection

International Sign for

Keepsafe




                                          The building blocks for a sustainable postal service   183
                           Appendix C: Products included in the scope of the Analysis of Markets




Mail Order Returns

Mailmedia Economy 1400 letter

Mailmedia Standard 1400

Mailmedia Standard Clean

Mailmedia 700 Standard

Mailmedia 700 Eco

Mailsort 700 (1)

Mailsort 700 (2)

Mailsort 700 (3)

Mailsort 1400 (1)

Mailsort 1400 (2)

Mailsort 1400 (3)

Mailsort 120 CBC (1)

Mailsort 120 CBC (2)

Mailsort 120 CBC (3)

Mailsort 120 OCR (1)

Mailsort 120 OCR (2)

Mailsort 120 OCR (3)

NCOA Suppress

NCOA Update

PacketPost Daily Rate 1C

PacketPost Daily Rate 2C

PacketPost Flat Rate 1C

PacketPost Flat Rate 2C

Packetsort Flat Rate 1C

Packetsort Flat Rate 2C




                                      The building blocks for a sustainable postal service   184
                                                 Appendix C: Products included in the scope of the Analysis of Markets




 Packetsort 8 1C

 Packetsort 8 2C

 Packetsort Plus

 Packetpost Returns

 Parcels

 PO Boxes260

 Presstream 1

 Presstream 2

 Presstream Premium

 Pressstream Walksort 2C

 Recorded Delivery 1C

 Redirections

 Redirect Check

 Responsible Mail

 Royal Mail Heavyweight

 Special Delivery £500 BR

 Special Delivery £1000 BR

 Special Delivery £2500 BR

 Special Delivery £500 Stamp

 Special Delivery £1000 Stamp

 Special Delivery £2500 Stamp

 Special Delivery Prepaid stationery

 Special Delivery £500 Account

 Special Delivery £1000 Account

 Special Delivery £2500 Account



260
      As explained in Chapter 3, it is no longer our priority tor review this service at this stage.




                                                                The building blocks for a sustainable postal service   185
                          Appendix C: Products included in the scope of the Analysis of Markets




Special Delivery £500 Meter

Special Delivery £1000 Meter

Special Delivery £2500 Meter

Special Delivery 9am £500 Stamp

Special Delivery 9am £1000 Stamp

Special Delivery 9am £2500 Stamp

Special Delivery 9am £500 Meter

Special Delivery 9am £1000 Meter

Special Delivery 9am £2500 Meter

Special Delivery 9am £500 Account

Special Delivery 9am £1000 Account

Special Delivery 9am £2500 Account

Surface mail

Walksort 1

Walksort 2




                                     The building blocks for a sustainable postal service   186

				
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