Stamps.com 2006 Annual Report Download - page 10

US Mail Volume
According to the U.S. Postal Service Annual Report, the total postage market was approximately $73 billion in 2006, of which
approximately $51 billion was represented by mail classes other than standard mail and periodicals. We believe that some portion of this
$51 billion is a potential market for purchasing and printing postage using PC Postage.
The U.S. Postal Service processed over 213 billion pieces of mail during its fiscal year 2006. Based on the USPS 2005 Household Diary
study, consumer-to-consumer mail volume is approximately 5.9 billion pieces per year, made up of the following segments: 2.2 billion
holiday/season greeting cards; 1.4 billion other greeting cards; 1.2 billion letters to friends or relatives; 0.8 billion invitations; and 0.3 billion
other. We also estimate that an additional 10.5 billion pieces per year are sent between businesses and consumers as business advertising mail,
and an additional 8.6 billion pieces per year are sent from businesses to consumers as First Class correspondence mail. We believe that
consumer-to-consumer and business-to-consumer-advertising mail are two potential markets for use of PhotoStamps.
Traditional Postage Industry and the Emergence of PC Postage
The U.S. Postal Service has experienced public demand for more convenient access to U.S. Postal Service products and services, and has
faced strong competition from overnight delivery services and online transaction services. The U.S. Postal Service also has historically
experienced lost revenue owing to fraud committed using traditional postal meters. In response to these challenges, in 1995 the U.S. Postal
Service announced the Information Based Indicia (“IBI”) program, its first new form of postage since the approval of the postage meter in
1920. The information based indicia was a new type of U.S. Postal Service postage mark that contained an information rich two dimensional
bar code. Each bar code is unique and contains technology that reduces the fraud risk to the U.S. Postal Service. The IBI Program is commonly
referred to today as the PC Postage program.
The goals of the PC Postage program were to enhance user convenience with a new access channel for postage that was available 24 hours
a day, seven days a week, while also enhancing the inherent security of the postage to reduce postage fraud. All PC Postage products, including
any subsequent enhancements or additional implementation of an existing product, must complete U.S. Postal Service testing and evaluation to
ensure operational reliability, financial integrity, and security, before becoming certified for commercial distribution. The IBI program also
aims to produce mail that is processed in a more automated manner in order to reduce U.S. Postal Service costs.
We believe that the IBI program has created an attractive alternative channel for the sale of postage, particularly to small offices, home
offices and small businesses. We believe that our current customers have chosen our service over other forms of postage such as postage
stamps or postage meters primarily to save time and to save costs.
The PC Postage Certification and Regulatory Approval Process
Our technology meets strict US government security standards. All US PC Postage products must complete extensive U.S. Postal Service
testing and evaluation in the areas of operational reliability, financial integrity and security to become certified for commercial distribution.
Each additional implementation of a particular product or function requires additional evaluation and approval by the U.S. Postal Service prior
to commercial distribution.
The U.S. Postal Service certification process for PC Postage is a standardized, ten-stage process. Each stage requires U.S. Postal Service
review and authorization to proceed to the next stage of the certification process. The U.S. Postal Service has no published timeline or
estimated time to complete each of the ten stages of the program. The most significant stage is the ninth stage, which requires a vendor to
complete three phases of beta testing.
The entire approval process for Stamps.com took approximately two and one half years. In March 1997, we submitted our letter of intent
to join the IBI program. From March 1997 through August 1998, we progressed through the first eight stages of the U.S. Postal Service
certification process. On August 24, 1998, the U.S. Postal Service announced that we were approved for beta testing and our PC Postage
service became the first software-only postage solution approved by the U.S. Postal Service for market testing. Between August 24, 1998 and
August 9, 1999, we successfully completed the three-phase beta testing required by the U.S. Postal Service’s certification process. On
August 9, 1999, we became the first software-only PC Postage solution approved for commercial release by the U.S. Postal Service.
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