Stamps.com 2006 Annual Report Download - page 16

A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public
networks. Anyone who is able to circumvent our security measures could misappropriate confidential information or cause interruptions in our
operations. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate
problems caused by any breach. We rely on specialized technology from within our own infrastructure to provide the security necessary for
secure transmission of postage and other confidential information. Advances in computer capabilities, new discoveries in security technology,
or other events or developments may result in a compromise or breach of the algorithms we use to protect customer transaction data. Should
someone circumvent our security measures, our reputation, business, financial condition and results of operations could be seriously harmed.
Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer
information. As a result, we may be required to expend a significant amount of financial and other resources to protect against security
breaches or to alleviate any problems that they may cause.
Risks Related to Our Industry
U.S. Postal Service regulations or fee assessments may cause disruptions or discontinuance of our business.
We are subject to continued U.S. Postal Service scrutiny and other government regulations. The availability of our services is dependent
upon our service continuing to meet U.S. Postal Service performance specifications and regulations. The U.S. Postal Service could change its
certification requirements or specifications for PC Postage or revoke or suspend the approval of one or more of our services at any time. If at
any time our service fails to meet U.S. Postal Service requirements, we may be prohibited from offering this service and our business would be
severely and negatively impacted. In addition, the U.S. Postal Service could suspend or terminate our approval or offer services which compete
against us, any of which could stop or negatively impact the commercial adoption of our service. Any changes in requirements or specifications
for PC Postage could adversely affect our pricing, cost of revenues, operating results and margins by increasing the cost of providing our
service.
The U.S. Postal Service could also decide that PC Postage should no longer be an approved postage service due to security concerns or
other issues. Our business would suffer dramatically if we are unable to adapt our services to any new requirements or specifications or if the
U.S. Postal Service were to discontinue PC Postage as an approved postage method. Alternatively, the U.S. Postal Service could introduce
competitive programs or amend PC Postage requirements to make certification easier to obtain, which could lead to more competition from
third parties or the U.S. Postal Service itself. If we are unable to compete successfully, particularly against large, traditional providers of
postage products like Pitney Bowes who enter the online postage market, our revenues and operating results will suffer.
The U.S. Postal Service could decide to suspend or cancel the current market test of PhotoStamps, and may do so in the event that there is
sufficient cause to believe that the market test presents unacceptable risk to U.S. Postal Service revenues, degrades the ability of the U.S. Postal
Service to process or deliver mail produced by the test participants, exposes the U.S. Postal Service or its customers to legal liability, or causes
public or political embarrassment or harm to the U.S. Postal Service in any way. If the U.S. Postal Service decides to suspend or cancel the
market test of PhotoStamps, our revenues and operating results will likely suffer.
Additionally, the U.S. Postal Service could decide to amend, renegotiate or terminate our credit card cost sharing agreement, which is a
key agreement that governs the allocation of credit card fees paid by the U.S. Postal Service and us for the postage purchased by our customers.
If the U.S. Postal Service decides to amend, renegotiate or terminate our credit card cost sharing agreement, our revenues and operating results
will likely suffer.
In addition, U.S. Postal Service regulations may require that our personnel with access to postal information or resources receive security
clearance prior to doing relevant work. We may experience delays or disruptions if our personnel cannot receive necessary security clearances
in a timely manner, if at all. The regulations may limit our ability to hire qualified personnel. For example, sensitive clearance may only be
provided to US citizens or aliens who are specifically approved to work on U.S. Postal Service projects.
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