Upstarts Eye PC Postage Stamps

For more than 70 years, small-business owners wishing to put postage on their letters had basically two choices: use an expensive Pitney Bowes meter or start licking.

Thanks to the Internet, though, the options are about to become more numerous. E-Stamp and Stamps.com, a couple of California start-ups, are working with the U.S. Postal Service to develop a PC-based postage service that will allow businesses to print their own stamps from a computer.

Both companies have a few hundred customers in Washington, D.C., and the San Francisco Bay Area testing the technology. The U.S. Postal Service introduced the specifications for PC postage a few years ago. The new postage uses a unique and intricate bar code that the government hopes will make postage fraud difficult.

But Pitney Bowes (PBI) is not going to relinquish its 85 percent market share in the postage-meter market without a fight: The company is about as far along as its upstart competitors in testing out its own ClickStamp PC postage service.

Not everyone thinks Pitney is moving quickly enough to make its products Internet-friendly. "Basically, we have two dot-com companies leading the charge, and the industry laggards pulling up the rear," said Vernon Keenan, president of San Francisco-based consultant KeenanVision.

But most of the analysts following Pitney Bowes on Wall Street do not believe PC postage will pose a huge threat to the company. Though its small-office/home-office Personal Post Office product has sold well, Pitney's postage-related revenue mainly comes from larger companies that would probably not be interested in a PC postage product.

"If I'm doing 100 to 200 letters a week, there's no way I'm going to use a PC postage meter. It's too cumbersome," said Prudential Securities analyst Alex Henderson, who follows Pitney Bowes.

Indeed, only 1.7 million meters are currently in use, according to Stamps.com Chief Executive John Payne. That amounts to about 6 percent of all businesses and about 18 percent of the 28 million small offices/home offices, Henderson said.

"We do not feel PC postage will have a negative impact on our existing business. We actually feel that this technology is complementary," agreed Pat Brand, a vice president of marketing at Pitney Bowes.

A huge beneficiary of intellectual-property protection in the past, Pitney could also receive royalty payments for the 15 patents it has filed on the PC metering application, according to Henderson.

Brand would not say whether the company was counting on licensing fees from competitors. "We've declared our intellectual property. Obviously, we're not yet privy to the particular design [of our competitors' products]," he said.

The money at stake is substantial but not enormous. Keenan estimated that PC Postage will account for about 4 percent of the U.S. Postal Service's total sales in 2003, generating about $138.7 million in fees for the companies playinin the market.

Those predictions don't include potential international usage, Keenan said.

Whatever its size, Pitney will be a major player in PC postage, Henderson said. "To get a 25 percent to 30 percent market share ought to be a lay-up," he said.

Not surprisingly, executives at E-Stamp and Stamps.com disagree. Stamps.com's Payne said he feels his company enjoys a huge advantage because it's the only one that is far along in testing a software-only postage product. The company expects to launch its product commercially this summer.

The other products that are in the second part of the three-phase testing process require users to buy a hardware device and plug it into their computers. While E-Stamp and Pitney have both announced plans to launch a software-only product, they are several months behind Stamps.com, Payne said.

E-Stamp Chief Executive Robert Ewald argued that the software-only product will only appeal to companies that aren't buying many stamps.

Users of the software service must be connected to the Internet and can only download one stamp at a time, a process that isn't efficient for most small companies, he said. "Our market research shows that 80 to 90 percent of all small businesses share one communication line for the computer and the fax, and occasionally their phone as well," Ewald said.

Ewald also cited E-Stamp's relationships with Microsoft and Compaq as a big advantage. "If Microsoft builds the E-Stamp product into Office or Excel in any way, then that's huge," Keenan said.

Of course, Stamps.com also has some high-powered partners. The company in February received $30 million in a round of financing, which included Intel and Galileo as investors. Stamps.com announced Wednesday that it will begin exploring how to use its technology to create secure vouchers or certificates in other industries.

Written By Darren Chervitz, CBS MarketWatch