Mystery shrouds postal service deal with Amazon

(MoneyWatch) Mystery surrounds the deal announced Monday between Amazon.com (AMZN) and the U.S. Postal Service to add Sunday package delivery, which is prompting some analysts to speculate on the profitability of the arrangement.

"They negotiated this in complete secrecy, under a seal from the Postal Regulatory Commission," said Bill McAllister, a reporter who covers the U.S. Postal Service for trade publication Linn's Stamp News.

Postal carriers will begin delivering Amazon packages this Sunday in the New York and Los Angeles metropolitan areas. The program is set to expand to "a large portion of the U.S. population" in 2014, according to a statement from Amazon.

Neither party would disclose details of the financial arrangement, leaving insiders like McAllister wondering, "Can one company generate enough revenue to justify this venture? It's obvious that the postal service thinks it can. I just didn't see that much business."

When questioned in an interview with CBS Radio News on the specifics of the deal, U.S. Postmaster General Patrick Donahoe said, "These are contracts terms that we set up. That's proprietary information as far as the pricing goes."

This lack of transparency comes as no surprise to eCommerce and retail expert Sucharita Mulpuru at Forrester Research, who said Amazon likely has competitive reasons for keeping the details under wraps. "This gives them negotiating leverage with UPS (UPS) and Fedex (FDX), too, if those guys want to get into the game and be a part of this as well."

So who profits in this deal? Not Amazon, according to Mulpuru. "They are absolutely taking a hit on this. No question." But in offering Sunday delivery, she said, Amazon is looking at the bigger, longer-term picture in trying to gain market share and encourage customers to shop more.

Meanwhile, for the postal service "it's a win-win," said postal service expert Rick Geddes, an associate professor at Cornell University. "This is a step towards a more commercialized postal service that is going to have to occur if the postal service is going to remain viable in the new, dynamic, electronic communications marketplace."

Although he would not go into details, Donahoe said the commercial arrangement with Amazon would generate profits for the postal service. "We're making money on it," he said, "absolutely."

The USPS has been struggling financially for a number of years. Last year it posted a $15.9 billion loss, and reported billions more in losses in the first few quarters of 2013. Geddes said there are only two ways of digging out of that hole -- raising revenue or lowering costs, and both have been a struggle.

In February, Donahoe met with resistance from lawmakers when he asked to scale back mail delivery to five days a week. The postal service is also limited when it comes to raising revenue. "By law," Donahoe told CBS Radio News, "we are capped at the rate of inflation for any letter mail, so we can't raise prices."

Could the deal with Amazon could be the first of more public-private partnerships as the postal service tries to turn its finances around? Likely, said Geddes.

That seemed to be the focus for the Postmaster General in announcing the partnership with Amazon. "The future of the postal service will be seven-day package delivery," Donahoe said. "We've got to figure out how to grow this business in order to keep the postal service afloat for all of America."