This Analyst Claims the U.S. Postal Service Is Giving Amazon a Huge Subsidy
But shipping industry watcher and money manager Josh Sandbulte thinks there’s an ugly underside to the USPS-Amazon collaboration. Sandbulte, writing in the Wall Street Journal last week, argued that the USPS effectively subsidizes the price of shipping Amazon’s packages.
According the Sandbulte, Congress has barred USPS from setting its parcel prices below its costs, to keep it from unfairly undercutting competitors like FedEx and UPS. But the formula for calculating those costs, set in 2006, hasn’t kept pace as packages have come to make up a higher and higher percentage of USPS volume. The law set the share of infrastructure costs associated with packages at 5.5%, but boxes now make up around 25% of Postal Service revenue.
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Sandbulte cites an April analysis by Citigroup that put a price tag on the resulting distortion. If package delivery bore its fair share of Postal Service system costs, each box would cost $1.46 more to deliver. That “subsidy” is systemwide, and the USPS has courted other large e-commerce companies.
But Amazon’s size means that it benefits disproportionately, and ships around 40% of its deliveries with USPS. In Sandbulte’s view, this means the Postal Service is “picking winners and losers in the retail world.”
But Sandbulte’s investment firm holds FedEx stock, meaning he has a direct interest in critiquing the USPS, and his analysis is debatable on several points. He disingenuously describes the pricing situation as “a gift card from Uncle Sam,” which implies there’s tax money involved. But the USPS doesn’t receive tax revenues.
Additionally, USPS’s legal duty to provide universal service means that even at a discount, shipping boxes for Amazon helps it generate revenue from potentially unused capacity. Fixed costs aside, USPS package delivery is profitable, helping subsidize rural service and letter delivery. So there’s room for disagreement about whether the situation is actually unjust.
Amazon issued the following statement in response to Sandbulte’s claims: “As is the case with all of its customers, our partnership with USPS is reviewed annually by the Postal Regulatory Commission, which has spent decades reviewing and approving USPS costing and pricing practices. The Postal Regulatory Commission has consistently found that Amazon’s contracts with the USPS are profitable. Amazon has invested hundreds of millions of dollars in a network of more than 20 package sortation facilities that inject directly into the USPS last mile network bypassing most of USPS network. This investment resulted in more efficient processes as well as thousands of jobs and related economic benefits in local communities.”
Either way, Amazon is hardly alone in getting a boost from the USPS’s complex pricing. Thanks to international agreements through the United Nations, international shippers—especially those sending small packages from China—often get services at substantially below cost. That puts U.S. stores and domestic online sellers alike at a persistent disadvantage.
This article has been updated with a statement from Amazon.