The Evolution of a Shipping Juggernaut

Stamps.com (STMP) was founded in September 1996 to explore the potential for joining the United States Postal Services’ (USPS) Information Based Indicia Program. The program entailed a ten-stage certification process for the commercial release of electronic postage, now known as PC Postage, that could be purchased online and printed from a computer using standard laser or inkjet printers. This marked the first new postage method authorized by the USPS since the approval of the postage meter in 1920. Stamps.com notified the USPS of its intention to participate in March 1997 and completed eight of the ten stages required for certification by August of the following year. At the time of its IPO in June 1999, the company had commenced the final phase of beta testing for its PC Postage service, and subsequently received approval for a commercial launch in August 1999, concluding a two-and-a-half year process. Pitney Bowes and Endicia launched their Internet postage services in 2000. Prior to EasyPost’s addition to the list of authorized PC Postage vendors in 2018, no other vendors entered the PC Postage market.

For much of the decade post-launch, Stamps.com primarily targeted small office and home office (SOHO) customers. These customers typically had fewer than ten employees, and were attracted to the convenience of the service, cheaper pricing relative to a traditional postage meter and other cost-saving features like address validation. Over time, Stamps.com introduced additional features, including multi-user capabilities and enhanced reporting to attract larger organizations, most of whom operated branch offices resembling the company’s usual customers. Of course, the focus on the SOHO market and displacement of postage meters naturally led to a customer set primarily utilizing PC Postage for letter mail.

In the aftermath of the Great Recession, volumes associated with first class mail and other market dominant mail classes (i.e. those in which the USPS has a monopoly) declined precipitously. Recognizing that demand could remain challenged for the foreseeable future, the USPS turned its attention to increasing revenues from shipping and package services, which were benefiting from growth in e-commerce. Stamps.com followed suit, introducing features like hidden postage and integrations with online marketplaces and shopping cart services. In 2010, the company entered into a partnership with Amazon.com (AMZN), enabling Amazon.com’s marketplace sellers to purchase USPS shipping labels. This was followed by a contract award to provide electronic postage for shipping transactions generated by the USPS’ online Click-N-Ship service in 2011. Interestingly, language introduced in Stamps.com’s 10-K that year highlighted risks associated with integration partners as well as financial arrangements in which the USPS compensates Stamps.com directly for customers or integration partners printing a certain amount of Priority or Express Mail postage. We believe this was indicative of the company’s economic prospects becoming increasingly tied to shippers.

In June 2014, Stamps.com acquired ShipStation, the company’s first acquisition since the dot com era and the first under CEO Ken McBride, who assumed his role in 2001. The acquisition positioned Stamps.com in the emerging multi-carrier software market and proved highly complementary to the company’s core PC Postage service. Shortly thereafter, Stamps.com acquired another leading multi-carrier software vendor, ShipWorks. Both ShipStation and ShipWorks were existing integration partners, but were also partnered with Endicia, which had focused largely on high volume shippers throughout its history. By acquiring two of the leading multi-carrier software solutions, Stamps.com not only benefited from higher average monthly subscription fees, but also captured all of the associated USPS postage volume once Endicia was displaced. Recall that Stamps.com’s financial arrangements with the USPS and other integration partners provided the company with significant leverage to USPS shipping revenues. In November 2015, the company acquired Endicia, further solidifying its position amongst high volume shippers and ensuring its dominance of the PC Postage market. As most multi-carrier software vendors at the time were partnered with either Endicia or Stamps.com, competitors of ShipStation and ShipWorks were effectively funding the company to an extent given the financial incentives earned by Stamps.com on their customers’ USPS postage volumes.

Following the acquisition of Endicia, we believe Stamps.com’s transformation into a shipping-focused software provider was complete. Not content to rest on its laurels, however, the company acquired yet another rapidly growing multi-carrier shipping platform, ShippingEasy. Of note, ShippingEasy had successfully obtained negotiated rates with the USPS, precluding the need to partner with a postage reseller and share in the associated revenues. While Stamps.com harbors no expectations that the company will secure its own negotiated rates across its other brands, we believe the potential remains significant, not only with respect to USPS postage volumes, but also with other major carriers like FedEx and UPS. More recently, the company acquired MetaPack, a provider of multi-carrier software solutions targeted primarily at the European market. We believe the acquisition expands the company’s addressable market to include enterprise shippers with volumes far in excess of the company’s current SMB customer base.

Disclosure(s):

The author holds a long position in Stamps.com (STMP).