Ever noticed the volume of junk mail has increased constantly in recent years? Not your supermarket catalogues and local pizza shop menus, but actual mail, delivered by the postie, that happens to be junk.

In 2002-03, Australia Post realised it was locked into a shrinking market. After strong growth in the 1990s, the volume of letters Australians were sending each other stopped growing. It wasn’t just that people called or emailed instead of writing to each other — in fact, as Australia Post points out, “social” letters are only a small fraction of the mail task. 80% of letters in Australia are “transactional mail” — i.e. bills and cheques etc. And as we began paying bills online or over the phone, and then receiving them online, and companies began charging us to receive a paper document, the volume of mail began growing much more slowly. Each year since 2004, the volume of letters being sent in Australia has never grown at an annual rate faster than 2%.

In fact, it began decreasing — except for one type of mail that we’ll get to in a minute.

Australia Post was stuck. It couldn’t grow its market share of letter delivery because it’s a monopoly. Letters for delivery in Australia weighing 250 grams or less or priced at less than four times the basic postage rate are reserved to Post under the Australian Postal Corporation Act 1989. It couldn’t charge more, because the Government repeatedly rejected its requests to increase the minimum stamp price. So it did what any intelligent company would do: it grew its market.

The third type of mail apart from transactional and social mail is promotional mail. It was about 15% of all mail in Australia in 2003 when Australia Post established its dedicated Mail Marketing Unit, which was “to encourage the use of direct mail as a marketing communications medium.”

Indeed, Australia Post went beyond encouragement. It could offer marketers the most comprehensive address database in Australia, and it supplemented it with a lifestyle database and response data collation. Australia Post not merely has the delivery mechanism for getting marketing information to you, it has lots of information about you. It has a division called FirstDirectSolutions which manages Australia Post customer information for marketing companies. Australia Post helps companies target people who have recently moved, or who have purchased by mail order, and it can offer age, gender and financial demographics. All very attractive information for direct marketers.

The response to Australia Post’s promotion of direct mail was immediate. Even as the volume of transactional mail began declining, promotional mail started growing fast — 5% and 6% in 2004 and 2005, then 8% and 9% the following years.

Australia’s political parties helped. The 2004 and 2007 elections were boons for Australia Post, with tens of millions of letters dispatched by our politicians to our letterboxes, and thence more or less directly to our recycling bins. You footed the bill for most of that, by the way. And the Howard Government, which was particularly fond of filling our letterboxes with fridge magnets and other types of propaganda, also helped out.

An Australia Post spokesman said that the corporation adhered closely to privacy requirements in using personal information, and noted that surveys conducted by the company to supplement its database were on an opt-out basis: it is made clear to participants that participation in Australia Post surveys would lead to additional marketing mail in the areas they nominated, and they could opt out at any time.

So, despite the overall volume of transactional and social mail flat or actually falling, Australia Post has been successful at keeping up its overall level of revenue from delivering letters, thank to Australia’s junk mailers.

But Australia Post has been leveraging itself in other ways, as well. Its monopoly on letters comes with a hefty and demanding Universal Service Obligation. There is no monopoly in parcel delivery, and Australia Post competes with, amongst others, major international players DHL and TNT. They are both former Post Offices since privatised by the German and Dutch Governments respectively — although the Dutch company merged with Australia’s TNT.

But Australia Post is able to leverage off its letter delivery infrastructure to provide a highly competitive parcel delivery service. And in contrast to letters, parcel volumes have boomed in recent years. Parcel volumes grew two and three times as fast as letters and, without the constraint of the Basic Postage Rate, revenue went up even faster: a 9.7% increase in 2005, 12% in 2006, 10.4% in 2007, 7.5% last year. During that period, parcel delivery became the biggest contributor to Australia Post’s profits, which have averaged between $500m and $600m a year. Australia Post also joined Qantas in a joint venture to run postal freight companies Star Track and Australian Air Express. Both companies were delivering profits of around $30m a year, to be split between the venture partners.

But that was during the boom. As Australia Post told Senate Estimates in May, the economic downturn has savaged its revenue. Letter volumes have fallen nearly 4% this year. The remorseless growth in parcel volumes has turned into a fall of 1%. Profit is likely to fall by 40%. Earlier this year, Qantas revealed that, while Star Track was faring OK, Australian Air Express had lost $3.6m in the December 2008 half.

Not that Australia Post is alone. DHL and TNT, for whom Australia is only a relatively small contributor, have both suffered massive revenue falls. DHL announced a 30% drop in profit in the second half of 2008. TNT announced a 40% drop.

There’s a bigger threat even when the economy recovers. The National Broadband Network, which promises a high-capacity delivery mechanism into 90% of Australian homes, threatens to make most letter traffic redundant, with companies, governments and political parties able to deliver transactional and promotional mail in electronic form far more cheaply. The end of traditional mail has been predicted before, but the NBN will undermine Australia Post’s letter business model while the Commonwealth continues to impose an increasingly outdated universal service obligation on the company.

If the Government’s rollout schedule holds, Australia Post has a decade, tops, before it faces an major threat to its letter delivery role. A competitive, unregulated parcel delivery business will be subsidising the infrastructure needed to deliver to those homes beyond the reach of the NBN, in regional and remote Australia, without the returns available from a monopoly on letter delivery.

Tomorrow: what’s the future of Australia Post?