The Newspaper Association for America (NAA) is said to be preparing a legal challenge to a “sweetheart deal” established between the postal service and Valassis Communications.

Having received approval from the U.S. Postal Regulatory Commission, the agreement will see Valassis receive a substantial rate-cut from the post office, thereby allowing the direct-marketing company to send the kind of preprint advertisements usually carried by newspapers straight to the customer. The mailing system will cost 42 percent less than the service now provided by newspapers.

Newspapers could see advertising revenue diminish by $2.5 billion as a result of the agreement, of which $1 billion could be businesses turning away from the newspaper advertising model altogether.

With preprint advertisements representing the second largest source of revenue for American news titles, the deal has unsurprisingly caused outrage in a newsprint industry already struggling to maintain and bolster ad revenue. Only advertisements placed by local entrepreneurs and retailers are a more lucrative source of revenue than preprint advertising, whose importance has grown considerably in the past five years. Figures released by the NAA show that while preprint ads accounted for only 17 percent of the newspaper industry’s $9.8 billion revenues in the first quarter of 2007, during the same period this year they have come to represent 26 percent of the industry’s $4.4 billion in sales.

In an article on his Newsosaur blog, Alan D. Mutter quotes an industry source as saying that “the health of the preprint business has a direct bearing on the bottom line of almost every publisher.” On average, 70 percent of Sunday revenue at U.S. newspapers comes from preprint advertising – and Sunday titles frequently generate the most profit for news publishers.

According to the terms of the deal, Valassis will be required to increase its volume by 1 million pieces in the next 12 months in order to secure the discount for the next three years. However, should it fail to meet the target, the company will owe the postal service a one-time penalty payment of $100,000.

Representatives for the postal service have defended the move, insisting that it poses no major threat to newspapers as the deal is limited to durable and semi-durable goods (including clothing and appliances) and excludes regional and local advertisers. Speaking to the International Business Times, Chairman of the Postal Regulatory Commission (PRC), Ruth Goldway insists: “We came at this with great sympathy toward the newspapers. We gave them additional time to prove that this would cause considerable unreasonable harm to their business… None of the information [the NAA] submitted allowed us to believe that this would create unfair competition."

Although this is not the first time that the U.S. postal service, a struggling institution, has brokered a deal with bulk mailers, it is, claims Paul J. Boyle, Senior Vice President for Regulatory Affairs at the NAA, “the first time that the postal service acted to help one bulk mailer to try to switch business from another.” The NAA has now submitted a formal complaint to the PRC and is mounting a legal challenge through the Court of Appeals for the District of Columbia circuit.

Advertising is a key revenue stream for both the newspaper business and the postal service, which have been hard hit by the migration of customers to cheaper online services. As each side has a clear economic interest in securing preprint advertising deals, it is unlikely that the dispute will be resolved in the near future.

Sources: Newsosaur, NYTimes, stateofthemedia.org, Media Post, IBTimes