Is The Post Office About To Kill Netflix's Business Model?

from the ouch dept

While Netflix has done a great job building up its business and competing with players who were much bigger and more well established, could it be the US Postal Service that finally does the company in? It turns out that those patented funky red DVD mailer envelopes are a pain for the postal service. They “sustain damage, jam equipment and cause mis-sorts during automated processing,” and the postal service has had enough. The Inspector General is asking to charge an extra $0.17 per DVD mailer if adjustments aren’t made to make the envelopes more “machinable.” While $0.17 may not sound like a lot, a research analyst at Citibank cranked the numbers and found that it would likely cut Netflix’s monthly margin per customer from $1.05 to $0.35 — basically killing 67% of its margin (ouch). Now here’s where the situation gets fun. It turns out that Netflix’s main competitor, Blockbuster, does not have this problem with its DVD mailers. Remember that Netflix sued Blockbuster over its patents last year. The two firms reached a settlement earlier this year, but could this be a chance for Blockbuster to strike back at Netflix? Anyone know if Blockbuster patented its “working” design for the DVD mailers? I’m sure it would be thrilled to license it to Netflix… at a reasonable fee.

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Companies: blockbuster, netflix

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Comments on “Is The Post Office About To Kill Netflix's Business Model?”

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70 Comments
Dave says:

Re: Re:

It’s not $1.05 per DVD. It’s $1.05 per customer. Presumably customers watch more than one DVD per month.

However, I’m not sure I understand how the post office can do this. Don’t they get their monopoly on letter delivery by adhering to pretty strict rules? I was under the impression they get to charge standard delivery rates by the ounce, and nothing else.

Jake Buck says:

Re: Re: Re:

they don’t charge by the ounce unless its over a certain weight, which the dvd mailers are not, i believe. they do charge extra if it is a non-standard size, because they cannot be properly processed with a machine ( tried to mail a square envelope once, it came back needing more postage ). not being able to be processed by a machine means more money, so they should pay more.

Robert says:

Re: Re: Re:postage rates

prior to 5/14/2007 mail was all weight based, on 5/14/2007 the post office changed the way it charges customers, to more directly reflect the cost of handling. some rates actually went down,(2nd ounce rates went down from .26 to .17 after the initial ounce) for those machineable pieces of mail, basically fairly flat letters in both small and large envelopes. After all manual sorting cost much more, therefore it is only fair to charge a little more for this service.

MiniG says:

Re: Re:

I think what it means is that they make 1.05 per customer per month, not per DVD. correct me if I’m wrong but you can have more than 1 DVD per month? hence reducing the margin by $0.17 every DVD. from a quick calculation, I’m assuming each customer has an avereage of slightly more than 2 dvd’s each per month, hence $0.70 loss.

Rose Welch says:

USPS

Yep. They can do so. We recently tried to switch from enveloped mail to a folded-brochure style mail at work to save money… and found out that it costs the same, because it’s shape not wieght, under a certain amount. Furthermore, if we didn’t tape the sides shut (which would have made it rip when opened) it would be twice as much as an enveloped letter because they’re non-machinable. The machine would rip the opened ends. Now, I’m not particularly outraged with the Netflix thing, because if they aren’t machinable, then they have to pay more people to process them. The money has to come from somewhere and it should be Netflix before it’s added to the general burden and they raise stamp prices again. Besides, Redbox is beating netflix and other online models out in my area anyway, and they’re expanding rapidly…

uh-huh0306 says:

Re: Re: USPS

What does THAT, have anything to do with it, dumb ass? The point is..the packaging design is NOT compatible with the USPS machinery. Therefore, it is NOT profitable for the USPS to process. If it is not PROFITABLE, the USPS has every right to either request a package design change, or to increase the fee for processing. This is common business sense that should not need explanation. A business relationship needs to be a win-win for both sides. Simply put, Netflix has a poor design and needs to adapt to the mailing standards. If its competitors can do it ………..
Stop whining and take responsibilty as they say. Everyone seems to love bashing the USPS, perhaps because of its government status. But, it is an independent branch of the gov’t. Its revenue is self generated, not funded with your tax dollars, so lighten up folks. You will not find a better bargain, and could not live without it. Try living in another country and deal with their “postal service”.

JimDesign says:

Re: Re:

I would hate to think that NetFlix would go to all the trouble to design, much less patent, this mailer and never check to see if it fit USPS guidelines. There are free booklets that give you all the details at the USPS offices as well of plenty of resources online.

My opinion is that some USPS equipment is either outdated or poorly maintained and NetFlix should not have to pay for that. I’ve never received a NetFlix packet that was damaged and that may be because our sorting center is pretty new and has new equipment. ‘Just speculating…

Robin says:

Grain of Salt

I saw this same story on the New York Times:

http://www.nytimes.com/2007/12/06/business/media/06flix.html

Anybody else notice that this is part of a report supporting the Citigroup’s analyst recommendation to buy Blockbuster stock and sell Netflix stock?

What’s unknown is what relationships Citigroup’s investment bankers have with Blockbuster, but analysts work in support of the investment bankers, not in pursuit of some philanthropic truth.

teresa Smith (profile) says:

Re: Grain of Salt

I am more than curious about Citibanks’ involvement in all of this. I am skeptical with USPS as well. Surely they didn’t just realize the mailers were fouling up their system. It has been many years ago that I attempted to send a square envelope only to have it rejected. Certainly the postal service should have addressed this concern by now.

Complete Idiot says:

“It turns out that Netflix’s main competitor, Blockbuster, does not have this problem with its DVD mailers.”

It doesn’t matter whether Blockbuster has the problem or not. The proposed charge is “per DVD mailer” which means that Netflix, Blockbuster, PornBarn, and your mother will all have to pay the additional 0.17

fierfek says:

Other business hurt

Another overlooked business is some non profit groups. They work with very slim margins to begin with. They use the same type of mailers for some mailings. this has greatly effected them since alot of there mailings are planned out months in advance. I now someone who lost a few clients because of this. they could not come up with an alternative fast enough. Thru the grapvine it was heard that there was complaints about the mailmen that walk and having to carry many of those types of mailers.

El Surveyorio says:

This will probably be a shock to all the anti-gov folks, but the post office is, in my experience, very willing to help you come up with a solution for this sort of thing – that is, they will work with you to design a machineable mailer.

Over the past decade, the organization I work for has had to re-design mailers (we send out surveys and such) probably 5 times and the post office has always been helpful.

Netflix will probably just have to take a one-time charge for the re-design and the recycling of the current nonmachineable mailers. I can’t imagine this would be an ongoing issue…and if it does become one, oh well, innovate or DIE!

Marty Cohn says:

Audit ≠ policy

Audit results from the Postal IG are recommendations that Postal management can disagree with and not implement if they articulate a reason. The IG routinely has audit findings that are not acted upon. The USPS loves the revenue Netflix provides even at the current rate, so it surely will not spring a surprise rate increase.

Just Some Guy says:

Profits and Such

Sucky timing considering that Netflix lowered the typical subscription rate by $2-$3 per month per customer. That isn’t helping the profit margin any either.
As far as the mailer goes, drop the size to that used by AOL when we all would get four of those damn CDs every month. Those seemed to process through the mail just fine (though I often wished mine would get lost in transit). Using a square envelope just a bit larger than than the DVD would adequately protect it and they would also likely save on cost of mailer on the supply side of things.

Ima Fish (profile) says:

I don't buy it

I’ve been a Netflix subscriber for years, I’d guess at least 5 years, at 8 movies at a time. Over five years that’s about 2,080 movies. And the post office has never lost a single DVD to or from my house. Never. Ever. (Movies sent to me were mistakenly sent to my neighbor, and vice versa, but they were never lost.)

In other words, I find it highly doubtful that this “problem,” if it exists at all, is widespread in any meaningful way.

There is certainly something else going on. If the post office is really taking action, they are doing it for political reasons. I just never would have guessed that Blockbuster would have that sort of political clout. It appears Netflix should hire more lobbyists and start greasing more wheels.

Overcast says:

Blockbuster could burn down Netflix – after them ‘lying’ about their ‘no late fees’ BS, I won’t bother with them now.

They told me at the store they are not ‘late fees’, but ‘restocking fees’. So I asked them – why am I being charged a ‘restocking’ fee. He said – “well, the movie wasn’t returned on time”.

So I told him – call it what you want, it’s a fee for the movie being late, so it’s a late fee in the customer’s eyes.

I didn’t care so much about paying a late fee, I just expected honesty. But, obviously; that’s too much to expect from business anymore.

Robin says:

“In other words, I find it highly doubtful that this “problem,” if it exists at all, is widespread in any meaningful way.”

Exactly!

imho, The only thing going here is a very lucky Citigroup analyst is getting a ton of attention for a report he wrote to support his firm’s investment bankers. (i.e. buy Blockbuster, sell Netflix, for which there’s a myriad of different possible back-stories).

TheDock22 says:

Redesign

Netflix should redesign the mailers anyway. They are ugly and I can’t count how many times I’ve ripped those darn thing.

Make them white with a red border or something. And make them a little more sturdy for crying out loud!

I switched to RedBox awhile ago and will never go back. $1 a night for new DVDs. If I want to watch something old, it only costs me $1.50 at the local movie place.

KipEsquire (user link) says:

Nothing New Here

Netflix’ envelopes have evolved quite radically over time and can evolve again. You yourself pointed out that Blockbuster has an acceptable version. Demand creates its own supply; necessity is the mother of invention.

Incidentally, who is more dependent on whom — Netflix or USPS? One can easily argue the Postal Service needs Netflix more than Nextflix needs the Postal Service.

What’s more interesting is that Netflix’ chairman, Reed Hastings, has himself predicted the quick demise of Netflix’ mailer business model with the inevitable rise of VOD.

Is it any wonder that Netflix is offering complementary VOD with its mailer subscriptions?

KipEsquire (user link) says:

In re Citigroup

“What’s unknown is what relationships Citigroup’s investment bankers have with Blockbuster, but analysts work in support of the investment bankers, not in pursuit of some philanthropic truth.”

Utter nonsense. Banking relationships — any relationships — must be disclosed on the back of any research report issued by a registered broker-dealer (which Citigroup is). Research analysts are, meanwhile, expressly forbidden under the so-called “Global Settlement” from even talking to investment bankers, let alone taking orders from them regarding their ratings.

Brain first, then keyboard.

Anthony says:

“In other words, I find it highly doubtful that this “problem,” if it exists at all, is widespread in any meaningful way.”

Actually is a problem. I worked for Northrop Grumman who designed & deployed the machines that sort this type of mail. DVD/CDs are technically not supposed to go into the machines to be sorted as they are, in fact “non-machinable.” However, the intelligence of your typical postal worker is below average to put it politely and they fire the Netflix/Blockbuster into the machine anyways.

They do tear the machine up, cause mis-sorts, etc. Normally after a run of mail processing, the floor of the post office is scattered with Netflix envelopes.

To sort the Netflix envelopes properly takes more manpower working on a slower sorting machine (1000pcs/hour sorting) compared to (~15000 pieces/hour sorting).

Shawn says:

How many people think the USPS=government

Did everyone forget that the USPS was privatized? They are regulated and they have a legalized monopoly on mail delivery, but they are responsible for their own profit/loss and are not funded by the US government and haven’t been since the 19080’s.

If the NetFlix mailers require extra processing, they should charge NetFlix more. If it destroys the NetFlix profit margin, so what?

The USPS doesn’t exist to subsidize *anybody*, even IF people ignorantly still think of the USPS as some sort of government handout.

Ima Fish (profile) says:

35. Anthony: “However, the intelligence of your typical postal worker is below average to put it politely and they fire the Netflix/Blockbuster into the machine anyways.”

Let me get this straight. These postal workers have sent 2,000+ of the movies I’ve received thought this machine and yet not one came to be in anyway mangled, harmed, disheveled, destroyed, etc. And let’s not forget the one day turn-around I get, so they’re not coming to me late. And the fact that not one has ever been lost.

If 100% of 2000+ DVDs get through this machine without a single incident, by its very definition it is not a problem. By its very definition the “problem” is statistically irrelevant.

Ima Fish (profile) says:

37. Shawn: “Did everyone forget that the USPS was privatized? They are regulated and they have a legalized monopoly on mail delivery”

“If the NetFlix mailers require extra processing, they should charge NetFlix more.”

So close, yet so far. You’re right that the USPS has a legal monopoly on the mail service. By law the only entity which can deliver materials to your mail box is the USPS.

However, the solution is not to make anyone pay more. The solution is to take away the monopoly. Let UPS and Fedex and any other number of delivery services have access to the mail box.

The cost of mailing would go down exponentially and Netflix’s profits would increase. It’d be a win-win situation for everyone, except those souls currently working at the USPS.

Shawn says:

Monopoly != Higher Cost

Mr. Fish…

If UPS and Fedex had to compete with USPS for regular mail delivery, it is not a given that “the cost of mailing would go down exponentially”. In fact, I would bet (your) money that the cost (to the consumer) would go UP even IF the actual cost (to the carrier) went down.

You assume that the postal rates are under the control of market forces… they are not. The prices they can charge are controlled, and some would argue they are artificially low. In fact, some say the cost of 1st Class mail is subsidizing the delivery of all that bulk junk mail. How does that factor into it?

Simple minds lean towards simple answers. This is a multi-faceted problem. be careful what you ask for, you may get it.

JimDesign says:

Re: Monopoly != Higher Cost

I think you’re wrong about the low price deal…

All that junk mail is paid for. If I get one item in my mail box, the delivery cost to the USPS for any more items is null. If you divide the cost of delivering the mail by the number of pieces each “stop” gets, their profits rise greatly, perhaps not “exponentially”, but still by a great factor.

It’s the same as when I rent a truck to deliver large items to a city far away. If I have one customer using 25% of the truck for a delivery, then my cost to deliver that item is high (and I pass it on to the customer). If I find 3 more customers who need deliveries to the same place, and they each pay for delivery, they can each pay an “artificially low” delivery fee while I actually can make money on the shipping. Cost to the consumer went down, profits for the carrier went up.

But I think you might be right about the “free market” part.

If UPS and FedEx start delivering to the mail box, that means fewer pieces for the USPS. That completely wrecks the profit margin involved due to the cost savings above. The USPS would have to raise their fees to stay in business and the other carriers would have to start equipping themselves for a greater volume of smaller mail items; more trucks, refitting the trucks with space for the small items, etc.

Ima Fish (profile) says:

40. Shawn: “You assume that the postal rates are under the control of market forces… they are not.”

Wow, that came out of nowhere. You didn’t even pull that out of your a$$. Why would you assume that I think “postal rates are under the control of market forces” when I specifically agreed with you that the USPS has a monopoly. Apparently, you don’t know this, but a monopoly by its very definition means it is beyond the control and influence of the market.

Moving on to your “argument” that monopolies lead to lower prices, I can guess it’s logically possible that a monopoly could lead to lower prices. However, if this is the case here, it’d probably be the first such case in the history of the US.

As I pointed out above, monopolies by their very nature ignore market forces. By eliminating the monopoly you’re increasing competition thus lowering prices.

Second of all, your assumption that prices would somehow magically rise if the monopoly was removed is unfounded and is without any evidence!! When the airlines were deregulated, prices went down. When AT&T was deregulated and de-monopolized, phone prices too went way down.

Anthony says:

@IMA FISH

I never said the DVDs won’t get to you, I’m just saying that USPS’s claims against them are correct. Also, it’s impossible to determine whether or not your local mail sorting facility sorts your DVDs in the correct machine or whether or not they get sorted in the machine that USPS is complaining about.
Like I said, they CAN go through a specific automated sorting machine, but USPS doesn’t like to use that machine because it takes quite a few more people to run it and does the sorting about 1/15th as fast.

Also note: I am NOT defending USPS because I like them, I barely ever use them due to some of the things I’ve seen in post office, I am just giving my experience as to why their claims against the Netflix envelopes are true and not some sort of conspiracy.

Ima Fish (profile) says:

42. Anthony: “I never said the DVDs won’t get to you, I’m just saying that USPS’s claims against them are correct.”

Well, you said that this is a real problem whereby Netflix DVDs mailed through the USPS sustains damage, jams equipment and causes mis-sorts during automated processing.

I pointed out that in my five years I’ve not had a single problem. So you really can’t have it both ways. If the DVDs get to me without any problems, then, there is no problem. It’s as simple as that.

“Also, it’s impossible to determine whether or not your local mail sorting facility sorts your DVDs in the correct machine or whether or not they get sorted in the machine that USPS is complaining about.”

But that’s irrelevant. It simply does not matter which machine my local USPS uses. The great service I consistently receive proves that USPS can provide it without the DVDs sustaining damage, jamming equipment and causing mis-sorts during automated processing. Once again, it is proof that no real problem exists. (And I should point out that not all of the movies I get come locally. I’d guess about 10% come from out of my state.)

“I am NOT defending USPS because I like them”

Don’t worry, I never assume anyone likes the USPS! But let’s face it, they’re still more pleasant than a trip to the DMV! 😉

Ima Fish (profile) says:

41. I just wanted to add a comment to my comment back in 41.

I recently bought a 50″ DLP television from Newegg. I paid 99 bucks to have it shipped from California to Michigan in 7 days. (I could have got it in 6 days, but I never expected it to be there that quick so I wasn’t home to get it.)

So here’s a few questions to Shawn:

How much do you think it would have cost me to mail the TV via the USPS?

How much do you think it would have cost if by law, the USPS was the only entity which legally could have delivered it?

Can you honestly say that giving the USPS such a monopoly would have decreased my shipping cost?

Shawn says:

Monopoly != higher prices for everybody, always

to the Fish:

Suppose that USPS rates for bulk mail are artificially low because the bulk of USPS mail *is* bulk mail (hence the work ‘bulk’) and they *need* that business. The USPS P&L depends on it, even though if you carved it out specifically, it is not profitable.

The difference is actually made up by the suckers who pay 1st class rates (who have no choice)

Now, assume the monopoly was lifted. Who would deliver bulk mail *under* their cost like the USPS does? Nobody. So that business dries up. One might think “Whew, now my 1st class mail will be cheaper because I’m not subsidizing the bulk mail!” Wrong. The net cost of 1st class mail would go up because of the change. In Fact, you can look at the postal rates now and see that the advent of email (which reduces the amount of real mail no matter how you look at it) is causing the net cost per parcel to INCREASE not decrease. the USPS has used this very argument in asking for postal rate increases.

If the monopoly were lifted, and *anybody* could deliver the mail to your mailbox, then the *only* people who would do so would be the ones who could do it at a profit. Maybe bulk mail would disappear? Who knows?… I’m just saying it isn’t as simple as you make it out to be. A monopoly doesn’t automatically increase prices for everybody. This monopoly creates a subsidized rate for bulk mail, the price you pay for 1st class mail is subsidizing the bulk mailers, who would probably disappear if every type of mail (even bulk) had to be profitable to deliver. Then the whole cost model changes drastically and unpredictably.

Get it yet?

JimDesign says:

standards

The USPS has a manual with standards for sizes, weights and everything required for the mail to be machineable. If NetFlix followed those guidelines in creating their packets, then the USPS should have to eat the cost of new or modified machinery.

My company created brochures and followed the guidelines, and even used a standard envelope, a few years ago. A lot of them came back for the same reason, yet most made it through. I think the problem is some sorting facilities have outdated or poorly maintained equipment and the USPS wants the sender to pay for it.

JayR (user link) says:

Despite being a happy Netflix customer, I have to agree with the Post Office on this one. The Netflix mailers are incredibly thin and and constantly arrive damaged. It’s rare to get an envelope in pristine condition. Now one could argue it’s USPS’ fault, but I know that’s not true for one simple reason — I’ve also used Blockbuster’s service. Blockbuster’s envelopes do not arrive damaged — their envelope is a little thicker and better designed.

printgeek says:

For all of you discussing how the USPS has a monopoly and how they “set their own rates” and are not subject to market forces, do some research on the Postal Rate Commission and Board of Governors. You’ll find out that setting postage rates (as it has been done in the past) is about as entertaining as watching sausage get made.

If you think that the Postal Service’s product (home delivery) can be done and done profitably, you’re right, if you deliver to the easy-to-get-to areas with high population density. Try creating a business model that delivers to EVERY home address (and most businesses) on a 6-days-a-week basis and see how the numbers work. (See: Publishers’ Express)

I don’t work for the USPS, but I work for a company that puts millions of pounds of mail into the system on a daily basis, and I can understand why they do some of the things they do, even if I don’t like it all the time.

Rose M. Welch says:

Idiots.

Okay, this is getting stupid. I work in a jewelry store, and my relatives live in different states. My store sends most mail because it is cheaper. I can send a package to Alaska or Hawaii (outside the continental U.S.), with insurance, signature delivery, garuanteed three-day service for fifteen bucks. UPS charges me fifteen bucks to send a five-ounce box back to Texas (I’m in Oklahoma.) in five days. Maybe. If they don’t lose it. Which they have done before. Furthermore, UPS and Fedex have never had a problem delivering to my work or my home, despite the fact that they can’t use the tiny mailbox in front of my house. They just walk a few steps. My newspaper is delvered to a newspaper box, however, put there just for that reason. And if I want to put a box in my yard that says ‘UPS & Fedex Deliveries’, no one can stop me. So please tell me more about your monopoly… Because popularity is not a monopoly.

postal worker says:

netflix design/usps delivery

Simple fact. Redesign the envelopes with a stiffener to prevent breakage. Make the envelope a tad bigger than the disk so that there isn’t all that loose flap. Get people to empty their mailboxes so the disks actually FIT in them.

Oh…and another thing, do you really think that UPS and FedEx would deliver to the rural areas? I can tell you NOT. A LOT of packages that are shipped via fedex and UPS are actually delivered to the USPS for the final delivery. So, if you think that the prices won’t go up, guess again.

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