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.
Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.
While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.
–The Techdirt Team
Filed Under: business model, dvd mailers, inspector general, postage, usps
Companies: blockbuster, netflix
Reader Comments
Subscribe: RSS
View by: Time | Thread
either way, this dosent sound good for Netflix.
what about FedEx or UPS?
[ link to this | view in chronology ]
If at the current rate there making 1.05 Per DVD
and if the postage is only going up $0.17 ($0.34 Round Trip)
Wouldn't that just knock there profit down to $.71 (A $0.34 Loss) not down to $0.35 (a $0.70 loss)
[ link to this | view in chronology ]
Re:
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.
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Re: Re:
[ link to this | view in chronology ]
Re: Re:postage rates
[ link to this | view in chronology ]
Re:
[ link to this | view in chronology ]
Re:
[ link to this | view in chronology ]
[ link to this | view in chronology ]
[ link to this | view in chronology ]
USPS
[ link to this | view in chronology ]
Re: USPS
[ link to this | view in chronology ]
Re: Re: USPS
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".
[ link to this | view in chronology ]
Re: Re: Re: USPS
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Re:
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...
[ link to this | view in chronology ]
[ link to this | view in chronology ]
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Re:
[ link to this | view in chronology ]
Grain of Salt
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.
[ link to this | view in chronology ]
Re: Grain of Salt
[ link to this | view in chronology ]
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
[ link to this | view in chronology ]
Re:
[ link to this | view in chronology ]
They will Survive
[ link to this | view in chronology ]
Other business hurt
[ link to this | view in chronology ]
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!
[ link to this | view in chronology ]
Re:
Finally someone who gets it!
[ link to this | view in chronology ]
Audit ≠ policy
[ link to this | view in chronology ]
I'll pay $1.05 more for the convienence!
[ link to this | view in chronology ]
Profits and Such
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.
[ link to this | view in chronology ]
I don't buy it
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.
[ link to this | view in chronology ]
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.
[ link to this | view in chronology ]
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).
[ link to this | view in chronology ]
Netflix
[ link to this | view in chronology ]
Redesign
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.
[ link to this | view in chronology ]
Nothing New Here
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?
[ link to this | view in chronology ]
In re Citigroup
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.
[ link to this | view in chronology ]
[ link to this | view in chronology ]
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).
[ link to this | view in chronology ]
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).
[ link to this | view in chronology ]
How many people think the USPS=government
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.
[ link to this | view in chronology ]
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.
[ link to this | view in chronology ]
"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.
[ link to this | view in chronology ]
Monopoly != Higher Cost
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.
[ link to this | view in chronology ]
Re: Monopoly != Higher Cost
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.
[ link to this | view in chronology ]
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.
[ link to this | view in chronology ]
@IMA FISH
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.
[ link to this | view in chronology ]
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! ;-)
[ link to this | view in chronology ]
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?
[ link to this | view in chronology ]
I hate Blockbuster
[ link to this | view in chronology ]
Re: I hate Blockbuster
[ link to this | view in chronology ]
A non-issue
This is just that one analyst trying to support his endorsement of Blockbuster's stock.
[ link to this | view in chronology ]
Monopoly != higher prices for everybody, always
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?
[ link to this | view in chronology ]
[ link to this | view in chronology ]
standards
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.
[ link to this | view in chronology ]
[ link to this | view in chronology ]
And on at least 3 occasions I have apperently returned my movies without even receivng them.
Some is messed up!
[ link to this | view in chronology ]
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.
[ link to this | view in chronology ]
Idiots.
[ link to this | view in chronology ]
I've got 11 months left on my membership
[ link to this | view in chronology ]
USPO
[ link to this | view in chronology ]
Re: USPO
[ link to this | view in chronology ]
Separate federal branch of Govt, NOT FUNDED BY TAX
[ link to this | view in chronology ]
netflix design/usps delivery
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.
[ link to this | view in chronology ]
[ link to this | view in chronology ]
They've got a LOT more problems than mailers...
[ link to this | view in chronology ]
[ link to this | view in chronology ]
So right it almost hurts...
[ link to this | view in chronology ]