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Summary:

One big loser in the The United States Postal Service’s planned rate hike is Netflix, which could see its costs to support its DVD-by-mail business increase by an additional $50 million a year in postage and handling if the proposal goes through.

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Netflix could be a big loser in the United States Postal Service’s plan to hike postage rates and overcome a potential $7 billion shortfall. The proposed increase would raise the rates that Netflix pays to ship DVDs to its customers, and could cost the company an additional $50 million a year.

According to the USPS, the rate hike would boost the cost of shipping most packages by 5.6 percent on average. But the increase varies depending upon what’s being shipped: The agency is proposing an eight percent increase for mailing periodicals, a 23 percent increase for standard mail parcels and a seven percent increase for media or library mail. The latter is the category that Netflix would most likely fall into.

A seven percent increase might not sound like a lot, but it could have a severe impact on Netflix’s business. While DVD-by-mail is not growing as quickly as Netflix’s streaming video service, it still accounts for the majority of the firm’s cost of goods sold (COGS). According to a presentation on the company’s job site, Netflix expects its COGS to be $1.4 billion in 2010, with more than half of that going towards postage and handling. With the DVD rental firm spending more than $700 million on postage and handling a year, a little back-of-the-envelope math suggests that its postage costs could increase by $50 million if the USPS proposal goes through.

That’s bad news for Netflix, as increased postage costs will eat into the company’s earnings next year. For fiscal 2009, Netflix earned $115.9 million, or $1.98 per share, and it expects to earn between $132 million and $144 million for the full year 2010.

One variable that this doesn’t take into account is the postal service’s plan to cut Saturday service delivery. As part of its cost reduction plan, USPS expects to move from a six-day delivery schedule per week to five days, a move it says could lower overall costs by more than $3 billion in the first year implemented. With a decreased delivery schedule, Netflix could see the number of DVDs it ships decrease slightly, but it’s not clear how that would affect its overall costs.

The rate increase comes as Netflix has been de-emphasizing its DVD business while growing its streaming catalog. The company has spent the last several months striking deals with movie studios that push back the availability of new releases through its DVD-by-mail business by 28 days, while at the same time adding new content to its streaming library. That strategy appears to be paying off, as Netflix saw its total subscriber numbers increase by 34 percent year-over-year in the first quarter. Even so, the DVD service continues to be a robust (and costly) business for Netflix; the company sees its DVD-by-mail service continuing to grow until 2013, at which point Netflix expects it to peak.

The USPS rate increase was designed to help boost revenues and fend off huge losses at the flailing government agency, but the price proposal still needs to get final approval from the Postal Regulatory Commission. The rate hike would be the first increase in two years, and if approved, would not go into effect until January 2, 2011.

Image courtesy of Flickr user Scott Feldstein.

Related content on GigaOM Pro: Slow and Steady, Netflix Pulls Ahead in Streaming Video (subscription required)

  1. Assuming Netflix doesn’t pass any of the cost increase on to its users.

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  2. I am a letter carrier and it sure sounds like the Postmaster General is trying to eliminate the USPS instead of saving it. There are still a great number of customers , business and residential, that depend on our service. I wonder if he plans on going after the 50-55 billion dollar mistake in prefunded retirement. The government has probably already spent it. I wonder if the PMG plans on retiring real soon!

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  3. All this does is prod companies like Netflix to move even more aggressively to a download model and away from snail mail. Ironically, this will simply make things worse than the Post Office as more customers will be driven away from it.

    What should be done is privatize the Post Office and eliminate its monopoly on first-class mail. This is what many countries are already doing. That and the Post Office should reduce delivery to just Monday, Wednesday and Friday. I don’t know a single person that depends on snail mail anymore. Heck, it could deliver mail once a month and I doubt anyone would really care.

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  4. Michael Chaney Tuesday, July 6, 2010

    Time for them to offer a streaming-only option. That’s really the only reason I have it.

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    1. Netflix streaming options are far too limited for that portion of its business to “carry” the company. While a streaming only option may suit some people, it probably wouldn’t appeal to enough of their customers to be viable.

      I do agree that it needs to strike a few more streaming distribution/hardware integration deals and really make streaming its core business.

      As for the post office…the decline in demand for traditional mail services is going to continue. The government is going to have to decide how long they want to subsidize this service.

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  5. It’s a really big country with a lot of people with a lot of different needs. If the Post Office is not delivering mail in sparsely populated areas, do you think somebody else will?

    Just because you, the man in the mirror, think that you do not need mail more than once per month, does not mean that the entire United States population does not need mail more than once per month.

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    1. First, Ryan didn’t say anything about monthly mail service. I did.

      Second, because the Post Office has a monopoly on first-class mail, we don’t know if someone else will deliver first-class mail to all locations in the US. However, what I can say is that there many parcel delivery services (FedEx, Airborne, UPS, etc.) that do deliver to all locations in the US and could do likewise with first-class mail. In fact, you can send letters by way of these parcel delivery services by use of their thin parcel envelopes and it will not only get to ANYWHERE in the US but will get there OVERNIGHT. However, they cannot officially deliver first-class mail so you pay a lot more by having to use their large cardboard envelopes instead of putting merely a stamp of theirs on your paper envelope for them to look for in your mailbox to see if you want any letter delivered by them.

      Justifying a government monopoly because you THINK no one will do what the government monopoly does is NOT a good justification for said monopoly. Remove the monopoly and see if the private sector will step in and do it. Odds are they’ll do it faster and for less. Competition drive prices down. Monopolies drive prices up.

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      1. First of all UPS AND FED EX do not deliver to all rural areas. Just FYI Ups and Fed Ex pay the POSTAL SERVICE to deliver to areas that are to far out of their way!!!!! The Post Office delivers millions of packages everyday sent to us by Ups and fed Ex because they do not want to go out in the Rural areas because it is not cost effiecient. The Post Office is still the most TRUSTED agency and lets be honest what other service do you get in this country for .44 cent!!!! When you can mail a letter from California to Florida for .44 or .46 cent that is still damn cheap!!!!! And yes I know the internet is what you will say, but lets be honest you will pay $25.00 or more for that a month for internet. That is $300.00 a year which is 682 pieces of mail. Think about it .44 or .46 cent for a piece of first class mail is still a good deal in this day and age!!!!

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  6. “and could cost the company an additional $50 million a year.”

    Overstated. More like $20 million a year. That’s $1.50 annually for each subscriber. Yes, it is still unwelcome, but I think they will weather it.

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  7. Actually, Netflix is not mailed at the “media mail” rate. Netflix uses first class shipping, which is one reason customers get a quick turnaround on their DVDs. The other reason is that Netflix gets special handling, due to the high volume of their product, and the near locality (for much of the country) of their distribution centers.

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  8. Netflix’s mailer is charged postage at the First Class Letter rate, not the media or library rate. So, their rates go up by 4.5%, not the 7% suggested by the author. Still an increase, but close to reasonable for a 2 year span since the last increase.

    The issue with the USPS business model is politicians. If you could get them out of the USPS decision making and planning, they would be fine. The USPS would close down 100 not needed processing facilities, and a number of non-profitable post offices or stations, located within 10 miles of others. But every time a plan is put forth to close a facility, a Congressman or Senator starts whining, and in some cases, adds a rider to any bill to keep that facility open.

    If you really want the USPS to operate like a business, tell your representatives to butt out of the business.

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  9. [...] could lose as much as $50 million next year if the rise in postage rates is approved. According to NewTeeVee, “For fiscal 2009, Netflix earned $115.9 million, or $1.98 per share, and it expects to earn [...]

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  10. [...] (NFLX) wants to move to a streaming model.  Check out what  postal rate hike costs them.  (GigaOM also Crossing Wall [...]

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