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