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Postal Service Surcharge Could Slash Netflix Profit
mikesd81 writes "Boston.com reports that Netflix Inc., the largest US mail-order movie-rental service, may suffer a cut in profits if the US Postal Service starts charging extra to manually sort the envelopes that carry its DVDs. An audit prepared by the Postal Service's Inspector General last month recommended charging one unidentified company 17 cents per envelope for labor costs. Citigroup analyst Tony Wible, who said in a note to investors Tuesday that the company is Netflix, estimated the charge might reduce profit per subscriber to $0.35 from $1.05. Wible advises investors to buy Blockbusters shares because their DVD envelopes don't have the problem (floppy edges that jam the USPS's automated sorting machinery). Netflix says the whole thing is no big deal and they will change their envelopes if necessary."
Netflix says the whole thing is no big deal and they will change their envelopes if necessary. I don't see the problem. Netflix doesn't seem worried.
simply distribute them digitally :)
;)
I'm sure that people won't mind downloading them and it will save some $.
feel free to report any abuse on http://ntlgl.com/
MP3 Search Engine
Sounds kind of like Blockbuster FUD.
Virginia is for lovers. EVE is for griefers.
So Netflix says they'll change the envelopes. So really it's a non-story as there's no fundamental problem shipping them if Blockbuster can do it without having a surcharge forthcoming for them too.
"Nature doesn't care how smart you are. You can still be wrong." - Richard Feynman
That's not the only thing. One major factor attributed to eating away at Netflix a Blockbuster's profits are the Kiosks you can find at McDonalds. However, long term outlook is in streaming media. Blockbuster is trying to leap ahead and go mobile with their streaming. Netflix already has a service, which (from personal experience) is really good, if you don't mind watching movies on your Computer...
Note that this "analysis" is from a guy who's been recommending Blockbuster stock over Netflix stock for a while, and that's been looking like a really dumb recommendation lately. The scenario described in the article -- where Netflix takes no action to rectify a problem that would destroy all their profits -- is unreasonable on its face.
I have seen the future, and it is inconvenient.
It should be noted that this is an analyst who had already rated Netflix a "sell" and Blockbuster a "buy", and was trying to continue to justify his ratings when he wrote this. In reality, NetFlix is very postal service friendly (they pick up their deliveries themselves, for instance, saving the postal service $100M a year), and has already redesigned their packaging a dozen times and could easily do it again if need be.
In other words, this is FUD spread by an analyst who wants to see his predictions about Netflix's stock swings come true.
E pluribus unum
Unless this story is lacking on important detail (which I suspect it is) I can't help but feel that there was a major communications breakdown.
According to the article, USPS blew $40 million manually processing Netflix mailers, but apparently didn't bother talking to Netflix and saying "hey...uhh...can you help us out here.?"
Netflix has changed the envelope repeatedly so I doubt they'll hesitate to do it again if not changing would cut per-subscriber profit by 2/3...
Unless Blockbuster has patented "envelopes that don't gum up Postal Service machines".
Sorry about the writing. Robot fingers, you know? Cliff Steele in DOOM PATROL #23
This has cost the USPS an extra 42 million dollars over the last two years and they're just complaining about the floppy edges now? It seems odd that this wasn't brought up a long time ago considering Netflix relies on the USPS for distribution and not keeping them happy means not keeping their customers happy. Seems like USPS could have just said, "See this no floppy edges on the Blockbuster envelopes? Do it like that. Now." 42 million dollars is a rather large wake up call.
Reviewing just the first hour of video games.
USPS: Hey Netflix can you change your envelopes so they won't jam our machines?
Netflix: Why should we?
USPS: We'll charge your $0.17 per envelope to process them manually?
Netflix: We'll change our envelope.
Is there really more to this? I would think Netflix would want the post office to be able to more efficiently process the mail. The faster it's processed, the faster it can be loaded on a truck and heads out. If the mail is delayed due to manual processing, Netflix customers are going to be less satisfied.
Ah ha! And that is when Blockbuster is going to reveal that they have a patent on the "Postal Sorting Machine Non-DVD-Jamming Envelope". I predict a $500 Billion patent infringement lawsuit to follow.
Maybe it is time to seriously consider revoking the monopoly provision that the USPS has in terms of being the only legal first class mail deliverer. The last time this was seriously proposed and enacted was over 150 years ago. That one competitive business put the USPS to shame and lowered prices and increased quality (as competition does).
I still can't figure out why we're accepting the postal service when there are many more companies that provide better service for other forms of mail (priority, ground, freight, etc). Even the USPS uses FedEx for their International Express service.
The USPS has one big problem: it can not compete well. It's run by bureaucrats who know they'll get paid regardless of service levels or prices. UPS and FedEx woo my businesses regularly (we mail a ton of stuff), and the prices haven't changed much even with fuel surcharges and the rest. I get an amazing rate for local deliveries of packages under 8 pounds, and it all ends up landing next day just via ground delivery.
I really haven't heard one good reason why we can't let competition into the first class mail market. Yes, the Constitution provides for the Federal Government to maintain mail delivery, but it doesn't actually say they should be the only providers. I'd think the USPS would do fine for remote areas of the country, and the big boys would bring prices down, and service up, by entering the market that desperately needs help.
This gives a good contrast with net non-neutrality. In this case, the envelopes (apparently) cost more to process than the postal service planned on. That's understandable since it's a fairly new thing to be shipping such mass quantities, so the postal service hasn't yet made a new category to cover it. So this isn't the postal service attempting to charge a customer more simply because the customer is making more money than another customer shipping the exact same envelope. Contrast this with net non-neutrality where the carrier wants to charge more to the more popular company per bit simply because that company has deeper pockets or is more profitable than some other company also transporting bits through the carrier.
The real story here is that the US Postal service is trying to pressure Netflix into changing their envelope design. This means Netflix is shipping so many movies that a flimsy envelope has gotten the attention of the US Postal service and is annoying the heck out of them. A sturdier envelope would no doubt be more expensive, but the odds are that Netflix will just do whichever is cheaper: Pay the extra fee or cough up the extra cash for new envelopes.
The fact that a Blockbuster shill is trying to spin this as some devastating catastrophe for Netflix is just proof of how desperate Blockbuster is, and how badly they're getting nailed by Netflix.
"Live Free or Die." Don't like it? Then keep out of the USA
But it creates a nice buying opportunity for Netflix stockholders ... or selling opportunity for people who had already shorted Netflix.
Don't piss off The Angry Economist
Agreed, They have been evolving their design for some time now
Um, don't you mean they were intelligently designing it?
***
Hey, if it costs the USPS more, maybe they could pay for it from the ill-gotten profits they derive from selling spamming services!
Apology to Ubuntu forum.
Netflix also said they pay for pickup service even tho they deliver their shipments to the post office, at an estimated $100M savings to the post office. They could either demand the post office pick up as they are paid to do, or charge less for what they don't do.
Either way, this is nothing but a conflict of interest from that so-called analyst. I wonder if the SEC will investigate him for this.
Infuriate left and right
The U.S. Postal Service is self-sufficient (not subsidized):
http://www.nalc.org/postal/perform/selfsufficient.html
http://usgovinfo.about.com/blpostalservice.htm
Oh, I don't doubt that rural deliveries would be more expensive -- but that's the responsibility you accept when you decide to move further away from urban areas. More gas to go places, more costs for communications (digital and physical), less choice in what you can buy locally, etc. The upside is more privacy, possibly more personal security, etc, etc.
I serve some churches in Alaska, and my shipping charges via FedEx are more expensive, but not that much more. I recently shipped an 8 pound package to Alaska and I believe the charge for FedEx ground was around $20. Shipping the same package to California is around $8. Considering the distance, that's not a huge price difference. Since the market sets prices based on supply and demand, it would make letters to Chicago cheap, and letters to Alaska expensive for me. That's normal, but how many people are mailing things to Alaska to begin with, compared to Chicago?
I personally think the NetFlix envelopes are horrid. I've had them come in various stages of destruction to my home. Ripped edges, torn open, etc. Nearly every envelope we get looks like it was jammed in some sort of machinery... that is until about three weeks ago. It looks like the postal service changed tactics and is manually sorting NetFlix envelopes to keep their equipment running smoothly. I've had no problems with torn envelopes since then. Perhaps the postal service is simply wanting to be paid for the problems NetFlix envelopes cause.
Other than that, I'm a huge NetFlix fan and hope they can work this out. The last thing they should want to do is make their delivery channel angry. Their business depends on it. I had naively imagined the problem was solved because NetFlix was working with the USPS. Let's hope the NetFlix managers figure out they need to be nice to the postal works. You DO NOT want to make your mail man angry! TRUST ME!
What we need is Postal Network Neutrality, and we need it now!
"It's the height of ridiculousness to say for those 9 lines you get hundreds of millions."
That IS an intriguing response, and one I've heard before but never spent time answering. I'll give it some thought.
I actually do hang out with one of my UPS drivers regularly at a local saloon, and he's told me that he would have no problem at all delivering first class mail to customers he alreadys serves (duh). We receive a daily UPS and FedEx pickup, as do hundreds of my customers. For those customers, the cost to UPS is negligible in terms of warehouse-to-end costs. Sorting would introduce a cost, but UPS and FedEx have significantly better sorting equipment than the postal service does (and I know this from someone who quit USPS and moved to UPS).
I'm not saying that EVERYONE would use it, but the added advantage of the competition would bring prices down for urban areas almost immediately, and allow the companies to look into competing in suburban and exurban areas. The priority would be the competitive pressures on the USPS to do better, faster, cheaper than currently.
All our shipments are done faster through FedEx or UPS than USPS. Both companies have provided me with thermal printers, and our software allows us to look up an address, weigh a package, and print the tag in seconds. I can do a batch of 20 shipments in just a few minutes. USPS has done better by allowing third party stamp sellers (which we now use when we have to use USPS), so they have made some positive changes.
Would UPS deliver at 41 cents per letter? I'm doubtful, but we also don't really know. Our house gets, on average, about 15 pieces of mail a day. Based on weight (I just weighed my mail from today), we're talking about a overall cost of about $11.15 to the companies sending the mail. Because UPS and FedEx would work on the total grossdelivery cost (not the individual net sending cost), I would believe that $11.15 is more than enough for them to sort and deliver letters to me daily. On my slowest days we receive one ground shipment that costs the shipper $6.00 or so. $11.15 is more gross income, but more work, so I'm sure they make more on the $6 delivery than on 15 deliveries totaling $11.15, but again, it depends on if their market forecasts can see a profit.
I'd think they could. The current system of USPS is huge, but I see new UPS Stores and FedEx Kinkos stores opening up regularly all around me. That means that they've built a decent infrastructure, and can likely cover many suburban areas already (my town is small, and I believe we have 20 FedEx depots of various sorts within a 20 minute drive of me).
You need to look at what's probably going to happen. This FUD, if public enough, may cause Netflix stock to drop. This represents an opportunity for traders with a short position to cover by buying at a lower price. This also represents an opportunity for people who want to buy stock to do so at a lower price. The next expectation is that when the world realizes this is no big deal for Netflix, the stock will rise again and all those who bought low will have earned something on their investment.
Maybe you think that the suggestion was for the short-sellers to short some more at the lower price? That, indeed, would be an unwise move.
GreyPoopon
--
Why is it I can write insightful comments but can't come up with a clever signature?
There's a simple answer to that though; instead of giving the USPS a monopoly, require all mail carriers to provide fixed-fee service to the entire country. Don't limit how the carrier does this; a carrier concentrating on urban service could (for example) pay the USPS to handle remote areas, and eat the loss whenever it leaves its own delivery area; if it's got a process advantage over the USPS (such as better sorting systems), it may not make a loss whenever it does have to pay the USPS to fill in coverage gaps. To protect the USPS from abuse, once you're a mail carrier, you may not make use of another carrier's fixed-fee services (so you'd need to negotiate a suitable commercial contract with the USPS to fill in your coverage gaps).
If postal services are a natural monopoly, the USPS ends up as the only carrier. If there's room for someone to undercut the USPS, they will do so, and make a profit in the process. So long as the USPS isn't stupid enough to set its rates below the level where they can continue to make a profit on every delivery, it survives to provide fill-in coverage.
Put another way; the USPS is a monopoly because we want reliable postal services at a fixed rate, anywhere in the country. If we regulate for the outcome we want, and let private enterprise do as it wishes within those regulations (with business-destroying penalties for flouting them), we should get the results we want for the minimum price possible. If that means a USPS monopoly, it's clear that the monopoly is a consequence of our desire; if it means competing carriers, then the monopoly was an inefficient way to get what we wanted.
I appear to have a blog. Odd.
Oh, is THAT how shorting works?!?! No wonder I've always lost money on my short trades! Gosh! The sarcasm is just dripping today! I'm gonna wear out my exclamation mark key!
See the "or" connecting the two concepts? That means that you would do one but probably not the other. Reading lessons on slashdot. What ARE they teaching the victims of government schooling these days?
Don't piss off The Angry Economist
Not only that, but the post office will probably prefer that solution to actually charging them the extra 17 cents to hand-sort.
Compare:
Cover the cost of extra work
vs.
Eliminate extra work
They've changed their envelopes before, and they'll have no problem changing them again. What I find interesting is that the US Post Office has suffered in silence for 2 years, charging up costs in something that could easily be remedied. If post office stock was available, that's the one I would drop.
It's interesting to note that Netflix' former COO, Bill Henderson, was the United States Postmaster General from 1998 to 2001, so I have to think their relationship with the USPS is nothing but close.
Note: Henderson's role changed to strategic advisor in February 2007.
Oh, is THAT how boolean logic works?!?! No wonder I've always lost bits on my binary relations! Gosh! The sarcasm is just dripping today! I'm gonna wear out my NOT key!
:)
See the "XOR" connecting the two operands? That means that one is true, but not the other. Reading lessons on slashdot. What ARE they teaching the victims of computer science these days?
No malice intended, just trying to be cute
Having previously worked for the US Postal Service DELIVERING ACTUAL MAIL, I can tell everyone here that the flimsy (though protective) tyvek Netflix-style DVD-sleeves are not a favorite with USPS workers.
They can be rather slippery and are often difficult to keep a good grip on within a large stack of sorted mail.
I have no doubt that similar US Postal Workers have had identical frustrations not to mention that the thicknesses of the disks really add up and complicate the holding the 2 to 3 piles of hand-held mail when preforming dismount-delivery (on foot).
As a postal worker, you come realize this 5" square (and thick for its area) Netflix-style DVD envelope is being delivered by you many dozens of times per day (or more) and the disks *are* slipping out of the letter stack more easily than other types of mail when delivering mail 'in the field'.
You also realize that this Netflix-style mailer is NOT bringing the First-Class postage rate (but you spend MORE of your time handling it than the premium First-Class letters).. They do not even pay second-class or media-mail rates but a pre-sorted postage rate. Also, in all likelihood, the Netflix-style DVD mailer is causing just as much trouble for the automated sorting machines in the postal distribution centers. It also is not difficult to imagine that these odd-shaped and slippery (for mail) DVD mailers therefore must be handled by 3 to 4 more sets of human hands to get accurately delivered compared to the handling and delivery for standard premium first-class postage envelopes. Netflix, et al are probably paying at least half-as much to have them delivered as they would cost if delivered first-class (if even that). Even my credit card-statement comes First-Class!
If the profitable business models for these DVD rental/mailing companies is dependent on US Government (USPS) mailing subsidies, I suggest shareholders beware.
Individuals in the US, mailing their personal letters are *required* (most of the time) to use First-Class postage stamps (or equivalent). These same individuals are experiencing increasingly HIGHER POSTAGE RATES because, in large part, they too are subsidizing the added expenses of delivering Netflix-style mailers and other bulk non First-Class mail.)
Ask your postal worker what they deliver more of, First-Class mail, or "bulk mail"... you will see in their expressions the real answer to why we see the frequent postage rate hikes.
Shape and size of mail DOES have much to do with the *costs* and efficiencies in the delivering of the US Mail. I only wish the prices for mailing were adjusted accordingly (as we would all have MUCH LESS junk mail). -Z
I find it unlikely that they are "suffering". In fact, it's probably in the best interests of the Post Office to work with Netflix to find a solution to this and keep them around. After all, how many new businesses are there that rely on the good ole post office as a cornerstone of their business model? Not many I'd suspect....
I want peace on earth and goodwill toward man.
We are the United States Government! We don't do that sort of thing.
This is rich.
Spam is a burden on everyone. It's a waste of time and resources
and is a nuissance. In some cases, it might even be a threat to
your financial reputation.
Yet they would rather shakedown a company that is actually
doing something constructive with the postal service. If the
postmaster general doesn't like Netflix envelopes, he could
make some constructive suggestions.
Forget charging Netflix extra. Take this charge and apply it
spam and especially bulk mail.
I rather doubt that bulk mail was originally what Franklin
had in mind...
A Pirate and a Puritan look the same on a balance sheet.
"The scenario described in the article -- where Netflix takes no action to rectify a problem that would destroy all their profits -- is unreasonable on its face."
Yeah, that would be like a brick and mortar movie rental company only trying alternatives to their antiquated business model after years of hemorrhaging money. If this guy is analyzing Blockbuster stock, he's used to a company taking no action to rectify a problem that would destroy all their profits.
And a pretty convenient one at that. They probably prefer printed, pre-sorted, barcoded identical envelopes to the kind of crap that regular people put in the mail--even if one does jam occasionally. (We get letters at my company that not only required hand-sorting, but probably handwriting experts to decode.)
Unless Blockbuster filed for a patent like, "A method for placing media into solid-cornered transport containers." If this is the case, we're all screwed.
Reid
The Right Reverend K. Reid Wightman,