Netflix Envelopes 'Jamming' Postal System?

A new audit suggests that the Postal Service is undercharging the DVD service.

Nov. 30, 2007— -- The U.S. Postal Service is spending millions of extra dollars each year to process DVDs shipped from companies such as Netflix and Blockbuster, according to a new audit.

The mailers the customers use to return DVDs to the companies often jam in the Postal Service's automatic mail sorters. So instead, 70 percent or so of the DVDs need to be sorted by hand, costing the Postal Service roughly $21 million in extra labor costs each year.

The report by the Postal Service's Office of the Inspector General said that over the next two years those added labor costs are expected to rise to $61.5 million.

Here is the problem: When DVDs are shipped out there is a hard leading edge allowing the packages to be automatically sorted. But when the customers get their DVDs, they rip off that edge to open the package.

When they reuse the mailer to return the DVD, the new leading edge is a floppy piece of plastic, and that edge is what often gets stuck in the postal machines. So they have to be sorted by hand instead.

The inspector general's report said that companies like Netflix and Blockbuster, although it did not specifically name them, should be charged a 17 cents surcharge for each package that can't be processed by machines.

Netflix alone sends 416 million DVDs a year through the mail. If it was forced to pay 17 cents more for each of those packages, it would cost the company an extra $70.7 million a year.

The other option listed in the audit report is that Netflix could redesign its mailers.

While the public sections of the report do not specifically mention any company by name, it's clear that it's referring to Netflix. The report said that 1.6 million DVDs are sent back to the retailer each day. Netflix spokesman Steve Swasey cited the same exact number when talking about his company's volume.

Swasey would not comment specifically about the audit, but said, "We have a close relationship with the United States Postal Service."

Since Netflix started mailing DVDs in 1999, Swasey said there have been 40 to 50 redesigns of the mailers, "always in compliance with first class mail standards."

He would not speculate on what steps, if any, Netflix would take but said: "We'll always work to maximize speed, efficiency and the overall enjoyment of our members and the profitability of shareholders."

Spokesmen for Blockbuster did not return calls to the company.

A spokesman for the Postal Service declined to comment on the report, pointing instead to management comments included in the audit.

In that report, top Postal Service managers wrote that the service "is greatly concerned with the possible negative impact on affected customers if a change in mailing standards results in a substantial price increase."

Netflix expects to have 7.3 million to 7.5 million members by the end of this year.

"We're one of the largest first class customers of the Postal Service," Swasey said.

Swasey said Netflix saves the Postal Service more than $100 million a year because it pays the full first class postage both ways but actually pick up the return mail at about 100 locations around the country.

Netflix is slowly shifting away from its mailing model. The company now offers more than 5,000 movies to be watched over a computer and soon online through TVs. But that is just a drop in the bucket compared with the 90,000 titles on DVD.

From January through August, Swasey said, Netflix had 10 million movie views online. Remember, the company mails out 1.6 million DVDs each day.

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