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USPS Slowdown Unlikely to Cramp Netflix's Style

USPS Slowdown Unlikely to Cramp Netflix's Style

The proposed slowdown of first-class delivery service by the U.S. Postal Service won't likely turn into a serious drain on Netflix's bottom line. The volume of business Netflix does with the USPS allows it to streamline the process, and its business is already emphasizing instant streaming access. However, the company's summer stumbles are still taking their toll, and even streaming may not be immune to delivery issues.

By John P. Mello Jr.
12/07/11 9:39 AM PT

Cuts in mail service that will add an extra delivery day to most first-class mail aren't expected to have a significant impact on Netflix, at least in the near term.

The U.S. Postal Service on Monday proposed modifying its current delivery standard for first class mail from one to three days delivery to two to three days.

One of Netflix's selling points is that it can deliver movie DVDs to its members overnight. That's not necessarily going to change with the post office cutbacks. Even if it does, though, it's unlikely to have a significant immediate impact on the service, which is still reeling from a massive subscriber exodus when it changed its pricing structure in September.

The USPS left the door open for next-day delivery for large mailers. It disclosed that "there would be an opportunity for mailers who properly prepare and enter mail at the destinating processing facility prior to the day's critical entry time to have their mail delivered the following delivery day."

$600 Million Postage Bill

Because of the volume of business Netflix does with the Post Office -- it's estimated it spends $600 million a year on postage -- it has systems in place to perform tasks that are ordinarily performed at mail centers. For example, Netflix presorts its DVD mailers by ZIP code before delivering them to postal processing centers for shipping.

"We consult with out biggest mailers, such as Netflix, before we even consider making changes like this," U.S. Postal Service spokesperson Susan McGowan told the E-Commerce Times.

"What this process is all about is mainly the mail that gets dropped into our blue boxes," she added.

Large mailers who bring their mail directly to postal processing centers will be largely unaffected by the proposed changes, she explained.

"If they bring their shipments in before noon, their mail will still be delivered the next day," she said.

However, it could be more difficult to get to those processing centers. That's because the Postal Service is also calling for possibly closing 252 of the 487 centers currently in service.

"Hopefully, Netflix will still be able to deliver overnight, but if there was one thing it didn't need it was more bad news," Rob Enderle, president and principal analyst with the Enderle Group, told the E-Commerce Times.

Netflix did not immediately respond to our request for comment on this story.

Small Impact

Any changes affecting Netflix's DVD rental business would have been more severe several years ago than now, according to Michael Pachter, an investment analyst with Wedbush.

That's because Netflix's DVD business has been declining since it introduced online streaming of movies and TV shows and, of course, the infamous September price hikes. This year Netflix has gone from around 20 million subscribers who receive DVDs in the mail to 11 million, Pachter said.

About two thirds of Netflix subscribers are streaming-only customers, he estimated, and one third still receive DVDs through the mail. Of that one third, he continued, two-thirds watch their DVDs on the weekend. "So it really doesn't make any difference if you send it back on Monday or Tuesday as long as you get it back on Friday," he told the E-Commerce Times.

The mail delivery changes would bother about 10 percent of Netflix's customers, he reckoned. "Netflix has had a ton of bad publicity with the price increase on their hybrid plan customers," he observed. "This is going to add fuel to the fire."

Nevertheless, he opined, "It's going to have a small impact on Netflix, more perception than reality."

Users Unruffled

The responses of Netflix users contacted by the E-Commerce Times appear to support Pachter's analysis.

"We're on the cheap Netflix plan (two a month), so waiting two days makes no difference to us," said Jean Grams, of St. Paul, Minn.

"I don't care -- one day, two days, whatever. I use Netflix DVD to get relatively obscure films I can't get streaming but can't remember a time when I was dying with urgency," observed Ada Focer, of Cambridge, Mass. "

"Delay doesn't bother me in the least," added Fran Kelly, of Swansea, Mass.

In addition to the proposed mail changes, Netflix's business model is also being threatened by cable TV companies who are beginning to mull charging usage rates for their broadband services. That means the more data you consume, the more you'll pay for it.

"Since Netflix doesn't control its pipeline, it's exposed to delivery problems," Enderle said. "Both the mail delay and pay per megabyte rules would severely impact Netflix's business model, maybe irrecoverably."


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