U.S. Postal Service to Netflix: You're killing us on labor

U.S. Postal Service to Netflix: You're killing us on labor

Summary: Netflix's return DVD mailers are apparently costing the U.S.


Netflix's return DVD mailers are apparently costing the U.S. Postal Service $21 million in annual labor costs. And the Postal Service wants some of its money back.

Simply put, Netflix's return DVDs clog the postal machinery and require manual sorting. When Netflix subscribers open their mailers the leading edge of the package is removed. On return, the same package comes back without the hard edge and plastic instead and jams the sorters.

According to Citi analysts Tony Wible and Mark Mahaney a potential 17 cent surcharge to Netflix's DVD return packages would crush the company's operating income per subscriber (Techmeme).

The analysts, who rate Netflix a “sell” and Blockbuster a “buy,” write:

If Netflix has to bear the full brunt of this increase (without other cost offsets), monthly operating income per paying subscriber would fall 67% from $1.05 to $0.35. NFLX questions whether the USPS will accept the OIG's suggestions, and if no hikes occur, the impact would be limited.

Here's the math:

nflx.png The Inspector General audit at the Postal Service didn't mention Netflix specifically, but the hints in the report are pretty strong. Some excerpts from the audit report:

We initiated this audit based on concerns raised regarding potential preferential treatment given to a large digital versatile disc (DVD) mailer. Our objective was to determine whether PRM (permit reply mail) mailers' mailpieces are processed in accordance with their approved classification and pricing.

The Postal Service generally processes PRM mailpieces in accordance to their approved classification and pricing, as outlined in the Domestic Mail Manual (DMM). However, employees manually process approximately 70 percent of the approved First-Class two-way DVD return mailpieces from one DVD rental company because these mailpieces sustain damage, jam equipment and cause missorts during automated processing. Nonmachinable mailpieces are subject to a surcharge. However, the DMM does not currently address the characteristics of the mailer's two-way DVD return mailpiece that make it nonmachinable.

Because these mailpieces are not machinable, the Postal Service pays significant additional labor costs to manually process them. We estimate the additional labor costs to process these mailpieces were $41.9 million during the past 2 years, and will be $61.5 million over the next two years. We will report this monetary impact of $103.4 million in our Semiannual Report to Congress as $41.9 million in unrecoverable costs and $61.5 million in funds put to better use.

Add it up and you have the following takeaways:

  • The Postal Service wants to add a 17 cent surcharge if Netflix doesn't redesign its mailers;
  • Congress will love this tidbit;
  • A surcharge would crush Netflix, which is under pricing pressure already;
  • It's a safe bet that Netflix will redesign its mailers;
  • The Postal Service is inefficient: Why did it take so long to even ponder a surcharge? A company would surely notice if a customer was increasing its labor costs.

On another note, Citi's analysts confirmed that Blockbuster's mailers don't clog the Postal Service's sorters.

As for that final takeaway, Wible and Mahaney reckon that the Postal Service may be looking to add surcharges to pay for other initiatives.

We are somewhat concerned that the USPS has singled out the rental by mail industry, which could allude to price increases despite any compliance with the mailers. To this point, the USPS proposed annual rate increase of $0.17 would provide $56.5 million in revenue and more than cover the estimated $31 million in annual manual labor costs, which implies that the USPS may be looking at online rental plans as a way to subsidize losses from other parts of its operations.

Netflix argues that it saves the Postal Service $100 million since it pays for first class postage both ways. But amid rising fuel costs and electronic delivery of mail and other promotions the Postal Service is likely to look to balance its budget somewhere.

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  • Of course the post office is inefficient

    That's why postal prices keep increasing. Their workforce is overpaid, that's why costs are so high, but I guess it is easier to blame your customers.

    If customers are causing an increase in costs, then you need to streamline your operations or provide guidance (give NetFlix recommendations on how to avoid the issue at hand).

    Of course, Congress should stop subsidizing the post office and allow competition (In 2005 the govt gave $500 million of your money to the post office. http://www.usps.com/history/anrpt05/)
    • Interesting - you state the govt gave away our money - not yours?

      Do you not live in the US. Do you not pay US taxes? If not them perhaps you should not comment?
      • If Indian businessmen can influence Hillary* and other politicians,

        then everybody has a right to comment.


        * "Hillary Clinton (chairperson of the India Caucus)" -- do a web-search on that phrase, if not "Hillary India lobbyist" if you think I'm full of something squishy, soft, and the color of cookie dough. Why can't America's politicians work for Americans? Do extra-American entities pay taxes? (No...)
        • Of course they don't pay taxes...

          they pay bribes. Not the same thing at all. And the Clinton family is well known for taking bribes.
          Beat a Dead Horse
      • yes it's my money too

        I could have phrased it better. Point is, OUR money is being wasted.
      • Even if he didn't live in the US...

        Why shouldn't he comment?
        Can't take any constructive criticism, so you just take the "SHUT UP" route without even considering the contribution?

        Wow, you sound like a smart one.
      • I Think You Knew...

        ...what he meant! Why bother to post such nonsense? But, if you must be that picky, it's "U.S. taxes" -- not "US taxes".
      • RE: U.S. Postal Service to Netflix: You're killing us on labor

        It is if truth be told exceptionally convoluted to not tie in as well as you in the spot
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    • As a formal USPS employee...

      I can tell you that the workforce is most definitely not overpaid. That's one reason I'm a former employee. Prices keep going up because costs keep increasing and mail volume is dropping. Gasoline, insurance, electricity, and the employees cost more over time. Couple that with fewer pieces of mail, and either it costs more to ship each piece or service must be cut.

      "Of course, Congress should stop subsidizing the post office and allow competition (In 2005 the govt gave $500 million of your money to the post office."

      The USPS does have competition. Have you ever heard of UPS, FedEx, DHL, G.O.D., or any other delivery company? One difference is that the USPS delivers to almost every house in the USA 6 days a week. They also deliver on Sundays and holidays (including Christmas) if you choose to use Express mail.

      All that being said, if NetFlix is paying for first-class both ways, the USPS is making money on every mailer even if all of them are sorted by hand.
      • Should read "As a former USPS employee..." (nt)

      • When anyone can deliver first class mail

        come and tell me the USPS has competition.
        • Glad to see someone understands the issue

        • Fair enough.

          But if anyone wants to compete in the delivery of first class mail, they must match the restrictions that the USPS operates under.

          1. All competitors must deliver to all addresses in the USA (including HI and AK) served by the USPS at flat rates. None of that profitable routes only crud.
          2. The flat rates must be approved by Congress.
          3. No piece of mail may be intentionally delayed in transit to the final distribution point.
          4. No piece of mail may be intentionally delayed at the final distribution point for more than one day, and then only when justifiable. Any such delays must be documented along with the justification.

          The real competition is in the overnight and package delivery arenas. In the overnight arena, the USPS only holds a market share of about 10%. I'm not certain about the package arena, but I'd be surprised if the USPS held any significantly higher percentage there.
      • USPS is the only monopoly that loses money.

        It is the only one allowed to deliver first class mail. They cannot make money because of the bureaucracy. It should be sold off to the private sector. I have a friend whose family works there and you should here what they have to say. No way should the taxpayer subsidize Netflix because the USPS is inefficient at spotting their shortcomings.
        • The only monopoly?

          Take a look at Amtrack's wonderful balance sheet on profit and loss.
          • Maybe they were delivering mail.

          • Airlines are no better

            Ignorant people love to pick on Amtrak (BTW, no "C", "Professor", but the fact is airlines are even worse. Without the subsidies that we taxpayers lavish on the airlines, the airline industry would cease to exist.

            Check your facts, "Professor".
      • USPS isn't telling the whole truth

        "NetFlix is paying for first-class both ways, the USPS is making money on every mailer even if all of them are sorted by hand."

        You're absolutely right if that were the only consideration. The killer is not that they have to be hand sorted, it's that the machinery has to be unjammed. I worked at a Postal Distribution Center one holiday season (back during the .com bust) and manually handled items weren't a problem. It was when their warehouse-sized sorting machine(s) came to a crashing halt that all hell broke loose.

        Even as the low man on the totem pole, the pay beats unemployment and minimum wage. The hours kinda suck, you worry about postal inspectors jumping down your butt with a federal case if you sneeze wrong, and as a seasonal you can't rely on having work from one night to the next. Although I think all I.T. types should spend a few weeks pushing and pulling mail carts on and off freezing cold trucks. It might give them a better perspective on what "blue"-collar work really is like.
      • fines vs subsidy

        Gee, I could swear that I had heard somewhere that each of these competitors to the USPS had to pay fines for their existence--seems there's something on the books that makes it somehow illegalt o compete against the USPS. Wish I could remember where I had heard that and in what context...
        • Wikipedia is your friend.

          The [url=http://en.wikipedia.org/wiki/USPS]USPS[/url] has a monopoly on first class mail. The others are competitors in the package and overnight mail arenas.

          As I stated in another post, I'm more than amenable to competition in first class mail. But everyone needs to play by the same rules.