Netflix facing USPS scrutiny

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Netflix is mulling potential changes to its iconic red envelope in the wake of a Citigroup report that suggested it could be in for a hike in mailing costs.

The December 4 report from Citigroup analysts sparked speculation that Netflix, an online DVD rental company, is causing automatic processing problems with its return mailers.

The analysts' report was based on a recent audit by the USPS Office of the Inspector General of a number of companies who use a return service for DVD mailers, including Netflix, Blockbuster Online, Gamefly and Simply Audiobooks.

The audit, which was released in November, did not name Netflix as the problematic mailer, but stated that approximately 70% of the approved First-Class, two-way DVD return mail pieces from one DVD rental company “sustain damage, jam equipment and cause missorts during automated processing.” The audit recommends that any nonmachinable pieces from any DVD mailer be subject to a 17 cent per piece surcharge.

In their report, the Citigroup analysts state that Netflix is not identified “but is implied” in the audit. The USPS Office of the Inspector General would not confirm that the disk mailer referred to in the audit report was Netflix.

“We do not release that information,” said Agapi Doulazeris, spokeswoman for the USPS Office of the Inspector General.

Netflix is constantly reevaluating its mailing format, said Steve Swasey, VP of corporate communications for the company.

“The report is speculative,” said Swasey. “If we have to change the mailer, we'll change the mailer.”

The mailer has already gone through 40 or 50 iterations within the past decade, he noted, adding, “It's something we're always improving.”

Swasea said that Netflix works in full compliance with the USPS and that the company has a very close working relationship with the service.

“We are full compliance with all [the Postal Service's] specifications and requirements,” Swasea said.

Although Netflix pays First-Class postage for outbound and return mail, it picks up the mail from the USPS at 100 different distribution points around the country As a result it saves the USPS about $100 million a year, Swasey said.

The report's analysts determined that Blockbuster Online's mailers were not subject to the same issues.

“If the USPS forges ahead with a rate increase, NFLX has more exposure to the change and is less able than BBI to offset any increase with cost savings,” the report states. A call to Blockbuster was not returned by press time.

When asked if the USPS planned to act on the recommendations made in the audit, Dave Partenheimer, a USPS spokesman, responded “not at this time."

Netflix delivers approximately 1.6 million DVDs each day. The company also launched a streaming video feature on its Web site earlier this year, but Swasey says that “it's still a DVD world.”

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