Netflix Faces the Post Office’s Ire

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Many movie fans are familiar with the flimsy red envelopes used by rent-by-mail DVD service Netflix—it turns out the United States Postal Service is all-too-familiar with them too. According to a report from the Office of the Inspector General of the USPS (PDF), about 70 percent of those iconic rec two-way DVD return envelopes have to be processed manually by postal service employees because they’re so flimsy: they sustain damage, jam machines, and cause missorts during processing. The postal service estimates it’s also incurred $41.9 million in costs processing these mailers in the last two years, and will blow through another $61.5 million in the next two years, for a total DVD-mailer processing cost of $103.4 million.

To be fair, the postal service isn’t exactly singling out Netflix: it also identifies Blockbuster Online, GameFly, and Simply Audiobooks as rental service companies sending two-way return envelopes for DVDs and CDs. But Netflix is the biggest player in the market, and the postal service’s self-initiated audit of how the mailers are being processed came from concerns raised about "potential preferential treatment given to a large digital versatile disc (DVD) mailer."

The Post Office’s recommended solution: require mailers like Netflix to redesign their DVD mailers so they can be reliably machine-processed, or have them pay an additional $0.17 per envelope as a "nonmachinable surcharge."

According to the Associated Press, a Citi Investment Research analyst estimates that surcharge would erode 67 percent of Netflix’s per-subscriber monthly operating income.