Blockbuster has had a rough year, posting a loss last quarter of $35 million and closing over 500 stores in the past year, but a new report out by the US Office of the Inspector General of the US Postal Service may put heat on chief rival Netflix. According to an audit by the OIG, the type of return mailers that Netflix uses jam automatic mail sorters and cost the post office about $21 million per year in manual sorting costs, reports Wired Epicenter.
The result is that the OIG has recommended that the USPS impose a 17 cent surcharge on each mailer. This, according to Citi analysts Mark Mahaney and Tony Wible, would cut Netflix's operating income per subscriber by 67%. "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," wrote the analysts. Blockbuster's mailers, on the other hand, are not prone to the autosort jamming problem, said Wible and Mahaney.
Analysts expect that Netflix will likely redesign their mailer to preempt any potential rate hike. Redesigning their mailers is something that that company has done numerous times over the past 8 years, and is a likely solution to the potential problem with the postal service.
Even so, Mahaney and Wible are unimpressed with the business, writing, "a price hike would exacerbate the risks we see in Netflix's business model as aggressive pricing, maturity concerns, and higher costs prevail." They reiterated their "sell" rating on the stock and gave Blockbuster a "buy."
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I'm confused why Netflix couldn't just work with the USPS to change the design of their mailer?
Posted by: Eric B | December 5, 2007 10:23 AM
Interesting. Netflix will no doubt redesign their mailers, but the sheen seems to be slipping from Netflix. Netflix reported its first ever drop in subscribers in July of this year, and with a sell rating on their stock as reported above - have they hit the ceiling?
Posted by: Simon G | December 5, 2007 3:38 PM
It seems like a good opportunity for online media consumption to really make a huge play, as bandwidth might end up being cheaper than postage and physical transport (gas prices are sky high): http://fishtrain.com/2007/09/23/itunes-movie-rentals-and-old-media/
Posted by: Jesse | December 5, 2007 3:51 PM
I send a lot of CD's around. I just use a normal envelope with some cardboard in it to keep it from bending, and the CD in one of those thin jewel cases. The price jumped a lot at the most recent rate increase because the envelope is rigid (with the cardboard). It used to go out for three stamps, now it's almost 2 bucks (can't remember how much exactly) I'm glad I'm not Netflix.
Posted by: Advice Network | December 5, 2007 10:27 PM
How come almost nobody has reported the post office isn't actually doing anything about this? The audit report is on their website and says postal management actually rejected the recommendations for new envelopes/surcharges etc.
The original wired post got it wrong!..then they updated with a netflix spokesman saying there was nothing going on to worry about.
Seems like tons of posts keyed off of the Wired one without checking there own facts. That's kind of scary given analysts rating the stock were involved too.
Posted by: mark | December 6, 2007 3:36 PM
I use Blockbuster Total Access. It is pretty good except that they keep jacking the prices. I like being able to go to a local store. For a while I had abandoned all video stores and was just using Vongo, Movielink, and iTunes. Netflix's video download service is very attractive, they need to continue increasing this sector and perhaps offer a free computer to tv device with a year's subscription. Blockbuster needs to get on the ball and integrate Movielink as part of Total Access or they are going down.
Posted by: David Mackey | December 7, 2007 10:30 PM