Rich Fiscus
12 Dec 2007 0:08
An audit performed by the Office of Inspector General, U.S. Postal Service (USPS) has concluded that there are problems with the envelopes used by online rental giant Netflix to deliver and return discs. The problem apparently occurs on the envelopes' return trip, after the consumer has ripped it open to remove the disc and then resealed it to return their movie. This leads to problems processing these envelopes by machine, and the need to hand sort 70% of these returns.
A Netflix spokesman said “The mailer is in compliance with the U.S.P.S. currently,” The report from the Inspector General's office confirms that following current Postal Service guidelines, Netflix had been told their envelopes could be processed by the machines, and recommends that those guidelines should be changed to reflect the problems the additional expenses incurred handling the envelopes.
The report recommends a $0.17 surcharge for each envelope unless the design is changed to make it more compatible with their sorting machines. This would reduce the company's operating income by 67%. Citibank analysts Tony Wible and Mark Mahaney downgraded Netflix’s stock Tuesday.
“Given the magnitude of this risk, we believe Netflix will work toward resolving this issue by redesigning its mailers. If the U.S.P.S. forges head with a rate increase, Netflix has more exposure to the change and is less able than Blockbuster to offset any increases with cost savings,” they said in an analyst note to clients. “A price hike would exacerbate the risks we see in Netflix’s business model as aggressive pricing, maturity concerns and higher costs prevail.”
Source: Video Business