LOS ANGELES Dec 6 The possibility of U.S.
Postal Service surcharges on DVD mailers caused one analyst to
reiterate his "sell" rating on online video rental company
Netflix Inc (NFLX.O), which ships over 1.6 million DVDs per
Citigroup analyst Tony Wible cited concerns about a
potential U.S. Postal Service surcharge of 17 cents per mailer
he said was proposed in a recent audit by the Postal Service.
An audit prepared by the Postal Service Office of Inspector
General (OIG) has concluded that the soft leading edge on 70
percent of one DVD rental company's return mailers "get stuck
during sorting and require manual processing and added about
$21 million in annual labor costs," Wible wrote in a note
issued Dec 4.
Netflix is not specifically mentioned, but is implied, he
A Netflix spokesman said he did not expect the company to
have to pay extra postage costs.
In the audit report published in November and obtained on
the Web site of the Office of Inspector General, the agency
estimated the additional labor costs to process DVD mailers
were $41.9 million during the past two years, and will be $61.5
million over the next two years.
"...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," the
audit report said.
A spokeswoman for the Office of Inspector General declined
further comment beyond the report, which did not name the
company, but recommended imposing the 17 cent surcharge on each
mailer if the issue was not resolved.
Wible noted that if Netflix had to bear the full brunt of
this hike, its monthly operating income per paying subscriber
would fall 67 percent from $1.05 to 35 cents.
Netflix spokesman Steve Swasey said it was highly unlikely
the company would have to pay any such assessments.
"We're in full compliance with U.S. Postal Service
regulations and specifications," he said, noting further that
if these regulations or specifications were to change, Netflix
would change its mailer.
"We've already gone through 40 to 50 iterations of the
mailer since Netflix started shipping DVDs a decade ago," he
In the same note, Wible reiterated his buy on Blockbuster
Inc BBI.N, saying the Netflix rival's return mailing
envelopes did not cause this problem and that the issue could
make a big competitive difference for the companies.
Swasey said that Netflix actually saves the Postal Service
about $100 million a year by picking up the returns from the
Netflix shares closed down 3 cents on Thursday to $23.90 a
share on Nasdaq, while Blockbuster shares closed down 6 cents,
or nearly 2 percent, to $3.12 a share on the New York Stock
(Reporting by Sue Zeidler, edited by Alexandria Sage and Carol