I am writing to you to request that the Commission do what it can to expedite its decision in the GameFly complaint proceeding. GameFly frled this complaint nearly two years ago. Before that, GameFly spent 18 months working with the Postal Service in an attempt to resolve informally the issues on which the complaint was based.

I understand that the Commission has competing demands on its resources. Delay in resolving the case, however, is costly to GameFly. At the company’s current volume of approximately 1.2 million shipments per month, the difference between the two-ounce flats rate of $1.05 that GameFly must pay to avoid automated letter processing for most of its DVD mailers, and the one-ounce letter rate of $0.44 that Netflix pays to avoid automated letter processing of return mailers, amounts to about $730,000. This amount represents more than 100% of GameFly’s monthly net income in 2011.

Respectfully submitted,
David Hodess
President and CEO

… the spectacle of Netflix lecturing GameFly about the nondiscrimination it seeks is a bit much. Netflix has built a $2 billion-a-year business on a deal with the Postal Service that allows the vast majority of Netflix return DVD mailers to bypass automated letter processing at no extra charge. Because the Postal Service refuses to offer comparable terms to GameFly (or any other DVD rental company), GameFly must pay $1.22 extra in postage per DVD round trip to similarly avoid automated letter processing. No amount of blame-the-victim rhetoric can change these facts.

Netflix’s saber-rattling about taking its business elsewhere if the Commission decides this case in favor of Gamefly is, like Netflix’s grievance about the discovery of Mr. Lundahl’s studies, addressed to the wrong party. The Commission’s duty in this case is to enforce the prohibitions of Title 39 against “undue or unreasonable discrimination among users of the mails” and “undue or unreasonable preferences to any such user.” If the Commission finds that the Postal Service has engaged in undue discrimination, the Commission must order the Postal Service to end the discrimination. If Netflix’s mail is as profitable to the Postal Service as Netflix claims, and as vulnerable to electronic diversion, GameFly is confident that the Postal Service will find a way to end the discrimination without jeopardizing the Postal Service’s business from Netflix.

Read the full document filed by Gamefly

In its motion, Gamefly says:

In its objections, the Postal Service seeks to place three kinds of information offlimits to discovery: (1) information about any aspect of preferential treatment received by Netflix other than the degree of manual processing of return DVD mailers; (2) information about the treatment received by DVD rental companies—other than GameFly—that have smaller mail volume than Netflix and Blockbuster; and (3) certain information about the Netflix-only drop slots at local post offices. These restrictions are unfounded.

Gamefly points out that the USPS has already admitted that Netflix receives special treatment:

The first issue has been resolved by the Postal Service’s own statements in this case. The Postal Service initially asserted that it had abandoned its practice of giving manual culling and manual processing to “the largest movie DVD providers” in the wake of the November 2007 report of the Office of Inspector General, and specifically “denie[d] that any ‘large percentage’ of inbound movie DVDs are processed manually.” Since GameFly began discovery, however, the Postal Service has admitted that the preferential treatment given to Netflix has continued or even increased since the OIG report. The Postal Service’s August 14 response to GFL/USPS-18, for example, admits that “the amount of manual processing of Netflix mail is likely at least as large as was set forth in the [Office of Inspector General Audit] Report, though no specific percentages are available.”

The Gamefly motion concludes:

A variety of information indicates that the Postal Service’s preferential treatment of Netflix is driven primarily by a desire to cater to a large customer, and that the operational needs that supposedly justify this discrimination are pretexts.

(1) Perhaps the most telling sign is the inability of the Postal Service to keep its story straight about whether it is discriminating at all. As noted above, at the outset of this case the Postal Service represented to the Commission that the practice of giving manual culling and manual processing to “the largest movie DVD providers” had been abandoned in the wake of the November 2007 report of the Office of Inspector General.
Since then, however, the Postal Service has admitted that Netflix DVD return mailers get at least as much manual processing as in late 2007.

(2) In response to GFL/USPS-28, the Postal Service asserts that dedicated mail slots for Netflix DVD mailers in “lobby drops available for the public to deposit mail” are “against current Headquarters policy, as detailed in the attached Retail Digest.” USPS response to GFL/USPS-28 (filed August 14, 2009). The attached headquarters directive states that: In an effort to accommodate Netflix mail, some offices have created special mail drops and signage for Netflix returns. This is not an
authorized use of mail drop slots and it has legal ramification [sic] for the Postal Service.

The headquarters directive is an admission that this form of preferential treatment for Netflix has no operational justification; and the “legal ramification” alluded to is presumably liability for discrimination under 39 U.S.C. § 403(c).

In addition, the company points out that Netflix mailers are routinely processed manually:

GameFly is not the only mailer to experience significant DVD breakage rates on automated mail processing equipment. In response to this phenomenon, the Postal Service has adopted a practice of manually culling out the DVD mailers of two high-volume shippers of DVDs, Netflix and Blockbuster, for special processing.

A report by the Postal Service’s Office of Inspector General in November 2007 found that 70 percent of the two-way DVD mailers from one unnamed DVD rental company received manual processing for this reason. USPS Office of Inspector General, Audit Report No. MS-AR-08-001, Review of Postal Service First-Class Permit Reply Mail (November 8, 2007).

The Postal Service’s practice of giving manual processing to DVDs from certain large mailers has continued since the OIG report. On routine visits to multiple Postal Service facilities, GameFly’s employees have observed that a large percentage of mail pieces from Netflix and Blockbuster are culled from the automated letter processing stream.

GameFly has asked the Postal Service to give GameFly’s DVD mailers processing on terms and conditions comparable to the terms and conditions offered to two larger DVD mailers, Blockbuster and Netflix. The Postal Service has not done so.

The issue has taken on additional urgency for GameFly because of Blockbuster’s entry into the game rental market:

Until recently, none of the larger-volume DVD rental companies offered video games. On February 11, 2009, however, Blockbuster, which hitherto had offered only movie DVDs (which GameFly does not offer), announced that Blockbuster was expanding its DVD rental service to include video games in the second quarter of 2009.

As a result of this initiative, GameFly now faces direct competition from a rival that is larger and longer established—and which, because of the preferential treatment given by the Postal Service, enjoys a substantial cost advantage in the distribution of its DVDs to consumers.

The company says it has attempted to work out an agreement with the Postal Service, but that the USPS has ignored its requests to discuss the issue.