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.

The second DVD they had told me was coming did arrive in today’s mail, and brought its own surprise. It felt a bit heavier and thicker than normal, so at first I thought maybe the other DVD was in there, but no, when I went to tear the tab seal, two Christmas cards, addressed to two people I’ve never heard of, dropped out.

Busy day at my local PO I guess…

Well, maybe, but I wouldn’t be so sure. In the first place, the damage is about what you’d expect from a flimsy piece of mail, open on two sides, with something rigid inside. When these pieces go through facer-canceller, bar code sorter, etc., they pass between a drive belt that pulls them in, and a rubber roller running in the opposite dirrection, whose purpose is to allow only one piece of mail to go through at a time. If there’s any imperfection on the leading edge of the mail piece, there’s a chance that the piece will be damaged in just the way this one is.

Netflix mailers run a very high risk of being damaged like this, because they’re so flimsy. And the discs are obviously at risk, given the lack of any padding. I was amazed the first time I saw a Netflix mailer- I was sure the damage rate would be too high for it to work, but obviously it isn’t.

Having said that, enough do get damaged to be a headache for the USPS. They are much more trouble than a regular letter, but they pay the same postage. Given that Netflix is one of the few businesses actually increasing it’s First Class mail usage, however, the post office doesn’t have much choice but to deal with them. 

Netflix Envelope on Flickr – Photo Sharing!

Overstock.com to Rent Games by Mail

I haven’t experienced the missing disc problem on the receiving end, although I’ve had a few discs go missing for a couple of days on the way back. That actually makes sense in a way, since a disc coming back from a subscriber has to go through a facer-canceller, which it doesn’t on the way out. One more high-speed collection of belts and rollers means one more chance for that flimsy envelope to get shredded. So the disc ends up dressed only in it’s sleeve, and takes a while longer to get back to Netflix and logged in.

As far as discs arriving open but on time, the real explanation is probably benign- most of the discs on the outbound trip still have to go through at least one sorting machine. It really doesn’t take much to tear the Netflix mailers, but as long as the to: address part is still attached, the piece gets delivered as is.

That’s my theory anyway. Then again, I did notice that my rural carrier’s Subaru does have one of those little DVD screens in it…

Sharing Netflix With Your Mailman | The New York Nerd

In a nutshell, the potential problem is that subscribers who currently enjoy overnight service to and from their Netflix service center might find themselves with 2 day service. If you’re the kind of Netflix subscriber who typically watches the DVD the day you get it, and sends it back the next day, you’re going to have a longer wait between movies.

Example- I have overnight service to and from my Netflix plant. I get a movie on Monday, and send it back Tuesday. Netflix gets it Wednesday, and ships out another DVD, which I get Thursday, assuming I’m not being ‘throttled’.

Now lets say the PO changes it’s network setup so that the service standard between me and Netflix is two days. I watch my DVD Monday, send it back Tuesday. Now Netflix dioesn’t get it back until Thursday. They send my next disc that day, and I get it two days later, on Saturday.

Do the math- assuming Netflix and the PO are both on time, with overnight service I get a new disc every three delivery days (i.e. Monday through Saturday). Switch to two day service, and it’s one every five delivery days.

There are 302 delivery days in a normal year, subtracting Sundays and holidays. So a quick turnaround subscriber who gets about a hundred DVD’s a year with overnight service would see that drop to about 60 with 2 day service.

That’s what it means for subscribers- what it means for the company is that in areas where service standards lengthen, a larger portion of their DVD inventory is going to be in transit, and unavailable.

So the question comes down to whether or not a postal plant consolidation is actually going to change service to my Netflix center.

Here’s an example- one plant set to be consolidated is Springfield, Mass. The Netflix center serving Springfield is in Worcester. You can use the USPS Service Standard software (available from the Postal rate Commission web site) to verify that mail between Worcester and Springfield is supposed to be delivered overnight.

The proposal, however, is to shift Springfield’s mail to Hartford for sorting. Using the software, double click on Hartford, and you’ll find that the service standard from Hartford to Worcester is two days. That doesn’t necessarily mean that Springfield to Worcester would automatically go to two day service, but it would certainly make it a strong possibility. (On the other hand, Hartford to Worcester is only 57 miles, so the USPS could consider upgrading Hartford-Worcester to overnight rather than downgrading Springfield-Worcester to two days. The devil would be in the details.)

In parts of the country where the distances between plants is greater, the chance of service standards slipping would presumably be greater.

Netflix is one of the few companies whose entire business model is based on first class mail. As they say in their letter of intervention:

Intervenor is an online DVD rental service providing more than 4 million members access to DVD movies. Members select movies to rent at the Netflix website (www.netflix.com) and receive delivery of their movies via First Class Mail. These rented DVDs are then returned to Netflix using First Class Mail. Intervenor’s service could be impacted by the changes described in this proceeding. 

That’s putting it mildly!

Speaking of Netflix, the ‘Hacking Netflix’ blog has a link to an interesting article about the inner workings of a Netflix shipping center in North Carolina.