Court Ruling Opens Window for Netflix Rivals

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GameFly, a company that rents computer games on DVD, dealt a blow to video rentals giant Netflix’s business model today, when a district court of appeals found that the United States Postal Service gave Netflix an unfair advantage by hand-sorting its DVDs for free and must develop a plan to handle all DVDs the same way at the same price.

The post office’s automatic sorting system often damages disks, particularly those being returned to the company. The disks can also jam the post office’s sorting machine. The USPS sorts Netflix DVDs by hand at no additional cost. But it has refused to do the same for GameFly and other companies, forcing the company to employ more packing and to pay $1.08 in postage per disk, while Netflix pays just the letter rate of $0.44.

GameFly first petitioned the Postal Commission in 2009, asking the postal service to handle the disks it and other companies lease by mail the same as it does Netflix’s. Although the commission agreed that the pricing was discriminatory, its proposed solution declined to offer hand-sorting for GameFly’s disks, requiring postage of $0.88 per DVD for the extra packaging.

The court of appeals found the proposal arbitrary and capricious.

“Without special manual processing like that afforded to Netflix, switching to letter mail could subject GameFly to an epidemic of cracked and shattered DVDs,” Judge David B. Sentelle wrote [PDF].

The appeals court is requiring the post office to find a solution that will treat Netflix and other companies’ disks equally, for equal rates. The decision will affect direct Netflix competitors as well, essentially removing a competitive pricing advantage the company has long held.

Netflix declined to comment, and GameFly didn’t immediately respond to a request for comment.

Postal employees and the postmaster general have previously claimed that hand-sorting of Netflix DVDs is labor-intensive and contributes to the post office’s financial troubles.

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