A new plan for the United States Postal Service to raise postage rates in the beginning of 2011 could mean a massive cut in Netflix profits. The video rental service, which uses the US Postal Service as a massive part of their business, mailing DVDs to their customers, could lose as much as $50 million next year if the rise in postage rates is approved.
According to NewTeeVee, “For fiscal 2009, Netflix earned $115.9 million, or $1.98 per share, and it expects to earn between $132 million and $144 million for the full year 2010.” A $50 million profit cut, due to postage, is more than one third of the companies expected earnings for 2010 and that is massive. The US Postal Service is also considering cutting Saturday deliveries all together, which could also eat into Netflix’s profits, as they will only be able to ship DVDs five days a week, rather than six. It looks as though Netflix is going to have to think hard about changing their strategy if they don’t want to be affected by an increased postage rate.
Luckily, Netflix has been putting a lot more effort into growing their online streaming catalog, and putting less emphasis on their DVD business. As more and more customers stream Netflix’s collection of movies and television shows from the web they will have less need for paying pricey postage to ship DVDs to customers by mail. The company’s streaming service has increased a great deal in the past year. However, their DVD-by-mail service has continued to grow as well, and is expected to continue growing until 2013.
The recent announcement of the launch of Hulu Plus, Hulu’s paid service, has put additional pressure on Netflix. Hulu Plus is a new paid service from Hulu, in which users can pay $9.99 per month to have access to a much wider variety of content than the free Hulu service, including back-episodes of old television shows, and the ability to watch not only on the Web but also on the iPhone, iPad and television. Netflix offers a wider variety of films than Hulu, but will they be able to remain profitable charging users $8.99 a month with a hike in postage fees and the potential of losing up to $50 million in profits?
If the postage hike goes through, the way I see it Netflix has a few options. Their first option is to just suck it up and live with the profit cuts the postage hike will result in. However, I obviously don’t think that that is the best option for Netflix. The company could either start cutting back on their DVD delivery service, build their streaming library and convince users that streaming is the wave of the future, or they could simply raise their prices. If users will pay $9.99 for a service like Hulu Plus that doesn’t deliver DVDs at all, then they will surely pay $9.99 for Netflix. A single dollar price hike for Netflix customers seems insignificant, compared to the $50 million that the company stands to lose.
What do you think Netflix should do if the US Postal Service postage rate raise goes through? How do you think it will affect the future of the company?