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Netflix could gain from loss of Saturday mail

By MICHAEL LIEDTKE AP Technology Writer

Publication: The Day

Published February 07. 2013 4:00AM
AP Photo
Netflix stock jumped 6 percent Wednesday in the hopes that one fewer day of DVD mail charges will increase its profits.

San Francisco - Netflix won't miss Saturday mail delivery, even though the weekend service helped keep its DVD-by-mail subscribers happy.

The U.S. Postal Service's planned shift to five days of home delivery a week instead of six may even make Netflix Inc. slightly more profitable by lowering the costs for sending out its familiar red envelopes with DVDs. That's because subscribers may be able to watch fewer DVDs for the same monthly price.

That's why investors reacted positively to Wednesday's announcement that the U.S. Postal Service intends to stop Saturday home delivery beginning Aug. 10. Netflix's stock gained $10.02, or nearly 6 percent, to close Wednesday at $184.41. Earlier in the session, the stock hit a new 16-month high of $185.14.

Under the plan, mail would be delivered to homes and businesses only from Monday through Friday, but it would still be delivered to post office boxes on Saturdays. The plan, designed to save about $2 billion a year, could face a challenge from Congress.

Investors' reaction might have been different if Saturday mail service had been eliminated three years ago, when the idea was first broached.

Back then, mailing DVDs was still Netflix's main business. It was so important that Netflix grew into the postal service's biggest customer. When the total number of Netflix's subscribers receiving DVDs peaked at 24.6 million during the summer of 2011, the company was spending about $600 million annually for discs to make the round trip between customers' homes and dozens of distribution centers around the U.S.

Netflix began this year with just 8.2 million DVD subscribers, and the number is expected to keep dwindling as the instant gratification of being able to watch video over the Internet makes the notion of watching movies and TV shows on DVDs seem antiquated. By contrast, Netflix had 27.1 million Internet video subscribers in the U.S. at the start of the year. It doesn't even offer the DVD option in Canada, Latin America, the United Kingdom and other markets it's expanding to.

Janney Montgomery Scott analyst Tony Wible estimates that Netflix will spend about $300 million on postal expenses this year and perhaps as little as $200 million next year, depending how many more DVD subscribers cancel their service.

The DVD-by-mail service began to shrink in mid-2011 when Netflix unbundled it from its rapidly growing service for streaming video to TVs and other devices with high-speed Internet connections. The change required Netflix customers to pay separate monthly fees if they wanted both Internet video and DVDs through the mail, which offered the latest theatrical releases more quickly.

The switch raised Netflix's prices by as much as 60 percent for those who wanted both options, much to the anger of hundreds of thousands of subscribers who canceled. Most customers, though, decided to stick with Internet video and dropped DVDs.

If Saturday delivery ends this summer, even more subscribers may opt for a streaming-only plan.

Wedbush Securities analyst Michael Pachter doubts most DVD subscribers will care about the loss of Saturday delivery. The customers most likely to be irked are ones who watch eight to 10 DVDs per month, because four or five fewer days of delivery each month will make it more difficult to get as many discs. "Those guys cost them money, so if they quit, it won't hurt them," Pachter said.

Netflix makes more money when its subscribers watch fewer DVDs because its expenses go down while the monthly fee remains unchanged.

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