Netflix (NASDAQ:NFLX), an online movie rental company and one of the largest corporate customers of the US Postal Service (USPS), could potentially face pressure on its margins if USPS implements currently planned changes in its operations. Such pressures could spell additional downside to the $82 Trefis price estimate for Netflix’s stock.
USPS continues to face losses as a result of declining mail volume in a weak economy. Despite $6 billion in cost-cutting measures, the US government agency posted net loss of $3.8 billion in 2009, up from $2.8 billion lost in 2008. The mail volume during the same period declined from 202 billion to 177 billion.
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In order to curb its losses, USPS has proposed eliminating Saturday mail delivery and raising postage prices. Although Congress is yet to approve these changes, they could have implications for Netflix’s DVD delivery business if implemented.
Although online streaming is growing, Netflix is still highly reliant on DVD shipments
Although consumers are increasingly shifting away from physical DVDs to streaming films online, the majority of the movies delivered by Netflix to its customers are still physical DVDs. We estimate that Netflix delivered about 1 billion movies in 2009 out of which approximately 900 million were delivered via DVDs.
Out of an estimated 80 billion annual first class mails processed and delivered by USPS, Netflix’s DVD shipments account for about 1.3%. As Netflix relies on USPS for quick delivery and return of its DVDs, any changes in USPS’ operating model are likely to have an impact on Netflix.
Impact on Netflix Service and Operating Costs
The changes proposed by USPS will affect Netflix in the following ways:
Potential Service Dissatisfaction Amongst Netflix Customers
With Saturday delivery being eliminated, Netflix’s subscribers will have to face two continuous days of no service (including Sunday). As Saturday is one of the prime movie watching days, there could be some dissatisfaction among Netflix’s subscribers if they don’t receive films they were expecting for the weekend.
Higher Postage Expenses for Netflix
Netflix spent an estimated $420 million in DVD postage and packaging costs in 2009. With the number of DVDs being shipped still increasing every year, any postage price rises are further going to accelerate Netflix’s costs and put pressure on its margins.
Netflix will either have to squeeze costs out of its distribution channel or pass on the increased costs to customers in order to maintain margins. If the company decides to do the latter, this can have consequences for customer satisfaction and Netflix subscriber growth.
You can modify the forecast below to see how Netflix’s stock depends upon postage and packaging cost per DVD shipped.