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Web Rentailers May Face Postage Hike Squeeze

10 Dec, 2004 By: Holly J. Wagner

Could a postage rate increase put a crimp in online rentals?

With a bill that would help the U.S. Postal Service avoid millions in pension payments dying on the vine in the lame duck Congressional session, the service has admitted it is likely to seek a rate hike next year.

“It's the biggest cost component in the whole [online DVD rental cost] thing, obviously,” said analyst Dennis McAlpine of McAlpine & Associates. “Unless the pricing is known — the price that Netflix and presumably the others pay is a discount off of what citizens pay because they do a lot of presorting — until you see that, you don't know how bad of an impact that is going to be. Whatever it is, it comes off the top.”

A postal rate increase alone is unlikely to make rentailers increase their subscription prices though, McAlpine said. But it could delay some new entries.

“It may [keep] some potential competitors out of the market,” he said. “Amazon will have enough other problems, because any rate increase is going to hit them, too. It might make them put off a launch until they see what the rate will be.”

That might take some time. Although a spokesperson for the postal service told the Wall Street Journal that the service will most likely request the increase early next year, the request would have to go through public hearings that would make it unlikely for any increase to take effect before 2006. The figure under discussion is 41 cents, a four-cent increase, but it could be more.

“We have known about the hike and do not expect the rate increase will impact our margins,” a Netflix spokesperson said. “We believe the cost savings related to the scale and automation that we have instituted at Netflix should offset the postage increase.”

Whatever happens, it would affect small as well as large rentailers, though some more than others.

“We presort and we batch, and we still have to pay 37 cents an ounce,” said John Fleming, CEO of upstart GameZnFlix.com, which rents movies and games by mail for $17.25 a month for a three-out plan.

“An 8-cents-per-rental increase would cause a 1 percent to 1.5 percent decline in profits,” Fleming said. “It would affect our gross profit, and I will be an unhappy CEO. We are not happy about it, but I don't anticipate we would raise rates that 8 cents. How do you justify a dime to someone when you've just dropped your rates?”

GameZnFlix is just preparing to cut its mailing cost with a new mailer like Netflix's and Blockbuster's, replacing a cardboard sleeve that was costing twice as much to mail.

“Our gross and net profit allows for this type of fluctuation, so if anything, we plan to keep lowering prices as much as possible,” said Otto Bethlen, CEO of just-launched EZ2movies.com ($18.95 a month for the three-out plan). “We acquire a lot of our customers via already established channels, so our short- or long-term business plan will not change. Four cents per customer will not add or take a lot.”

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