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Could Possible U.S. Postal Bankruptcy Derail Netflix?

15 Nov, 2010 By: Erik Gruenwedel

Should Netflix be concerned following last week’s disclosure by the U.S. Postal Service that it lost $8.5 billion in its most recent fiscal year (ended Sept. 30) — a financial predicament some members of Congress believe leaves the USPS is in jeopardy of maintaining operations a year from now without a bailout?

Analysts don’t think so.

Eric Wold, with Merriman Curhan Ford in New York, and Edward Woo, with Wedbush Securities in Los Angeles, say Netflix and Blockbuster By Mail, which together represent nearly 20 million monthly subscribers, have been aware of the postal service’s fiscal declines for some time, and have responded accordingly.

Indeed, Netflix is the USPS’ largest individual customer, generating upwards of $600 million annually in fees and handling charges. It is attempting to transform itself into a predominant streaming service in part to reduce postal fees.

“Most likely postage rates will increase and service will be cut on Saturday,” Woo said regarding publicized steps the USPS seeks to incorporate pending congressional approval. “While both are bad for Netflix (and other DVD by mail services), they aren't critically bad and likely won't change the tide of subscribers moving to Netflix.”

Established in 1775 by Benjamin Franklin — who was the nation’s first postmaster general — the USPS operates as a quasi-independent government organization, with its own marketing, fiscal and revenue budgets.

With mail volume declining due to increased usage of e-mail and the Internet and rising pension costs, the Postal Service in recent years has had to borrow money from the U.S. Treasury, despite cutting more than 100,000 jobs and raising rates. It is projected to lose more than $6.4 billion in 2011, even after cutting another 25,000 positions.

The USPS, which is the nation’s second-largest employer (after Walmart), said it would have to borrow $3.5 billion just to meet current obligations.

“If corrective action is not taken quickly, the Postal Service will likely run out of cash and borrowing authority by this time next year, placing its ability to continue operations in serious jeopardy,” said Sen. Tom Carper (D-Del.), in a statement.

With political winds predominantly opposed to bailing out what many believe is an anachronistic — yet mandated —entity, politicos such as Rep. Darrell Issa (R-Calif.) say the USPS must downsize internally.

“If compromise fails, Congress has an obligation to fix the Postal Service’s budget imbalance not through a bailout, but through new mandates to cut costs and revise labor agreements,” Issa said in a statement.

Regardless, analyst Wold said elimination of Saturday delivery wouldn’t be an issue for Netflix.

“It’s getting tough to know if streaming is considered the incremental business or if that’s DVD, given that [Netflix said] more hours are being viewed through streaming than DVDs,” Wold said.

A Netflix representative was not immediately available for comment.

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