Netflix: GameFly Seeking ‘Special Treatment’ by Post Office

Netflix said by-mail video game service GameFly is trying to deliver rental discs via first class postal delivery paying a lower fee than Netflix does for DVD/Blu-ray Disc mailers.

Los Gatos, Calif.-based Netflix made the comments in a legal filing released Aug. 30 regarding GameFly’s “motion to compel” filing.

GameFly April 23, 2009, filed a complaint with the U.S. Postal Commission alleging discrimination and that the postal service provided “unreasonable preferences” in rates and handling practices to Netflix and Blockbuster when dealing with DVD mailers.

The Los Angeles-based game service, which at the time of the filing said it shipped about 590,000 discs per month, contends that to meet the 1-ounce first-class mail weight limit, it experienced a surge in broken discs due to absence of protective inserts in the mailers. Adding the inserts would bump the mailer to 2 ounces, increasing postage from 42 cents (now 44 cents) to $1.

Upon visual inspection of several postal processing facilities, GameFly alleged it saw workers processing both Netflix and Blockbuster first-class mailers by hand, unlike most first-class mail that is processed via automation. GameFly asserted the issue became acute after Blockbuster began by-mail distribution of video games. Netflix does not rent games.

In its comments, Netflix said GameFly’s complaint and request for confidential information regarding its business amount to little more than an attempt to “gain for free” market research paid for by Netflix. The online DVD rental pioneer said the information has nothing to do with its relations with the postal service.

In addition Netflix said GameFly is attempting to “manipulate” the postal service into getting a reduced rate for its mailers. Indeed, GameFly and Blockbuster both use business reply mail, which requires an additional accounting step to determine the return postage amount, while Netflix uses a less labor intensive permit reply mail whereby the return postage is pre-paid.

“GameFly does not seek nondiscriminatory treatment; GameFly wants its own special treatment,” Netflix said in the filing. “Instead of investing the time and resources that Netflix has in reducing its costs … GameFly is attempting to get reduced postage costs … so they can get the economic equivalent of what Netflix has achieved on its [disc] breakage reduction.”

Netflix said an unfavorable decision by the postal service would likely result in a reduction of disc shipments and the acceleration of its streaming service.

Netflix spends more than $600 million annually in postage fees for first-class mailers, making it the postal service’s largest individual customer.

A GameFly representative was not immediately available for comment.