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Netflix Neutrality

By 16 September 2010 6 Comments

As a Netflix subscriber, I am both impressed and puzzled by the speed with which its movies zip through the postal system. Drop one in the slot for a late afternoon pickup, and the chances are that in the pre-dawn hours of the next day an email will appear saying that it has been received, even when the slot is in Red Lodge, MT, next to the wilderness that adjoins Yellowstone National Park.  Considering the haphazard experiences usually associated with USPS, it does raise a question: how do they do that, while shipping a million movies per day to 15 million subscribers, 92% of whom get one-day delivery?

Game company Gamefly had the same question, and in 2009 it filed a complaint with the regulators charging favoritism by USPS. Netflix and USPS had to respond, and in doing so they provided some interesting insights into Netflix’ business practices. (Thanks to Hacking Netflix for the links to the complaint and other material.)

Digital Society doesn’t usually spend a lot of time thinking about the Post Office, but there are three reasons why this tale is interesting and relevant.

The first is that Gamefly’s complaint is in essence a net neutrality question. USPS is a network, and by statute it has a monopoly on certain kinds of communications, including the use of mailboxes. This is the strongest possible case for neutrality – it would hard to justify allowing USPS to make a deal with Netflix to exclude Blockbuster – so the issue creates a useful context for thinking about neutrality issues.

The second is that USPS (and UPS & FedEx & other services) are broadband carriers, and rather efficient ones. There seems to be a general assumption abroad in the land that all video should be delivered via the Internet, instantly and at very low fees. This is a fine vision – if consumers are willing to pay the freight. On the other hand, perhaps consumers would be willing to take some delay in trade for lower prices, and perhaps creation of an efficient system requires that they be faced explicitly with this choice. It is far from clear that we should make the investment in Internet infrastructure necessary to allow 300 million American each to stream a different movie at the same time. This issue, too, is lurking in the net neutrality debate, where the free culturists are determined to prevent the price system from doing its job of forcing trade-offs and allocating resources.

The third is that this matter is a foretaste of what we can look forward to if Net Neutrality were to become law. The proceeding is proceeding at the stately pace that characterizes regulatory matters, which is not exactly Internet time, and so far has generated a docket with 247 entries and six volumes of transcripts, and shows no signs of ending.

So how does Netflix do it? For one thing, it knows how to work the postal system. In 2006, it hired a former Postmaster General to be COO.  And according to USPS statements, as summarized by Hacking Netflix:

  • Gamefly has chosen to use an insert which requires more expensive postage.
  • Gamefly envelopes are not branded and are hard to manually cull, unlike the bright red Netflix mailers.
  • Netflix picks up the mail from 130 different locations and delivers it to 58 shipping centers to cut down on machine processing which could damage DVD mailers.
  • By removing Netflix mailers before processing the US Postal service saves money: less mail is machine processed and fewer jams occur because of DVDs.

Gamefly is not giving up, so the matter continues. The blog Courier, Express & Postal Observer , which is also following the controversy, makes a series of excellent points:

GameFly’s complaint and the responses of Netflix and the Postal Service illustrate how the regulatory process perverts the process of negotiating rates between the Postal Service and its customers.  This complaint case and Netflix’s response is similar to case filed before the Interstate Commerce Commission prior to trucking and rail deregulation where contracts had to be filed with the Commission and carriers were limited as to the number of contracts that they signed.   This prevented carriers from offering services that were price competitive and limited the growth of new and innovate ways to distribute goods in the United States.

I do not know whether GameFly’s or Netflix’s cases have merit.   I do know that both companies and the Postal Service would be better served if the companies were able to negotiate rates with the Postal Service without regulatory interference.  Shifting both companies to a negotiated contract model for rates would require the Postal Service to know nearly as much about GameFly’s and Netflix’s business and their distribution requirements as they know themselves.  The Postal Service would find it to be in its interest to try to find ways to use its assets to provide transportation and distribution services at a lower cost than these companies now do themselves.

The potential benefits that exist for GameFly and Netflix are not unique.  All mailers would benefit from a Postal Service that had to know its customer’s businesses as well as the customer in order to design its services and price its products.   However, the current regulatory process does not encourage this and instead creates the adversarial environment illustrated by the exigent rate case

Well said, sir! But please add in an end to the USPS monopoly so other carriers can compete by offering a better deal and tailored services.

And above all, get rid of the need for hearings.

Images from USPS; Gamefly.

6 Comments »

  • Shinobi said:

    But what about mail that isn’t part of some pre determined big business deal? What happens to my Grandma’s Birthday Cards when the Postal Service is too busy knowing all the ins and outs of Netflix and Gamefly.

    First it’s gonna take longer, my stupid one off mail is going to be slower, because it is no longer a priority. And then eventually the USPS will probably stop handling individual mail altogether, or they will raise their prices a lot, because it is not as profitable to have to pick up and sort hundreds of individual letters as it is to simply pick up large mailings from their corporate clients. Then I’ll have to pay more, and it will probably take longer for my grandma to get her birthday card, that is if I can send it to her at all.

    The reason Net Neutrality, and Postal Service Neutrality is important is to protect the individual consumers, like independent blogs or some chick in Chicago sending her Grandma a Birthday Card. Not every action that people want to take will necessarily result in a profit, and when profit is the primary goal of a service, important functions become overpriced and marginalized.

    There are some things we need to function well all the time, not just when someone is going to make a lot of money off of them.

  • Brett Glass said:

    What is also interesting — but was not pointed out in the article — is that Gamefly is not asking (as “network neutrality” advocates do) that different tiers of service with different restrictions be eliminated. It’s simply asking for the same treatment for the same price.

  • Steve Snark said:

    So Brett, volume discounts are illegal now?

  • James DeLong (author) said:

    Mr Glass makes a good point — my impression from the Gamefly complaint and from the material in the USPS affidavits (though I will take correction from anyone more expert) is that part of the problem is that Gamefly has had difficulty finding out exactly what is going on, despite numerous meetings with USPS personnel.

    One of the many problems with the regulatory state is that the opacity and complexity of the regulatory process becomes a source of competitive advantage for anyone who masters it (such as by hiring a former agency head), and the investment necessary to achieve this mastery is a barrier to entry by small entities.

  • Brett Glass said:

    The Post Office has not published a “volume discount” schedule or offered volume discounts on equal terms to all comers. Rather, it seems to be quietly giving a discount (not to mention taking care not to break their DVDs, which can cost $50 or more!) to certain favored parties.

  • George Ou said:

    24 hours to deliver a single 50 GB Blu-ray disk works out to around 4.63 Mbps sustained average. Make that 3 disks and we’re up to 13.9 Mbps average over the course of 24 hours. That type of sustained throughput is not something that broadband networks and the Internet can handle on a large scale.

    In this sense, the USPS system is indeed a formidable broadband system. The difference is that it has a latency of 24 hours rather than 50 milliseconds but the width of the pipe is extremely large when you’re sending Blu-ray disks.

    As for the merits of the complaint, the USPS may very well have a good excuse. But they need to be a lot more transparent and publicize the information so that any business can try to emulate Netflix.