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Postal Service Loses Bid to Raise Netflix Delivery Fees

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By Casey C. Sullivan, Esq. on March 25, 2016 1:05 PM

No, it's not 2003 anymore, but Netflix still sends millions of DVDs through the Postal Service every week. Indeed, Netflix alone purchases 97 percent of the U.S. Postal Service's "round-trip" mailers, the products that allow you to return a mailed DVD with an enclosed envelope, no extra postage necessary.

Currently, the law restricts how much the Postal Service can charge for those mailers. USPS had recently sought to change that, seeking to raise rates on those red envelopes, but their request was denied by the Postal Regulatory Commission. The Service sued, but the D.C. Circuit declined to undo the Commission's ruling on Tuesday. Netflix customers, your DVD deliveries are safe for now.

Not Everyone Streams Their Movies

Netflix may be known as largely a streaming company these days, but their DVD-by-mail program still remains an important part of the business. Netflix mails out millions of DVDs each week to the over 5 million remaining DVD-by-mail subscribers.

Those numbers have been steeply declining, dropping almost as quickly as Netflix's streaming service expands. (DVD-by-mail subscribers declined 22 percent year over year in 2014, compared 19 percent growth in streaming.) Still, mailed DVDs remain a cash cow, with a 50 percent profit margin.

Competitive vs. Market-Dominant Products

When it comes to setting the prices for USPS products, the law creates two categories. In one category, there are the Postal Service's "competitive" products -- the type of products you can get from USPS, UPS, or FedEx. Competitive products are subject to a price floor, allowing the market to set the price above that floor.

In the other category, there are "market-dominant" products. Those are the products in which USPS has such a dominant market share that it can "effectively set the price of such product substantially above costs ... without risk of losing significant levels of business."

Price caps for these products are meant to ensure that the USPS does not abuse its dominance; such regulations, the D.C. Circuit notes, are similar to those affecting other state-granted monopolies, like local utilities and energy companies.

Round-trip mailers are classified as a "market-dominant" product. Indeed, USPS is the only entity to offer them. You simply can't get your Netflix delivered via UPS or FedEx. Thus, when the Postal Service asked the Postal Regulatory Commission to reclassify round-trip mailers as "competitive" products, allowing USPS to raise the price, the Commission declined.

Sure, We Control the Entire Market, but We're Not Dominant!

Appealing that decision, the Postal Service argued that the DVD-by-mail and streaming should both be treated as the same market. When considered as one, USPS has significantly less market power. Further, the Postal Service argued, Netflix is an equivalent "near-monopsonist," allowing its countervailing buying power to keep the USPS in check.

Reviewing the Commission's decision under the APA's arbitrary and capricious standard, the court found the refusal to classify round-trip mailers as market-dominant to be "more than reasonable." There was no evidence showing that USPS couldn't just raise the price significantly and cause Netflix to change its distribution strategy. As the court noted, either Netflix uses USPS, or it does not; the company has no bargaining power over USPS. In all scenarios, the Postal Service remains dominant. Classification of round-trip mailers as a market-dominant product is a natural result of USPS's very real market dominance.

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