---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

GameFly to USPS: higher postage than Netflix costs us $730K per month

GameFly is a service where customers pay a monthly fee to rent games which are delivered via the US Postal Service—kind of the Netflix of gaming. The mailing of these games, and the danger of games breaking in transit, are major ongoing concerns for the company, and in 2009 GameFly filed a complaint with the United States Postal Service alleging that Netflix mailings were given priority over—not to mention better rates than—GameFly's mailings.

On March 23, the president of GameFly wrote to the Postal Regulatory Commission asking that the complaint be resolved. The reason is startling: the cumulative cost difference between the shipping of a Netflix and GameFly disc exceeds the net monthly income of the company.

"GameFly filed this complaint nearly two years ago. Before that, GameFly spent 18 months working with the Postal Service in an attempt to informally resolve the issues on which the complaint was based," David Hodess, president and CEO of GameFly, wrote to the Postal Regulatory Commission. The next paragraph of that letter, sent to Ars via an anonymous source, is a jaw-dropper. Update: you can read the letter for yourself.

The issue needs to be resolved quickly, and the reason is purely financial. "At the company's current volume of approximately 1.2 million shipments per month, the difference between the two-ounce flat rate of $1.05 that GameFly must pay to avoid automated letter processing for most of its DVD mailers, and the one-ounce letter rate of $0.44 that Netflix pays to avoid automated letter processing of return mailers, amounts to about $730,000," Hodess wrote. "This amount represents more than 100 percent of GameFly's monthly net income in 2011."

GameFly had already complained about the length of the proceedings in 2010. "This complaint case has been pending before the Commission since April 23, 2009—almost a year ago. Continued delay threatens irreparable injury to GameFly," the company wrote. The volume of mailings reported then is the same as now, 1.2 million per month. That's bad news for the company, as its profits are being eaten by postage fees and growth appears to have stagnated.

Netflix and GameFly ship differently
The media may be the same, but GameFly and Netflix mail their discs in very different ways, and at a different scale of operations. GameFly has four shipping locations, whereas Netflix has 58. Additionally, it's a simple thing to visually separate Netflix sleeves from the rest of the mail for manual sorting, as those discs are mailed in brightly colored sleeves. GameFly, on the other hand, has made its packaging blend in with standard mail as a way to reduce theft.

GameFly has estimated that it pays $50 per game, and that's a major issue when a game is broken or stolen. To keep those losses at a minimum, GameFly uses a cardboard insert to protect the disc, which in turn adds significant weight to the mailers. Netflix discs are mailed in paper sleeves, and are much lighter.

The methods of shipping also vary. "Both Blockbuster and GameFly utilize Business Reply Mail for their return mail pieces, which requires an accounting step to assess postage due fees; while Netflix utilizes Permit Reply mail where return postage is prepaid and the postage due assessment step is not required," Larry J. Belair, the senior plant manager for the US Postal Service in San Diego said in a 2010 filing. He also pointed out that other companies that ship discs in bulk use letter-shaped mailers, while GameFly alone uses flat-shaped sleeves.

Belair also explained why Netflix sleeves are handled differently than most mail. "When volume densities of a single DVD rental company's pieces warrant, postal employees may segregate all of that company's pieces (that are located—some are not found) in separate trays so they can avoid downstream handling," he explained. "Segregation can begin as far upstream as the rental customer's delivery unit." Belair estimates that 97 percent of DVD mailers belong to Netflix, while only 1 percent come from GameFly.

So there are multiple things here that contribute to Netflix's streamlined operations: the sleeves are mailed in a way that requires less work by the USPS, the discs are mailed in packages that are shaped a specific way and are brightly colored to aid in manual sorting, they're lighter than GameFly mailers, and Netflix operates at a much higher volume than the game rental service.

It's going to be a hard sell to get the Post Office to change GameFly discs' fees and handling, especially if the company is unwilling or unable to change the method, size, shape, and coloring on its sleeves. There are two competing forces at work here: the cost of replacing broken or stolen games versus higher shippings costs.

GameFly may characterize Netflix as receiving preferential treatment, but the reality is much more nuanced. What's clear is that the shortest path to higher profits appears to be further streamlining of the game rental outfit's shipping methods, although each path in that chain opens the company to higher rates of breakage or theft.

We contacted GameFly for comment on the letter, but have yet to receive a reply.

---