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Originally published Wednesday, February 6, 2013 at 12:42 PM

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Netflix could gain from loss of Sat. mail delivery

Netflix won't miss Saturday mail delivery, even though the weekend service helped keep its DVD-by-mail subscribers happy.

AP Technology Writer

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No Saturday delivery means the monthly price should decrease by 1/7 (14%). MORE

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SAN FRANCISCO —

Netflix won't miss Saturday mail delivery, even though the weekend service helped keep its DVD-by-mail subscribers happy.

The U.S. Postal Service's planned shift to five days of home delivery a week instead of six may even make Netflix Inc. slightly more profitable by lowering the costs for sending out its familiar red envelopes with DVDs. That's because subscribers may be able to watch fewer DVDs for the same monthly price.

For Netflix customers, DVDs that used to arrive on Saturday would come on Monday instead, delaying when they could watch a movie and send it back for the next one. Those who want to make sure they have a DVD to watch on the weekend might have to mail the discs back to Netflix a day earlier to ensure that they receive it on Friday.

However, analysts believe few customers are likely to mind. Most Netflix subscribers no longer get DVDs anyway, and those who do often let their discs sit on shelves for days or weeks, so the extra waiting time won't hurt that much. Complaints are more likely to come from subscribers who try to watch as many DVDS as possible each month - an unprofitable audience for Netflix anyway.

Investors reacted positively to Wednesday's announcement that the U.S. Postal Service intends to stop Saturday home delivery beginning Aug. 10. Netflix's stock gained $10.02, or nearly 6 percent, to close Wednesday at $184.41. Earlier in the session, the stock hit a new 16-month high of $185.14.

Under the plan, mail would be delivered to homes and businesses only from Monday through Friday, but it would still be delivered to post office boxes on Saturdays. The plan, designed to save about $2 billion a year, could face a challenge from Congress.

Investors' reaction might have been different if Saturday mail service had been eliminated three years ago, when the idea was first broached.

Back then, mailing DVDs was still Netflix's main business. It was so important that Netflix grew into the postal service's biggest customer. When the total number of Netflix's subscribers receiving DVDs peaked at 24.6 million during the summer of 2011, the company was spending about $600 million annually for discs to make the round trip between customers' homes and dozens of distribution centers around the U.S.

Netflix began this year with just 8.2 million DVD subscribers, and the number is expected to keep dwindling as the instant gratification of being able to watch video over the Internet makes the notion of watching movies and TV shows on DVDs seem antiquated. By contrast, Netflix had 27.1 million Internet video subscribers in the U.S. at the start of the year. It doesn't even offer the DVD option in Canada, Latin America, the United Kingdom and other markets it's expanding to.

Janney Montgomery Scott analyst Tony Wible estimates that Netflix will spend about $300 million on postal expenses this year and perhaps as little as $200 million next year, depending how many more DVD subscribers cancel their service. The company no longer discloses its postal expenses.

The DVD-by-mail service began to shrink in mid-2011 when Netflix unbundled it from its rapidly growing service for streaming video to TVs and other devices with high-speed Internet connections. The change required Netflix customers to pay separate monthly fees if they wanted both Internet video and DVDs through the mail, which offered the latest theatrical releases more quickly.

The switch raised Netflix's prices by as much as 60 percent for those who wanted both options, much to the anger of hundreds of thousands of subscribers who canceled. Most customers, though, decided to stick with Internet video and dropped DVDs.

If Saturday mail delivery ends as planned this summer, even more subscribers may opt for a streaming-only plan.

Wedbush Securities analyst Michael Pachter doubts most DVD subscribers will care about the loss of Saturday delivery. The customers most likely to be irked are ones who typically watch eight to 10 DVDs per month, because four or five fewer days of mail delivery each month will make it more difficult to get as many discs. "Those guys cost them money, so if they quit, it won't hurt them," Pachter said.

Netflix makes more money when its subscribers watch fewer DVDs in a month because its expenses go down while the monthly fee remains unchanged. The DVD plans start as $8, as do the ones for Internet streaming.

Even though Netflix has fewer DVD subscribers, that side of the business is still slightly more profitable than the streaming service. That's mainly because Netflix's licensing fees for Internet video are higher than its DVD expenses.

Netflix, which is based in Los Gatos, Calif., had little to say about Wednesday's developments, other than to say it's "in favor of a healthy postal service."

Netflix CEO Reed Hastings was more forthcoming during an April 2010 conference call with analysts. If Netflix were to lose Saturday home delivery before the company had more time to expand its streaming service, "it's not a good thing for us," Hastings said then. "We hope they hold off as long as possible, but we're also cognizant that the total health of the USPS is at stake, and they may need to make changes that they need to make."

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