Wednesday, January 13, 2010

Leaving the Mailstream One Customer at a Time

In an interview with All Things Digital, Netflix CEO Reed Hastings stated that its DVD by mail business will continue until around 2030.  The importance of the mailed DVD will rapidly diminish over the next 20 years.  “Pretty soon, we’re going to be a streaming business that rents some DVDs,” Hastings told the All Things Digital reporter.  

There are numerous signs that the end of the mailed DVD is coming.   Netflix has already put the "Watch Instantly" tab first so to encourage Netflix to try the download service.   Netflix has announced that all three major game consoles, the Sony PlayStation 3, Microsoft Xbox 360 and Nintendo Wii, can all stream Netflix movies.  A limited number of Blue-ray disc players and HDTV's now have the capability of streaming Netflix content as well.   By next Christmas, this feature should become a standard feature in consumer electronics.  At the just concluded Consumer Electronics Show in Las Vegas, Netflix announced that nearly every manufacturer of high definition televisions and Blue Ray disc players will introduce integration of Netflix streaming functionality as a standard feature of their products.    Even store brands at Best Buy and brands sold at mass marketers like K Mart, Target, and WalMart will have this feature next year.

While Netflix Chairman announced 2030 as the year that mailed DVD service will end, it is clear that his projected date is but a rough estimate.   Consumer behavior could move that date forward or back by as much as a decade.  The key drivers include:

  • Introduction of computer capabilities and wired and wireless network streaming in the living room.   Currently, streamed video exists to computers with broadband connections.   In most cases the content is streamed to a desktop or laptop computer for viewing by one person.   For family viewing, and in particular viewing on high quality HDTV's, a consumer most often needs to connect a networked computer to his audio and video entertainment center.   This is not a particularly elegant solution and often involves purchasing a computer with far greater capabilities than is required for high quality streaming of audio and video content.

    Netflix's deals with consumer electronics manufacturers should allow consumers to get streaming content to their audio and video entertainment centers at a much lower cost.  The speed at which consumers add streaming capable audio-video receivers, Blue ray players, game consoles, or HDTV's will depend on the life of the thousands of HDTV's and other devices just purchased in response to the introduction of digital television.   It is not unreasonable to think that it could take ten years for recent HDTV purchases to be replaced.  In the meantime, streaming Blue Ray players and game consoles costing well under $200 should be available by next Christmas to fill in the gap. 
  • Improved reliability and speed in broadband service and in-home wireless speeds.   One of the annoying parts of using Netflix's streaming service is the problem that changing downloading speeds cause for viewing.  Movies can stop in the middle and a screen refresh is required to restart the film where it stopped.   There can be many causes of this interruption but two issues stand out, the quality of the broadband connection, and the quality of the home wireless or wired network.   Introduction of streaming video from hundreds of websites including websites that are dedicated to streaming content like YouTube and Hulu and sites that post both original and re-posted content puts great strain on the capacity of broadband networks. 

    Current cable, DSL, and satellite broadband networks were not designed to handle the volume of downloaded media content they are now handling.   New fiber-optic networks are just being installed and it will take between five to ten years until plans of private and public investments for this installation to be complete.   (Australia is spending $31 billion Australian to lay fiber-optic cable nationwide in a project that will take five years.)  Then the governments and companies that install the networks have to convince customers to replace existing land-line phone and broadband service with the new fiber-optic service, which will be an expensive and time intensive effort.

    At home, there is a similar problem.  With the exception of a limited number of new homes and major reconstruction, homes are not built to handle computer network wiring.   Using wireless networks solves the problem.   Most homes with wireless networks still have equipment using the wireless G standard which works find for most web-based activities.   However, heavy video streaming, like what is required when streaming movies may require more capabilities. The newer wireless N standard offers faster wireless speed and greater coverage, but requires purchasing and installing a new router, something that many homeowners find daunting.   While wireless N routers designed for streaming video are relatively inexpensive, under $150, the replacement cycle on routers is quite long and may be tied to decisions of homeowners regarding switches from one broadband supplier to another or their eventual purchase of fiber-optic telephone/broadband service.

  • Expanded Choice and Capacity to Stream Movies.  Even Netflix has to deal with the challenge of streaming the thousands of movies that customers may want to watch.  It is possible that bottlenecks may exist in Netflix's computer and networking capability that causes problems in streaming video today.  Expanding the computer and networking capability to handle projected customer need will take time, but the switch from mailed DVDs to streaming videos will have less to do with Netflix staying a step ahead of customer demand than the other factors that currently retard steaming demand.      

Currently Netflix is one of the Postal Service's most important customers.  While First Class mail has declined for a decade, Netflix mail volumes have grown. The Chicago Tribune reported that in Netflix's Carol Stream warehouse processes 60,000 DVD's a day, producing 120,000 individual First Class mail pieces (1 piece in each direction.   With 58 similar warehouses, Netflix may generate around 2.5% of all First Class mail volume or 2 billion pieces annually.   The Postal Service can ill afford to lose this business but there is nothing it can do to stop the loss.

Netflix is not the only example of a customer abandoning the mail stream.   Info Week announced today that it is eliminating another 8 print editions and will produce 24 printed and 12 digital only editions this coming year.    The loss of mail volume from Info Week, and other trade journals should be a particular concern as most of the issues are delivered to high volume, and highly profitable stops at businesses and other non-households.   The lost revenue and volume from Netflix, Info Week and other customers is unlikely to be replaced by other letter or flat mail. 

The decline in business from Netflix and Info Week suggest that the Postal Service needs to better track demand of individual customers or customer segments in order to understand how secular, cyclical, and price trends, affect the rate at which the switch to electronic alternatives will occur.   The Postal Service has collected this information for a sufficent period to begin developing market segment or customer specific demand forecasts.  It may even be possible to use these forecasts to provide operating planners information on how the actions of specific customers will affect demand for sortation and transportation capacity at particular facilities or regions.  Finally, these customer and customer segment forecasts may help strengthen the Postal Service's understanding of how it can best use its pricing freedom to increase, revenue, volume, and net income through the use of sales, and incentive specific contracts that are designed for specifc customers or customer segments.      

The detailed forecasting effort described above is a much greater than the effort, developed and modified in 40 years of regulatory filings, that is now included as part of filings to the Postal Regulatory Commission and used in forecasts  presented to the Board of Governors and published in public presentations and reports.   Without this effort, the Board of Governors, Congress and others trying to ensure the future of the Postal Service and mail service in the United States will all find that they have too little information to make a credible plan for the future.  


Anonymous said...

I've been a postal worker,union rep, and postal observer for over thrity years. I'm beginning to follow your blog religously. I find it to be loaded with the necessary objective dogma management should need. It is very unfortunate indeed, Potter and 'company' are letting all of the service oriented employees down. It's a travesty. It is time for a 'coup d etat'. Where does the change in Postal leadership come from? Certainly not from within current mgmt philosophy. Is it possible someone over at the PRC would see things differently? I'm afraid they to are leaning toward a five day delivery. This would be a death kneel.

Anonymous said...

I was employed as a postal manager for 38 years. Over 20 years ago it was evident 6 day residential delivery was doomed.
Residential delivery is needed much less. Three days a week is certainly more than enough.
Carrier A could carry RT 1 on M W F and RT 2 on T T S with normal 1 day replacement required.