Netflix's assertion raises a couple of interesting question that are independent of whether GameFly's complaint has merit.
- Does increased competition among entities providing a service using an old technology hasten the decline in the use of the old technology? Currently only Blockbuster offers a competitive mail delivery movie service. Netflix's other competitors are the remaining Blockbuster and other retail outlets, and kiosks operated by RedBox and Blockbuster.
Competition from new technology is most likely to knock out the weakest competitors offering services using older technologies. Blockbuster is likely to file for bankruptcy early this month which will allow it to jettison a significant number of its retail outlets. The Los Angeles Times reports it plans to concentrate its business on its licensed arrangement for kiosks with NCR Corporation and developing an on-line operation.
- Do lower costs for delivering and selling software for devices that can be used to stream movies affect the shift away from old technology? All three of the major video game consoles (i.e. Nintendo Wii, Microsoft XBox 360, and Sony Playstation 3) have Wi-Fi capabilities that allow a viewer to stream Netflix's online content using the console. Currently, there are over 60 million of these consoles in use. If GameFly's service makes these consoles more attractive for potential buyers then it is possible that it creates a larger market for the consoles that are used for video streaming. However given as a September 30, 2009, GameFly had 330,000 subscribers, it would appear unlikely that it has much impact on increasing the share of homes that have Wi-Fi capable game consoles.
- If the current Netflix Envelope permits Postal Service automation equipment to handle envelopes containing CD's and DVD's why did GameFly not reverse engineer or license the envelopes?
Unless Netflix holds a patent on the envelope there would be nothing to prevent envelope manufacturers from reverse engineering the envelope Netflix uses and selling them to other firms that want to mail large quantities of CD's and DVD's by mail using the Postal Service's lowest cost processes. Similarly, GameFly could have paid for the reverse engineering themselves. The proprietary study that GameFly wants would significantly cut the costs of this reverse engineering if it has not done this already.
Netflix holds a a patent on its envelope, patent #6,966,484. The patent was issued in 2005 and and refrences versions of the envelope since 2001. Netflix's patent has not prevented Blockbuster from having its own envelope as does GameFly. However, it is possible that the patented envelope design may allow the Postal Service to handle Netflix's discs more efficiently than the envelopes available to mailers who do not have access to the patent.
GameFly has two options in regards to the patent. First, it could seek to license the patent. However, Netflex may not want to relinquish any competitive advantages from its patent. Second, it could reverse engineer the envelope with the goal of designing an envelope that that does not violate the Netflix patent yet still can be handled on the Postal Service's automation equipment. The proprietary study that GameFly wants would significantly cut the costs of this effort. (Thanks to Brian Sheenan of postalnews.com for the patent information.)
- Why did the Postal Service not do the research on envelope design itself? The Postal Service has always relied on private industry to design envelopes that meet its specifications. Creative requirements of mailers often result in a cornucopia of designs designed to attract attention and increase the impact of mail. In the case of Netflix, the Postal Service worked with Netflix's envelope designers to help design and test potential envelope designs that Netflix developed that led to the envelope that was patented.
movie by mail business.
An alternative approach may have developed if the Postal Service operated under a different business model and had more capital. Under this model the Postal Service would have developed and patented the envelope itself and then licensed the design to all mailers that required an automation compatible self mailer with return envelope for CD's and DVD's. This way the Postal Service could make money both on the patent and in the mail that uses the envelope.
- Does the envelope issue raise questions about how the Postal Service manages its customer relationships and how the regulatory process influences these relationships? The public fight between GameFly and the Postal Service appears to also be a fight between two of its customers. The regulatory process forces the Postal Service to choose sides in a public battle between two of its customers rather than trying to find a way to privately maximize its return from both customers. UPS does not have to figure out the impact on Walmart if it proposes a certain discount structure to Amazon. Why does it make sense for the the Postal Service to do this in public or for the Postal Regulatory Commission to have to make an evaluation of how rates charged to one corporate customer affect the business of a second corporate customer?
- How is new competition from Apple, Amazon, Hulu and others affecting the pace that consumers are shifting from mailed to streamed video content? Consumers now have the choice of a number of options for viewing video content streamed over the web including subscription, rental, and free services. Both Apple and Amazon are offering streaming of offer streaming of individual TV shows and movies. Both charge 99 cents for TV shows and 3.99 for movies. Hulu also offers a large number of current television shows, a wide selection of older shows and many older movies free of charge with commercials Hulu also offers the full season of shows on three broadcast networks for a $9.99 monthly fee. CBS and Comedy Central currently have many of their current shows on line for free. Many of the movies offered on-line by competitors for rent are not yet on Netflix's on demand service.
Currently none of the services offering streaming content offer as easy an interface for selecting movies or as wide of a selection of as the one Netflix has for viewing by mail. Nor do they offer as wide a selection of movies for watching on line as Netflix. In order for Netflix's on-line competitors to make a significant inroads into Netflix's business they will have to improve their interface, expand their selection, and reduce the risk that movies will be interrupted by network issues. Given that these firms currently dominate sales of music mp3 files and sales of DVD's and CD's, they can be expected to make the neccessary changes to offer a competitive customer experience for selecting movies for streaming.
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. The future of the mailing industry, and the Postal Service itself requires this change. The question is what would it take for Congress to recognize and act to make this change.