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Cash-strapped Postal Service seeks DVD-mail price increase

Companies that rent movie and video games by mail to tens of millions of Americans could see the price of delivery go up if the financially strapped U.S. Postal Service succeeds in a push to change the rules governing DVD mail.

The Postal Service, which has run a multi-billion dollar deficit for years, said in regulatory filings that DVD mail ought to be changed from a so-called "market-dominant" to "competitive" classification.

That, officials say, would allow the cash-strapped service to negotiate a price with companies like Netflix to recover mailing costs, ending years of what critics describe as a highly favorable deal Netflix struck early on.

But officials vowed not to set too high a price that could wipe out consumer demand for the mail-DVD business, though at least one DVD company is skeptical about such assurances.

"The Postal Service recognizes that technological change and changing consumer preferences could lead eventually to the demise of mail delivery of DVD, and it is not in its interest to accelerate that delay or hasten any such demise," postal lawyers wrote in filing with the Postal Regulatory Commission.

The request stems from a lengthy regulatory and court battle that began over charges from a competitor that the Postal Service gave special terms to Netflix that weren't available to other DVD-by-mail services.

Video game rental company GameFly accused the service of discrimination, and last January the U.S. Court of Appeals for the D.C. Circuit noted in a ruling that the Postal Service kept Netflix protected from an industry-wide problem of DVDs getting smashed in the automated mail stream by hand-processing the company's signature red envelopes.

"Rather obviously, this is not without cost to the Postal Service. Nonetheless, the service provides it to Netflix free of charge," the court ruled.

The ruling didn't order a specific change, but left the fix up to postal regulators.

In 2007, the Postal Service's inspector general recommended officials save tens of millions of dollars by charging Netflix a standard hand-sorting fee, but officials have refused.

Darlene Casey, a spokeswoman for the Postal Service, declined to comment on the latest development, citing a policy of not discussing pending matters before postal regulators. But GameFly filed papers with the commission on Dec. 26 raising sharp questions about the Postal Service's move to deregulate DVD mail.

First, the company said there's nothing to back up the Postal Service's contention that product competition for DVD by mail will somehow constrain prices.

With DVD mail companies forced to absorb postal increases by accepting smaller margins, the Postal Service would profit, according to the company.

"By the Postal Service's logic, all market-dominant postal rates should be deregulated, and the Postal Service should be free to exploit its market power to the full extent that the traffic will bear: the higher the price, the greater the incentive for ratepayers to devise substitutes," GameFly argued in its pleading.

"Congress, however, did not appoint the Postal Service as innovation czar over its customers, or give it carte blanche to gouge captive customers," the game company said.

Netflix has also raised concerns about the proposed change. The company warned investors in a Securities and Exchange Commission filing that increased postal rates could hurt profits.

"If the U.S. Postal Service were to change any policies relative to the requirements of first-class mail, including changes in size, weight or machinability qualifications of our DVD envelopes, such changes could result in increased shipping costs or higher breakage for our DVDs, and our contribution margin could be adversely affected," company officials wrote in a SEC filing in early 2013.

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