WASHINGTON (CN) - The U.S. Postal Service cannot raise the cost of sending DVD mailers to competitive rates because Netflix and Gamefly are "captive" to the post office's services, the D.C. Circuit ruled.
Two years ago, the D.C. Circuit approved the Postal Commission's plan to end DVD-mailer discrimination - and Netflix's favored status at the U.S. Postal Service - by equalizing the postage for DVD flats and letters.
Netflix is the U.S. Postal Service's largest individual commercial mail client.
For years, the Postal Service sorted Netflix DVD mailers by hand, free of charge, while sending other companies' DVD mailers through automated processing machines.
GameFly, a video game rental service, challenged the post office's bias in court, claiming that automatic processing often damages DVDs, requiring GameFly to package their discs in heavier - and therefore more expensive - cardboard packaging.
GameFly paid 88 cents per rental to send DVDs as one-ounce, first-class flats, twice as much as it costs Netflix to mail a one-ounce, first-class letter.
The Postal Commission ended the post office's favoritism by equalizing the cost of first class letter and flat DVD rates, so any DVD mailer can use either first-class letter or flat.
While customers for Netflix's DVD-by-mail service have steadily declined since 2010 in favor of the company's streaming service, it remains highly profitable for the company - considerably more so than streaming, according to court records.
On Tuesday, the D.C. Circuit ruled against the Postal Service's efforts to raise the price of its DVD mailing services.
The appeals court ruled that the post office may not classify its round-trip DVD mailers as competitive products, rather than market-dominant products subject to a statutory price ceiling, which is the current classification.
While Netflix holds a near market monopoly in the DVD-by-mail market, its market power is irrelevant given its mandatory reliance on the post office's services, the court noted.
"It should be obvious that as long as the DVD-by-mail business is quite profitable, Netflix has no rational economic course but to pay the market-dominant piper," Judge Laurence Silberman wrote for a three-judge panel.
And while technological innovations may result in a further shift away from the use of mail in favor of streaming, "there was no evidence presented to establish at what point an increase in the price the service charged would cause Netflix and GameFly to look elsewhere for distribution."
Silberman said that Netflix and GameFly could not pass on any increase in postage price to consumers without losing them, which would put the Postal Service in "a position to extract more of the profit margin of its captive suppliers."
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