Netflix Shipping and Receiving

Image courtesy Netflix Media Center A Netflix employee opens a returned envelope

In the early days of Netflix, the company had one major advantage over its rent-by-mail competitors. While other companies had one central distribution center, Netflix had several scattered around the United States. This cut down on the amount of time that customers’ DVDs spent in transit. Today, Netflix has more than 40 distribution centers strategically located throughout the United States. This allows 90 percent of subscribers to get their DVDs the day after Netflix ships them. The return trip takes the same amount of time.

Netflix also processes nearly all of the DVDs it receives on the day they arrive. Each weekday, the United States Postal Service (USPS) delivers thousands of DVDs to each Netflix shipping center. Employees open the envelopes and scan a UPC barcode on the sleeve containing the DVD. The Netflix inventory system automatically updates the subscriber’s queue and sends an e-mail message reporting that the DVD has arrived. An employee then inspects the DVD to make sure it isn’t broken or too damaged to play and returns it to the shipping center’s inventory.

Like the receiving process, the shipping process requires both people and machines. An inventory control system makes sure that subscribers haven’t exceeded their allotted rentals per month or allotted number of DVDs rented at a time. It then matches subscribers’ queues with inventory information for each shipping center to let employees know which DVDs to ship. Employees place each white DVD sleeve into a red mailing envelope. People seal the envelopes, but machines apply the small, round stickers that keep the paper flaps secure during transit. Machines also take care of sorting all of the outgoing DVDs into bins destined for the right ZIP code. This process is similar to the automated sort that happens at a UPS shipping center or at USPS facilities. At the end of the day, the USPS picks up the DVDs that are destined for home delivery.

Image courtesy Netflix Media Center Neflix envelopes being sorted

For the most part, this process, with its one-day delivery and same-day processing, is fairly efficient. It allows Netflix to deliver 1.5 million DVDs through the USPS every day - Netflix delivered its billionth DVD on February 25, 2007. However, a number of factors can affect which DVDs you get and when you get them. One is the rarity of the DVD. If there aren’t many copies in the system, Netflix may have to ship one from a center that is far from where you live. Another is the popularity of the movies you want to watch. For newly-released films, Netflix may have fewer copies of the film than there are people who want to see it. In some cases, new releases have wait times of days or months.

If you watch lots of DVDs from Netflix every month, it may also take longer for you to get to the top of the waiting list for extremely popular movies. According to Netflix, this is to give the best possible service to all customers. However, critics of the practice refer to it as throttling and say that it puts Netflix’s best customers at a disadvantage. Although Netflix claims it has always given its least-frequent renters the highest priority for new titles, it didn’t always disclose this fact in its terms of use. For this reason, the throttling debate led to a class-action lawsuit - Frank Chavez v. Netflix Inc. - by users who accused the company of wrongdoing. Netflix settled the suit in 2006, but the settlement is currently in appeals.

Subscribers have also questioned the quality of the Netflix shipping process. DVDs travel to subscribers’ homes and back in plain, unpadded envelopes, and many discs spend a lot of time being handled and shipped. For these reasons, some people receive broken, scratched or otherwise unplayable DVDs. Critics claim that Netflix uses inadequate packaging to improve its bottom line and even accuse the company of willfully distributing defective discs. However, Netflix has been a member of the Better Business Bureau since 2001, and the Better Business Bureau has given the company a satisfactory rating.

In addition to throttling and quality concerns, Netflix faces fierce competition from several directions. People have plenty of other choices for renting DVDs, including video stores, other rent-by-mail services and movie download services. In addition, Netflix cites DVD sales and movie piracy as potential threats.

Netflix has also faced intense competition from Blockbuster, which introduced its Total Access program in late 2006. This program supplemented Blockbuster’s existing rent-by-mail service, which it launched in 2004. Total Access allows subscribers to rent movies by mail. In addition, subscribers can return their DVDs to a local Blockbuster store and pick up a free DVD rental while they’re there. This free rental is just like any other in-store Blockbuster rental - it has a due date and has to be returned to the store in person. In the first quarter of 2007, Netflix reported that Blockbuster’s new program had caused its growth to slow. Netflix also alleged that Blockbuster’s rent-by-mail programs infringed on its patents.

Some analysts suggest that Blockbuster’s focus on following Netflix’s rent-by-mail model will be its undoing [Source: SeekingAlpha]. Netflix CEO Reed Hastings has claimed that Blockbuster is only a short-term threat and that its Total Access program won’t be profitable at competitive prices [Source: Motley Fool, Motley Fool]. Only time will tell which company will become more profitable and whether people will continue to rent DVDs by mail as streaming video technology continues to improve.

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