FeedFlix, a Netflix API service, says that Netflix is losing 0.3% of DVDs it is shipping.

GameFly, which gives the same Netflix-style service for video games, is unhappy about ~1.0% loss rates for the DVDs it is shipping. Probably for that reason and some others, they filed a complaint with the Postal Regulatory Commission. USPS is serving both companies, and some people in the industry say this could be a potential evidence of USPS giving preferential treatment to Netflix. While it might as well be the case, I think the more important explanation lies somewhere else.

Let's say you want to own a movie and a game. The movie you want to own is Transformers: Revenge of the Fallen, which is currently topping the Amazon.com sales charts. You can buy it for $15. Or, you can start the cheapest Netflix subscription plan for $9 a month and receive the movie's DVD. Then, you can claim that the DVD has never arrived. You can then either cancel your subscription plan or become a "legit" user for the rest of your life. Yet, in this initial transaction, you acquire the DVD for a mere $9, instead of $15.

Let's now look at the GameFly side. You want to own Uncharted 2 for Playstation, which sells for $55 at Amazon. Instead, you start a GameFly membership, cheapest one being $9 a month. The same story of claiming the DVD is lost and you net out $46 profit.

Going back to the loss rates, let's consider the total loss rate TL = PL + UL, where PL is Postage Loss and UL is User Loss, all being percentages. Postage Loss is the percentage of losses caused by postage service, and UL is the other part of losses caused by user behavior. Based on the two articles above, TL(Netflix) = 0.3% and TL(Gamefly) = 1.0%. People are talking about the alleged differences in PL(Netflix) vs. PL(Gamefly), but what about the UL side?

Let's consider the two extreme examples: If a DVD you receive from your subscription was worth $1 million, would you keep it (assuming you were still paying $9 a month subscription fee)? And in the other extreme, if a DVD you receive was worth only $0.5, would you keep that one? I guess we can safely assume that when the "inherent value" of a DVD approaches infinity, the UL rate should approach 100% too. Then, it should be perfectly rational to assume UL(Gamefly) should be higher than UL(Netflix) as average game prices are significantly higher than those of movies.

I think the perfect test for this theory could come from Netflix' internal data on loss percentages for DVDs and Blu-Rays. As Blu-Ray discs are more expensive, Netflix should have a higher loss rate for Blu-Rays, compared to regular DVDs.

If the assumption holds, what can GameFly do? In my opinion, they shouldn't search for the answer in the courtroom. Instead, they should consult behavioral economists. If I remember correctly, showing the list of "Ten Amendments" just before an exam reduces the cheating rate significantly, even though the amendment has nothing to do with the content or context of the exam. While it could be weird to see the Ten Amendment page coming out of each game envelope, I am sure economists can figure out an effective "anchoring" method eventually.