• The New York Times, Thursday, December 6, 2007 11:19 AM

A recent audit by the U.S. Postal Service's Office of Inspector General found that the adhesive flap that seals Netflix mailers often jams machinery and requires sorting by hand. It has recommended a 17-cent surcharge on every package that requires hand sorting (not just Netflix discs).

A research note issued Tuesday by Citigroup claims that 70% of Netflix's return mailers must be sorted by hand, while Blockbuster's envelopes do not cause this problem. The issue could make a big competitive difference for the companies, it says. If Netflix "has to bear the full brunt of this increase (without other cost offsets), monthly operating income per paying subscriber would fall 67%," writes analyst Tony Wible.

Wible also says that Blockbuster is edging in on Netflix by offering more convenient access. "Netflix either has to spend more on marketing or lower pricing to increase growth," he says. Netflix spokesman Steve Swasey says that the company has gone through 40 to 50 iterations of its mailer since it started shipping DVDs a decade ago, and that it is open to further adjustments.

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