Netflix "throttling" customers

[skcin]

If I were a Netflix customer, I'd be pissed.

http://www.cnn.com/2006/US/02/10/net....ap/index.html

Netflix sends frequent renters to the back of line
Policy designed to reduce number of films rented for monthly fee

Friday, February 10, 2006; Posted: 11:15 p.m. EST (04:15 GMT)


SAN FRANCISCO, California (AP) -- Manuel Villanueva realizes he has been getting a pretty good deal since he signed up for Netflix Inc.'s online DVD rental service 2-1/2 years ago, but he still feels shortchanged.

That's because the $17.99 monthly fee that he pays to rent up to three DVDs at a time would amount to an even bigger bargain if the company didn't penalize him for returning his movies so quickly.

Netflix typically sends about 13 movies a month to Villanueva's home in Warren, Michigan -- down from the 18 to 22 DVDs he once received before the company's automated system identified him as a heavy renter and began delaying his shipments to protect its profits.

The same Netflix formula also shoves Villanueva to the back of the line for the most-wanted DVDs, so the service can send those popular flicks to new subscribers and infrequent renters.

The little-known practice, called "throttling" by critics, means Netflix customers who pay the same price for the same service are often treated differently, depending on their rental patterns.

"I wouldn't have a problem with it if they didn't advertise 'unlimited rentals,' " Villanueva said. "The fact is that they go out of their way to make sure you don't go over whatever secret limit they have set up for your account."

Changing the rules
Los Gatos, California-based Netflix didn't publicly acknowledge it differentiates among customers until revising its "terms of use" in January 2005 -- four months after a San Francisco subscriber filed a class-action lawsuit alleging that the company had deceptively promised one-day delivery of most DVDs.

"In determining priority for shipping and inventory allocation, we give priority to those members who receive the fewest DVDs through our service," Netflix's revised policy now reads. The statement specifically warns that heavy renters are more likely to encounter shipping delays and less likely to immediately be sent their top choices.

Few customers have complained about this "fairness algorithm," according to Netflix CEO Reed Hastings.

"We have unbelievably high customer satisfaction ratings," Hastings said during a recent interview. "Most of our customers feel like Netflix is an incredible value."

The service's rapid growth supports him. Netflix added nearly 1.6 million customers last year, giving it 4.2 million subscribers through December. During the final three months of 2005, just 4 percent of its customers canceled the service, the lowest rate in the company's six-year history.

After collecting consumer opinions about the Web's 40 largest retailers last year, Ann Arbor, Michigan, research firm ForeSeeResults rated Netflix as "the cream of the crop in customer satisfaction."

Once considered a passing fancy, Netflix has changed the way many households rent movies and has spawned several copycats, including a mail service from Blockbuster Inc.

Netflix's most popular rental plan lets subscribers check out up to three DVDs at a time for $17.99 a month. After watching a movie, customers return the DVD in a postage-paid envelope. Netflix then sends out the next available DVD on the customer's online wish list.

Customers catch on
Because everyone pays a flat fee, Netflix makes more money from customers who watch only four or five DVDs a month. Customers who quickly return their movies to get more erode the company's profit margin, because each DVD sent out and returned costs 78 cents in postage alone.

Although Netflix consistently promoted its service as the DVD equivalent of an all-you-can eat smorgasbord, some heavy renters began to suspect they were being treated differently two or three years ago.

To prove the point, one customer even set up a Web site -- www.dvd-rent-test.dreamhost.com -- to show that the service listed different wait times for DVDs requested by subscribers living in the same household.

Netflix's throttling techniques also have prompted incensed customers to share their outrage in online forums such as www.hackingnetflix.com.

"Netflix isn't well within its rights to throttle users," complained a customer identified as "annoyed" in a posting on the site. "They say unlimited rentals. They are liars."

Hastings said the company has no specified limit on rentals, but "`unlimited' doesn't mean you should expect to get 10,000 a month."

Netflix says most subscribers check out two to 11 DVDs a month.

Growing risk
Management has acknowledged to analysts that it risks losing money on a relatively small percentage of frequent renters. And that risk has increased since Netflix reduced the price of its most popular subscription plan by $4 a month in 2004 and the U.S. Postal Service recently raised first-class mailing costs by 2 cents.

Netflix's approach has paid off, so far. The company has been profitable in each of the past three years, a trend its management expects to continue in 2006 with projected earnings of at least $29 million on revenue of $960 million. Netflix's stock price has more than tripled since its 2002 initial public offering.

A September 2004 lawsuit cast a spotlight on the throttling issue. The complaint, filed by Frank Chavez on behalf of all Netflix subscribers before Jan. 15, 2005, said the company had developed a sophisticated formula to slow DVD deliveries to frequent renters and ensure quicker shipments of the most popular movies to its infrequent -- and most profitable -- renters to keep them happy.

Netflix denied the allegations, but eventually revised its terms of use to acknowledge its different treatment of frequent renters.

Without acknowledging wrongdoing, the company agreed to provide a one-month rental upgrade and pay Chavez's attorneys $2.5 million. But the settlement sparked protests that prompted the two sides to reconsider. A hearing on a revised settlement proposal is scheduled for Feb. 22 in San Francisco Superior Court.

Netflix subscribers such as Nathaniel Irons didn't believe the company was purposely delaying some DVD shipments until he read the revised terms of use.

Irons, 28, of Seattle, has no plans to cancel his service because he figures he is still getting a good value from the eight movies he typically receives each month.

"My own personal experience has not been bad," he said, "but (the throttling) is certainly annoying when it happens."

[Rickypt]

I have a friend at work who suspected this as starting last year he noticed significant delays in getting his DVDs. He used to rent about 7-8 per week. I still get my DVDs like clockwork, but I only average about 5 per month.

I'm disappointed in this because I'm a huge Netflix fan and been hoping they survive. They just need to change their advertising, stop saying unlimited DVDs, establish an overall cap on renting per month, and make that clear to customers.

It's still a fantastic service.

[skcin]

I do Blockbuster, and I have had no problems. The main reason I like it is that I get 2 free in-store rentals in addition to my 4 per month, so 6 rentals for $12 per month ain't bad. I originally had the unlimited rentals, but I didn't rent enough for it to be worth it.

Plus, this way if I feel like seeing a certain movie that night, I can go & get one of my freebies at the store, as opposed to having to wait for it to come in the mail every time.

[paleshadow]

When I first signed up for netflix I would get 3 movies at a time. I upgraded to 5 a few months ago. Initially I thought it may be taking longer, but it is about the same. For new releases that come out on Tuesdays you have to time your returned movies so that they arrive on Monday. Also, I check where they have been shipped from. Mostly they come from one of two locations in NY where I live, but sometimes I will get one from San Jose. The out of state ones take longer to receive and send back. A way around this is to send the out of state one back in the same envelope as the ones that came from in state.

[amber]

I'm pissed, even though I wouldn't be classified as a frequent renter. Why? because that's wrong. Like rickypt said, they should have disclaimer or monthly cap.

[Rickypt]

I still want to love Netflix 'cuz they give their money to Dems, according to last year's True Blue listing. And Blockbuster used to refuse to carry certain movies that they considered "offensive", so I always thought they were run by rightwingers.

Plus Netflix had the idea first, the whole online renting thing, and it's a really great one.

[BTFLCHLD]

Originally Posted by skcin

The main reason I like it is that I get 2 free in-store rentals in addition to my 4 per month, so 6 rentals for $12 per month ain't bad. I originally had the unlimited rentals, but I didn't rent enough for it to be worth it.

i switched from netflix to blockbuster too for same reason (fre in-strore.) im going to adjust to 4 per month as you did as i am not watching near enough. did you see the recent commercial where they are offering four in-store rentals now? im wondering if thats for new customer only?

[skcin]

Originally Posted by BTFLCHLD

i switched from netflix to blockbuster too for same reason (fre in-strore.) im going to adjust to 4 per month as you did as i am not watching near enough. did you see the recent commercial where they are offering four in-store rentals now? im wondering if thats for new customer only?

No, it's for everyone. The catch is that it's one rental per week - if you don't use it that specific week, it's gone. I'm going to stick with the 2 free rentals, I usually like to rent 2 movies at once.

[Richard B]

No surprise here for me. I knew they were doing that about 8 months ago. Very clever.

I have also participated in the class action lawsuit, but as yet, it has not begun...the one free extra DVD.

I would never rent from censored galore Blockbuster. Something about a mormon operated company make me not want to give them my money.

[SuzeQuze]

Originally Posted by Rickypt

I have a friend at work who suspected this as starting last year he noticed significant delays in getting his DVDs. He used to rent about 7-8 per week. I still get my DVDs like clockwork, but I only average about 5 per month.

I'm disappointed in this because I'm a huge Netflix fan and been hoping they survive. They just need to change their advertising, stop saying unlimited DVDs, establish an overall cap on renting per month, and make that clear to customers.

It's still a fantastic service.

Diss noticed this too and switched to Blockbuster last year. I believe he talked about it here. It is interesting how long it takes the news to catch up!

[amber]

Originally Posted by Richard B

I would never rent from censored galore Blockbuster. Something about a mormon operated company make me not want to give them my money.

Ah, I didn't know that! Same reason I don't shop at Albertson's. Thanks for the heads up, I don't want to give them any money, either.

[Pisces Queen]

I signed up for Netflix and picked out the movies I wanted ~ put them into by bin and never received a darn thing. I canceled after a month and went to Blockbuster.

[Richard B]

The best alternate web DVD rental to Netflix is:
GreenCine

They have a amazing selection of independent, foreign, documentary and adult porn.

[BTFLCHLD]

Originally Posted by Richard B

The best alternate web DVD rental to Netflix is:
GreenCine

They have a amazing selection of independent, foreign, documentary and adult porn.

adult porn...im on it
i dont typically research ownership in companies im renting movies from
how did you know about blockbuster?

[Richard B]

Originally Posted by BTFLCHLD

adult porn...im on it
i dont typically research ownership in companies im renting movies from
how did you know about blockbuster?

Known this a long time. A friend of mine (who is Mormon) has known for along time. They're so proud of that fact. Which also accounts for the "censorship" and family oriented shop.

And be sure to also boycott Marriott Hotels while you're at it. Same reason.