Posted on 02/11/2006 5:52:44 AM PST by yankeedame
Updated: 03:15 AM EST
Netflix Presses Pause for Heavy DVD Renters 'Throttling' Practice Delays Shipments, Gives Preference to Infrequent Renters
By MICHAEL LIEDTKE, AP
SAN FRANCISCO (Feb. 11) - 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.
Carlos Osorio, AP
Netflix subscriber Manuel Villanueva typically receives about 13 movies per month
-- down from the 18 to 22 DVDs he once received before being identified as a heavy renter.
=================================
Netflix typically sends about 13 movies per month to Villanueva's home in Warren, Mich. - 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."
Los Gatos, Calif.-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."
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The service's rapid growth supports his thesis. 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, Mich., 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 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 per 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.
Because everyone pays a flat fee, Netflix makes more money from customers who only watch four or five DVDs per month. Customers who quickly return their movies in order 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 - http://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 have also prompted incensed customers to share their outrage in online forums such as http://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."
In its terms of use, Netflix says most subscribers check out two to 11 DVDs per month.
Management has previously acknowledged to analysts that it risks losing money on a relatively small percentage of frequent renters. The risk has increased since Netflix reduced the price of its most popular subscription plan by $4 per 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 down 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."
Apparently not, my one complaint with them is the lack of weekend work.
I have high def pay per view in wide screen and Dolby Digital sound from Direct TV available 24/7.
I don't believe they disclose the deliberate delays in shipping available movies and shipping from depots across the country.
I actually sent back a scratched disc, reported it, and received the SAME scratched disc later. I could tell because it had a distinctive shape.
They do NOT say in the terms of service "If you rent 'too many movies' we will deliberately fail to check in your movies promptly, hold back on shipping available movies for 24 hours or more, and will ship the movies from Timbuktu."
We went from 2 day turn around to EIGHT. ALL the time. That is horrendous.
It 130 I quoted directly from the terms of service where it does explicitly say they may hold movies for a day or more before shipping and may ship from distribution centers other than the one closest to you.
I saw that after I posted, but my internet went out, so I couldn't come back. When I signed up that was NOT in the terms of service. I was throttled in 2004 and early 2005, and I cancelled my service.
Yeah they had to change it, apparently that's what they always did, but they didn't make it publicly known. I always assumed that's what they'd do, gotta protect the profit margins and with next day turn around a person could easily suck up more postage than they pay in a month, but apparently some thought it was low down and dirty. Now it's out in the open. Longest turn around I've seen was 4 or 5 days, I'd get annoyed if I started seeing 8 days regularly, my general goal is to have Netflix to watch over the weekend and 4 or 5 days does that for me just as well and sometimes better than 2 days (getting movies on Wednesday I might watch them before the weekend then my stack is short coming into the weekend).
but they DID NOT specify any of this when i signed up. i quit long before they ever came clean.
they only came clean because someone sued. what does that tell you?
unlike a standard written contract, where the small print is on the same page, you have to know where to look to find the small print on an internet contract.
i don't care what netflix does--they don't want my business and i don't want there "service".
they didn't spell this stuff out until long after i quit. at least a year after i quit.
if they didn't include it until after i quit, how could i have read it before i signed up?
i got throttled on "tales of jim bowie" and dinosaur movies form the 1950's.
i guess there was a pretty high demand for this stuff.
if you are paying a monthly fee, a slow down is the same as a limit, because they artificially limit how many movies you can get in a month to boost their profits.
none of this was disclosed.
Everything you said was active verb, you said you just checked the site and there was nothing there about it, I found it in no time.
Tells me some people blow things out of proportions. It was easily guessable they'd do something like this long before they were forced to "reveal" it. Figure between two way postage and man power each cycled disk costs Netflix a buck (won't even bring in the highly complicated durable costs like buildings, equipment and the disks themselves, just sticking to the easy math of shipping and handling), with most of their customers paying $17.99 a month they have a clear cut business need to keep the average number of cycles below 18. And when you contemplate the durable costs that number probably drops to 14 or 15. Understanding that information it's obvious they would do something to lower the cycles as customers began to approach the threshhold.
For someone that doesn't care what Netflix does you sure do spend a lot of time decrying what they do.
You said they aren't coming clean with it now, I showed you that they are indeed coming clean with it now.
No it's not, a limit is a cutoff of service, a slow down is continuing service but not as quick. Since they don't make any promises of turn around time after your first group then a slow down isn't breaking any promises.
None of it WAS disclosed, now it all is.
discostu doesn't care about any of that!
he will defend any sleazy rip-off that a business pulls, because it is "normal business practice" and a logical and reasonable way to make a profit.
guys like him are bad news to capitalism, because those kinds of practices invite government intervention.
you clearly aren't even reading other people's posts!
i'll now stop reading yours.
goodnite.
You'll be back.
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