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."
They didn't before, and that got them in trouble
Show where that was in the OLD tos, not the NEW
Show where that was in the OLD tos, not the NEW
The Availabilty column was in the queue from the first day I got there which was 2000 or 2001. That's a clear indication of a limited number of copies, because if they were making copies as needed then all disks would have the same level of availability.
why was this thread pulled?
This thread was not pulled.
My Brother in Law got tossed from a Chinese restaurant once, because the place advertized "All You Can Eat", and Dave decided to find out if they really menat it. He lasted three hours and cleaned them out of all of the good stuff before they asked him to leave and never come back...
Newsflash! They are a business.
They have make $x on every DVD shipped. SInce you pay a fixed monthly, their profit from having you as a customer depends how many DVDs they ship you.
People who rent a Lot of DVDs a month are costing them money. They've taken the obvious step to correct the problem.
Blockbuster does it too.
I remember that promise, too!
there seemed to be a couple of delays. it would take them a day or 2 after i returned the film (directly to the post office on their return address) before the dvd would be logged in on the computer as having been returned.
then another day delay before sending out the next one.
this was a few years ago. the delay times seemed to be pretty constant (unlike what other people are reporting), so i assumed the delays were intentionally built into their system.
it had the appearance of intentionally limiting the number of videos i could get each month, so i quit.
however, intention is pretty hard to guage accurately--i'm making an assumption based on the consistent time pattern
It seems like a reasonable business practice. I'm a Netflix subscriber.
a friend told me that three people created a group and started ordering the movies and sharing them with each other...two years ago. So teh big tears in this story may be hiding a sharing idea that is popular among the geek world of music and video.
Until recently (according to the article we are presumably posting about) it was not disclosed that people were being selected for slowdown. Nowhere does it say that this was due to limited supply of workers! This was only to limit costs of mailings. They disclosed because they got caught -- like Bill after semen was found on Monica's dress.
Anyway I have a food bar idea for you - a separate line for FAT people with limited replacement of food in their bins. But advertise unlimited salad bar for all! This way you stay profitable, you can have the dressed cleaned of all traces, and nobody's the wiser.
I would think so but one advantage is the free weekly rental with a printable ticket. I only live about 8 miles from the closest Blockbuster rental store and can drive down and pick up the free rental.
I am watching free for another week and then will see how I like the service. Got to be an improvement over Netflix I would think.
Everyone knows fat people don't eat salad.
That is true up North and certainly out West - but here down south they deep-fry salad in bacon fat.
I cracked up and called the wife over to read this. We had a married couple come with us to an eat-all-u-can breakfast buffet. Among the usual stuff, there was a monstrous bowl of boiled shrimp (this was Navarre Beach, FL).
The woman vacuumed up the bowl and when they refilled it, she asked her husband to reload for her. He was embarrassed and said "No", so she did a repeat Hoover job. Thereafter, the bowl remain unfilled for the remainder of our visit. We talk about that to this day. Thanks for a trip down memory lane.
You can get 8 at a time from Blockbuster for $48 a month.
Man, your DVD burner must be REALLY slow!
;)
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