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."
Well, if you like new releases, I would suggest red box at McDonalds. New releases for $1.00. Also, customer service rocks, my bf got a bad copy of Sky High and got 2 special promo codes to get a replacement copy and another movie as well.
Well of course workers had something to do with it, you only have a finite number of workers and machines, with them you can stuff and mail a finite number of envelops. It's simple logic, no reason to mention it. There was nothing to be "caught" at, it's all a matter of simple logic. Anybody that's bothered to learn even the most minor concepts of running a business know they were going to wind up in a situation where they would want to favor some customers over others on the turn around, it was bound to happen and their logic was the right on.
What an idiot example, completely lacking in any of the most basic recognition of the reality of the situation.
Exactly, ain't America grand! I've done the same with my ISP.
Those are illegal.
If I wanted to watch clean flicks I'd rent G rated movies.
"People who rent a Lot of DVDs a month are costing them money. They've taken the obvious step to correct the problem."
Which makes sense, if only they didn't insist on using the hook "unlimited". I am happy with Netflix so far. Access to such a huge catalogue of films cannot be had any other way at this point.
I wish I had that much time. Between work, kids, dogs, I can barely handle the 3 at a time. And, then, if the movie isn't very good, it gets sent back unwatched. One of the reasons I like the mail service.
thanks--that sounds like a much better deal.
yum, yum!
the stampede will soon be coming your way!
a sleazy operation is a sleazy operation.
what people are objecting to is netflix's redlining the heavier users, not the issue of actual availability of dvds. if they are offering different levels of service, they should have said it up front, and maybe had a price differential.
they advertised one type of service and provided a lower-level service.
but triaging in hospitals is (hopefully) not being done based on how often the service is used. if hospitals did that, they might get into serious trouble.
now that netflix has disclosed what they are doing, there is no real problem. the problem was back when they didn't disclose, and simply delayed the turn around.
how about if we all had a credit card that would slow down payments to "frequent billers" without disclosing. then we could use it to buy products and services from your business. you would be out of business before you ever collected the money owed to you.
A wise man once said: "Admitting you're wrong is a good thing, it shows character and places you above most of the rest of the world." Actually, it was Bozo the clown who said it, but even a clown gets it right once in a while (albeit in a run-on sentence with excess prepositional phrases).
Post #7 well said. Netflix is overrated, IMO. Either I buy the classic DVDs that I want outright or I can just rent the favorites at Family Video for $1 apiece. Besides, Netflix is already obsolete. Cable and satellite companies already offer pay-per-view.
OMG...I did the same thing! LOL!!!!!!!
GMTA..hehehehe.
"Cable and satellite companies already offer pay-per-view."
But not in the original aspect ratio, HD and DD. DVD can offer that.
They need to protect profitability as well as attempt to satisfy the customer. There was always a conceptual limit, depending on how fast you watched things and the rate of turn around. That's what they advertised that's what they're providing.
Oh that's so cute. Don't bring an idiot parallel to a discussion of facts. Even all you can eat restaraunts can set limits on all you can eat, it's perfectly legal and reasonable. Even with next day turn arounds it's hard to get up over 12 movies a month with a max out of 3, if you want more than that in a month then change your rental to a higher max out limit. That's all you need to do, NetFlix is trying to maintain profitability, it's not a charity it's a business, they exist to make a profit, if a certain type of customer is damaging that profit they either need to get rid of those customers or find a way to make them profitable. And there's absolutely nothing wrong with that.
I have had periods when I fired them back pretty quickly but, overall, I do not average out as a fast returner. But the rate of shipment seems to have slowed.
I am quite surprised that they acknowledge this practice. I consider it bad faith, if not fradulent. I pay them money each month and their represnetation gave me no hint that that this was the deal. Forgot to have my lawyer take a look.
Although I agree with majority sentiment on this forum that businesses are free to set the terms of their offerings, I am surprised that most would find this underhanded maneuver to be a fair practice. To me, it is like an all-you-can-eat-buffet insisting on clean plates for return visits to the buffet but deliberately making it difficult for a customer to get a clean plate...i.e., requiring that a waiter bring it and then telling the waiters to take their time. (I've never seen any such thing in an eatery...just trying to construct a daily life analog.)
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