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."
My mother is homebound and uses Netflix. She's been complaining lately about the moview she's been receiving. Maybe this is what's happening with her account.
Really doesn't make a lot of sense because if people get dissatisfied, they'll just switch to a different service. I noticed Blockbuster has started a similar service.
There's a bunch of people out there renting 8 at a time and ripping them to their computers and then sending them back within like a day or so.
These are the people that are targeted by this.
Solution: use Clean Flicks
Get the movies without the filth.
http://www.cleanflicks.com
Their biggest problem is the US post office that despises the postal loss from shipping heavy videotapes to light-weight DVDs. We have a serious problem with postal abuse of mailed DVDs.
Count me as one of the "complainers". I canceled my Netflix subscription this week and signed on with Blockbuster.
I had been waiting over a week for Redeye, 40 Year old Virgin, and one other.
I now have all three from Blockbuster. They may throttle me too and I will cancel with them if it happens. I had been a member of Netflix for about a year, am retired, and was a HEAVY user I guess. Tough shi*!
I wish they'd direct some of that wrath on the hordes of AOL disks.
I love how these companies come up with ideas and when customers do what they ALWAYS do with deals like these, the companies whine. Duh, what did Netflix expect?
If Netflix has such a problem FULFILLING ITS LEGAL OBLIGATION to the CUSTOMERS who signed up for its program, maybe they should just fold and return to letting customers rent dvds at Vid store outlets instead of having this mailing program.
Sounds like Netflix needs a major THUMP ON THE HEAD. I'll continue renting mine (infrequent renter) when I feel like it, no contracts, no deals.
Wow, I wish I had the time to watch one movie a month. I'd never get anywhere close to even 13. I try to catch one movie a year in the theater and to rent one movie a year to watch at home. And I'm even behind on that.
"There's a bunch of people out there renting 8 at a time..."
The max you can have out at one time is three...from both Blockbuster and Netflix.
I use netflix, although I have their cheapest plan. They have series' like Monarch of the Glen, Cadfael, and MI-5 that Blockbuster does not.
From my mailbox to theirs is usually one business day, and ditto on the turn around time. Only once did I receive a disc that wouldn't play, and netflix sent out an immediate replacement. I like their service, and selection enough that I've given gift subscriptions to friends.
I use and like their service, too. I would guarantee that this guy is copying these movies as fast as he can and shipping them back the same day he gets them. Unless, of course, he doesn't work and can just hang around and watch 3-4 movies a day. *Rolleyes*
But that's the MSM for ya...find a successful business with many satisfied customers and cull out the ONE that has a "problem" (usually self-induced) with said company. They do articles like this on a daily/weekly basis.
actually, you can get more than 3 movies at a time from Netflix, but you gotta pay more per month. Also can get fewer than 3 a month, but you gotta pay less. :>
seems to me that Netflix is catering to those users who give them the most profitability - good bidness move!
I never heard of Clean Flicks. I can think of some movies that if they edited out the language, and violence would be about fifteen minutes long. LOL!
Team America: World Police comes to mind, and I see they don't have it on clean flicks. (Darn it.)
"actually, you can get more than 3 movies at a time from Netflix, "
How did you do that? I used to belong to Netflix, but now Blockbuster. I only saw 1, 2 and 3 at a time plans from Netflix.
Makes perfectly good business sense for Netflix to throttle and give priority to infrequent renters.
Then there were people like me. I would watch the movie the night I got it and put it in the mail the morning after. They used to send me the new movie when they got my return. THEN the waited one day before sending out the new movie. So I cancelled.
I think they have a 5 movie plan.
"Unlimited Internet!"
Well, unlimited until I reached the maximum hours.
If I was Netflix I would just offer a tiered system - X dollars for X DVD's a month - or X dollars for up to X DVD's, and X dollars per each DVD after that.
OK, I was just curious. I couldn't find it on their site. Thanks.
I don't go to movies in the theater ... it's been about 7 years now. I just hate sitting in theaters.
I liked Netflix because they had movies that Blockbuster didn't carry ... like The First Churchills, The Pallisers, Jewel in the Crown, and the Brit flicks. I watched them like crazy til Netflix started waiting an extra day to mail out new movies. I didn't like the change in service I had come to expect. So I cancelled.
Now I buy all my DVDs. I just finished watching the whole first season of 24. I'll end up selling all my collection on eBay. But it's irritating to get used to their stellar service only to realize that it has changed.
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