Netflix's best customers penalized

[canadateck]

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."



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

[lordsmurf]

This is a poorly written article. The "78 cents" comment illustrates shitty research, as companies arrange bulk discounts. They do not pay full First Class rate, especially not when sending out.

I fail to see the point of this article. It's reporting old news from 2005.

Must be a slow news day, got to dig up some conspiracies for the front page.

[Xylob the Destroyer]

netflix is ripping me off
blah blah blah
boo ******* hoo!
if you don't like it, cancel your subscription...
I've been using netflix for well over a year on their 3-at-a-time plan and am satisfied for the most part
it seems the people who bitch the most are the ones who are most likely pirating.
in a best case scenario, i would get 3 discs on Monday, mail them back tuesday and get 3 more on thursday -- mail them back Friday and get 3 more on Monday. Rinse and repeat infinitum.

now, I don't even have a ******* life, and I still don't have enough time to watch 3 DVD's in one nite...
why do people constantly bitch about this so much?
the only reason I can think of is because it's severly cutting into their piracy.
boo ******* hoo.

[canadateck]

I could Care less also I'm a buyer not a renter,But I would want what they say you get when you buy in.

Nothing to do with pirates,just lazy cheap people.

[parallax1]

now, I don't even have a ******* life, and I still don't have enough time to watch 3 DVD's in one nite...
why do people constantly bitch about this so much?
the only reason I can think of is because it's severly cutting into their piracy.
boo ******* hoo.

Don't think very hard do you?

Do you even know at what point they start throttling? If I get more than 3 per week on the 3-at-a-time plan will I get throttled? Who knows? But if so and it causes me to go to the end of the line for new releases is that fair? If they offer 'unlimited' (which I don't think they do anymore) then why is it right to 'limit'? Why should I not complain?


Personally when I get throttled I cancel and join Blockbuster for a while and come back. But this company is making millions on a reputation of unlimited rentals, why should they be given a pass when it comes to light that they do limit you?

[offline]

no longer news -moving

[lordsmurf]

Heavy renters are a minority that can very easily harm a system. The "throttling" is not for "all discs" either, but rather give priority to those who rent less and want the same discs. Add older, less popular discs to your queue. You're still getting rentals. Don't like it? Too bad, deal with it.

Is it fair that your excessive renting habits can block those with less demands from getting discs? No, of course not. People with only a few desires are more important than those that insist on heavy activity. Don't like it? Too bad, deal with it.

"Unlimited" is a comparative marketing term. Most people would agree you get as many discs as you want, therefore it is perceived as unlimited. "Unlimited" is the perception of the consumer, and in that regard, complainers are a small minority. Don't like it? Too bad, deal with it.

[non-linear]

I think what Netflix will probably do next is what Zip.ca in Canada started doing -- only offering a certain number of discs per month with free shipping, then if you want more than the limit, you pay per disc (with Zip, it's $2.49 per disc).

[Supreme2k]

If every employee from Netflix came before the Grand Jury and swore that they personally held all of the discs in their basements until they felt like shipping them, I still wouldn't believe it. I have been using them since late 1999 and have never experienced this "throttling". A couple of years ago, I even did some research for an independant company on a 3-out where I sent movies back immediately without watching them (opened the envelope and re-sealed them). Choosing only latest releases, I was able to get at least 32 rentals a month for over a year. The study was for 8 months for paperwork's sake, but it continued (clinically) for over 16.

I agree that the loudest complainers are the pirates whose supply is being slowed down. The only people lamer are (most of) their customers, who pay $10 for a disc that is in the $5 bargain bin.



I found it quite amusing that the site linked in the article totally denounces the article and (almost) backs up and praises Netflix. 8)

[lumis]

i think the use of the phrase "Best Customer" is being thrown around a bit too much.

just because you use the hell out of their service doesnt mean they consider you their best customer.. it means the oppisite..

they would much rather have people rent 6 movies a month than 60.

now, if it was a retail video rental store and you had to pay a set amount per movie, then you might be considered a best customer if you rented 60 movies a month.

[whitejremiah]

i dunno, they are still making a killing either way, and yes, there are people out there who do watch that many movies...or more accurately, they will watch one, send it back, watch another the next day, send it back, rinse, wash, and repeat...by the time they are done cycling through their first 3, the first disc from the second set is likely either there, or on it's way....i know some people like this that do watch a movie every day...or maybe 2 days apart at most....as for pirating....im sure there's probably a lot of people that do that, too.....but like i said, there are some people that do in fact watch that movies, and it could be affecting them slightly.........i dont know that it would be enough to make someone drop that type of subscription though....

[winifreid]

How can you not believe they "throttle" when they essentailly admit to it and changed their use statement reflect it? If they, and their lawyers, beleived unlimited meant that they could limit high use customers and not state such, then why did they change their statement? I understand why they do it, but feel they should have changed their use statement, as they did. I have been their customer for years and will continue to be one because they have a great selection and are still cheaper than my loavel store for the 10 disks/month I get on the 3 out plan

[elister]

netflix is ripping me off
blah blah blah
boo ******* hoo!
if you don't like it, cancel your subscription...

Done.

Ive been a subscriber to Netflix for several years now and I cant walk 50 feet to Blockbuster and find stuff I want to watch. Netflix always has what im looking for.

However, it took this article for me to finally realize why my DVDs were taking so long to deliver. Where normally I can get 2 shipments per week (6 movies total), its now slowed down to once a week. Sending back the movies is always fast, but getting new ones is getting slower.

Netflix, it was fun while it lasted.... but you can screw yourself if you think you can get away with throttling longtime members.

[lumis]

didnt blockbuster, for a brief time, have unlimited in-store rentals? where you paid like $25 or $30, and could go to the store rent 2 or 3 movies, returned them when you wished (even same day) and get 2 or 3 more?

[doppletwo]

Blockbuster still has in-store unlimited rentals.


It is truly unlimited. I have rented as many as 8 DVDs in one day using a two at time unlimted account. Also I have gotten of 60 movies in a month.


It doesn't hurt them since, there is no postage. It would be costing me gas, but I walked up there.


Blockbuster probably has the worst selection of any DVD rental place near me, but their unlimited rental system wroks great for my. Lately I have only been watching a about ten rented DVDs a month.


I am pretty sure its permanent for the time being.

[jimmalenko]

How can you not believe they "throttle" when they essentailly admit to it and changed their use statement reflect it? If they, and their lawyers, beleived unlimited meant that they could limit high use customers and not state such, then why did they change their statement?

To stop morons suing them

[doppletwo]

How can you not believe they "throttle" when they essentailly admit to it and changed their use statement reflect it? If they, and their lawyers, beleived unlimited meant that they could limit high use customers and not state such, then why did they change their statement?

To stop morons suing them

You mean you still don't believe in Netflix throttling?


They have admitted it. If I was an investor and Netflix didn't throttle, then I would be pissed.


Not throttling would kill profits for Netflix. For the vast majority of users throttling isn't a prolbem because you can only watch some many movies.


I have never used Netflix, but if you look at the numbers, then its clear that if you spend in too many DVDs too fast that Netflix will lose money. I know the prices for postage mentioned in the story are way too high for comericial bulk mail.

[jimmalenko]

How can you not believe they "throttle" when they essentailly admit to it and changed their use statement reflect it? If they, and their lawyers, beleived unlimited meant that they could limit high use customers and not state such, then why did they change their statement?

To stop morons suing them

You mean you still don't believe in Netflix throttling?

Never said that. If the truth be known, I don't *CARE* whether Netflix throttles or not since it doesn't affect me.

My comments were based around the fact that patrons of the land of the free seem to sue for anything these days, and that this was just closing one possible "loophole" or avenue for suing - that is, being so naive to believe that unlimited really means no limits, because "... it isn't in their terms of service ...".

[thayne]

I noticed they sometimes send me return envalopes with a texas address on it and I'm in california

[lumis]

I noticed they sometimes send me return envalopes with a texas address on it and I'm in california

it could be that is the only location that has that particular title, or has that title currently in stock.. or they're throttling you.

[Doramius]

I noticed they sometimes send me return envalopes with a texas address on it and I'm in california

That's pretty common. Sometimes the title you receive came from someone who had it in stock and they want the stock to stay with that center. Your normal return area is probably a local address and if you see that more frequently, that's because most of your rentals come from locally.

Personally I agree with Netflix. I am a heavy renter to rental places and I would feel throttled. However, I can always go to another title, BECAUSE I am a heavy renter. I have a list of other movies rather than new releases. I go to a rental place locally and could check out 8-10 DVDs a week. Or I could check out only 2 a week. My chances of catching that title within the next 2 weeks is extremely high. People who complain about it are probably impatient fata**es. Dammit, get off you a** and check the local video stores. Many titles have that IN-STOCK guarantee, so if they are out of it, you get to rent it for free. I've taken advantage of plenty of those.