Netflix sends frequent renters to the back of DVD line
<small>AP ^ | 2/09/06</small>


<small>Posted on 02/10/2006 11:26:23 AM PST by iPod Shuffle</small>


Posted on Fri, Feb. 10, 2006

Netflix sends frequent renters to the back of DVD line

MICHAEL LIEDTKE

Associated Press

SAN FRANCISCO - 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 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."

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 wife wanted to get Netflix but I voted her down (I get to wear the pants in the family today...kinda) then I went to complaintsdotcom and checked them out. I don't think we'll be getting Netflux any time soon.

 

Heh, my parents subscribe to netflix. I don't get what's so wrong unless you're a diehard movie person. We usualy watch one every friday and saturday night and send 'em back monday then wait 'til friday.

 

I think thats kinda bogus, I wonder if blockbuster does the same thing?

 

I quit Netflix because it would take too long for the DVD to get back to Netflix. When I first joined I could get a DVD within one dat after I ordered it, but then it went to 3-4 days and 3-4 days to return it, so I figured is was not worth the money... I was only getting maybe 5 -6 rentals a month at the end. I will just wait for the PPV

 

We've had them for almost 2 years and rent a lot of movies. This certainly explains why the turnaround time has been taking longer and longer. Other than that, I like the service. Maybe I'll try Blockbuster's online program and if it sucks as bad as I suspect it will, come back to Netflix as a new customer for better service for a while.

 

Same here. I will check out that site though, should be interesting.

 

Depending on how many DVD's you plan to get each month, I wouldn't let this stop you. As far as complaints.com, never heard of it; but from the sound of it I doubt too many satisfied customers bother to go there. So your experince there is bound to be skewed.

Even if this policy is true, it sounds like you have to be a rabid daily watcher before it becomes an issue. I've been using them for 2 years or so now and have no complaints, and there's been times where I'm returning a disk every other day.

In my book, Netflix Rules!

 

Erik, where do your Netflix movies come from, and how fast do they get them to you? Most of mine come out of San Jose, but I think a few come out of San Francisco. The address for me to return them to is always SF.

I usually get them the next day after they're shipped, but sometimes it takes 2 or 3 days.

 

I used Netflix for almost 12 months, I had no problem with the turn around time,
typically 2 days. Problem was we just didn't watch the movies on schedule
so we'd end up keeping them for, lets just say too long.
Unless you're a dedicated movie watcher, don't bother.

 

Dan:

I live near Watsonville, so I assume most of them come from San Jose (about 20 miles away). Average turnaround time is 2-3 days, depending on which day and what time I post them.

The longest I had was 5 days, but that was something like mailing them back on the Friday before a 3 day weekend, and not seeing another one until the following Wednesday.

Erik

 

You're right Eric. Satisfied customers wouldn't bother to write to a company to complain about it or complain to another company in the hopes of getting a grievance resolved.

Before I sign a long term agreement with any company, I want to know about their customer relations history and disagreement policies, and what better place to do it than through complaints.com or the better business bureau? Netflix only has 41 complaints lodged against them through complaints.com. It isn't alot. But when you consider that that number only comes from people who know about complaints.com and have taken the time to write for help, it becomes significant.