Netflix, for the last few years, has been riding a tidal wave of rave reviews, good press, and that all-important word-of-mouth.
You can see it in pieces at BlogCritics, such as these by Eric Berlin and Casper.
The business model is indeed successful and wise and has been working well.
But that wave has become choppy. There have been rumors for some time that Netflix was engaging in an activity known as "throttling".
The company has now admitted, in court documents, that it indeed does this deceitful action.
Since Netflix gets a flat fee for unlimited DVD viewing, customers who quickly return their movie are making less money for Netflix than those who return them more slowly.
So Netflix has found a way to tweak that a bit.
Enter the Associated Press story which may lead to a backlash against Netflix.
The story begins with a clear anecdotal example, about how a customer who used to regularly view and receive 18 to 22 movies a month. Now, under the "throttling" plan, he is getting only 13.
The Netflix CEO may want to think before he speaks again. What he told the Associated Press was that few customers complained about what he called a "fairness algorithm."
Company Profile:
Netflix (Nasdaq: NFLX) is the world's largest online movie rental service, providing more than 4 million subscribers access to more than 55,000 DVD titles.
Service Profile:
Members have the choice of nine subscription plans, starting at $9.99 per month for unlimited rentals with one DVD out at a time. With the most popular plan, at $17.99 a month, Netflix subscribers can rent as many DVDs as they want, with three movies out at a time. There are no due dates and no late fees. DVDs are delivered directly to the member's address by first-class mail - with a postage-paid return envelope - from shipping centers throughout the United States.
Added: There is also a class action suit being organized about this matter.
Article comments
— go to most recent comments1 - Bill Wallo
Since I don't return DVDs fast enough, I can't complain all that much about the service (i.e., I don't even make it to 13 DVDs a month). But I am bothered by advertising that promises one thing ("unlimted" rentals) and then business practices which seem to undermine the general understanding of what that means.
2 - Scott Butki
Me too. It seems deceiving.
3 - Anna
Ah! That explains it. When I first signed up, the turnaround time was amazing. 2-3 days round trip from my mailbox. Now it's more like 4-5 days.
Ah, well. It doesn't much matter to me, since I watch movies about as frequently as I did when the service was faster. For me, Netflix is a convenience. I have access to a vast library of DVDs that would never be available in my small-town rental stores. And, at the prices they charge, Netflix is still a better deal for me.
4 - Catana
I've been a Netflix user for two years, and have very few complaints. Most of the complainers seen to be people who generally want the most recent movies and want them RIGHT NOW. It's good that Netflix is finally upfront about throttling, but it doesn't affect most customers, from what I can tell, only the heaviest users. Speed of fulfillment probably depends on availability as well as variables such as the USPS. It's impossible for any rental company to keep enough copies for every single subscriber to have exactly what they want when they want it. It's no different if you go to your local Blockbuster.
Even when delivery time slows down, my average rental cost is about two bucks. I dare any local brick and mortar to meet that. Plus, the selection is far beyond what I could get locally.
For the latest info on the controversy, and some comments -- http://www.hackingnetflix.com/2006/02/comments_on_the.html
5 - Scott Butki
I agree that Netflix has a great collection and is an exceptional company.
That said, the idea of penalizing heavy users seems unfair.
Bill, Anna and Catana, thanks for your comments.
Cantana, here's that link as a live link. Thanks for providing it.
6 - Catana
Scott, penalizing heavy users may seem unfair, but if the supply of copies of any film is limitted, then someone is going to have to wait. If the statistics show (and I'm sure Netflix must have a way of tracking usage) that someone is renting way more than the average for a particular level (number out at one time) then those whose usage is more moderate are the ones being penalized when the supply runs short. It makes sense that Netflix would try to balance this out.
Another point that few people note is that Netflix membership rose about 60% last year. I'm sure this required a lot of adjustments to meet the additional demands on the system: determining how many copies to stock, improving shipping, etc.
And last but not least, subscription rates have been lowered twice since I've been a member.
7 - Matt Paprocki
They're not trying to balance their stock though. They want to save on their shipping costs. It's cheating their customers, period. If you have the time to watch that many movies and their service says you're allowed to, then so be it.
Netflix was going straight for Blockbuster's throat (and they've been quite aggressive in doing so), and I can't imagine this press will help that.
8 - Phillip Winn
Matt -- I suspect Blockbuster either already has or will soon have a similar "throttling" setup. It's survival.
Of course, I've been a Netflix customer since before they offered unlimited rentals (since 1999), so I'm probably biased, but I've been pretty happy.
9 - Guppusmaximus
I would be upset if they weren't upfront with me about this "throttling" tactic.. It's not just that, it's the fact that they were supposedly giving a faster turn around to the people with Trial Memberships to get them to sign on. If this is the case than they should get penalized in a court of law.
Come on...Netflix needs to do their F*cking job. If they want people to pay for unlimited rentals and a turn around of 2-3 days then they should spend some of their millions on shipping and to keep product in stock . Stop blaming it on the USPS. This is what any buisness does if they want customers to keep buying from them.
If your favorite grocery store didn't keep their shelves stocked you wouldn't go there...Would you? I don't believe Netflix has that kind of overhead to be pulling this sh!t...
10 - Scott Butki
Why is a throttling strategy required at all?
11 - Dave Nalle
Throttling reduces overhead because it means they don't have to have quite as many copies of the movies in stock.
Dave
12 - Scott Butki
And for the record, Netflix was not "up front" about this. It was only noticed because it was mentioned as part of a settlement of a court case,
as explained here.
13 - Mike Liveright
I am not a NetFlix customer yet, but I'd feel that it would be OK to "throttle" fast returners, but only somewhat, and CLEARLY UP FRONT!!!.
1) Take say 50% of their returns as an-throttled.
2) Take the other 50% and try to satisfy them on less "popular" choices, e.g. on those that are in stock.
3) If there is not way to satisfy these with more in stock titles, then treat these also as un-throttled requests.
That way the rapid returners will be able to get their requests, and see lots of movies but there will be some preference to those who are slow returners.
14 - sal m
honesty is the best policy...it seems like netflix has created a problem for themselves where there didn't need to be one...if they put a cap on the how many dvds a person could get over the course of a month - something like 15 - they'd be better off...they wouldn't seem deceitful and the cap of 15 dvds per month wouldn't turn off enough people to make a difference...i used to be a member and to think that people can get that many dvds per month is mind boggling, so it certainly wouldn't bother me as a casual renter...
i think most people would think it reasonable to limit the monthly number at something like 15...now they're going to get nothing but bad press, and needlessly so...
15 - BOT
I'm pretty much with Sal M on this one.
To me, some sort of limit seems an acceptable idea.
I look at this Netflix situation like I do our local buffet. Sure it's "all you can eat," but IF all the FAT people are muscling out everybody else so that the "regular person's" access to the "all you can eat" buffet is limited (or curtailed altogether, at times), then preferential treatment SHOULD be given to the "regular guy" at the "expense" of the FAT GUY. Seems reasonable to me.
Just be "up front" about it. That's all.
16 - Crystal
You can also look at this the opposite way - Netflix should send the most desired movies to the quick viewers first. They'll watch them right away and send them back and the slower viewers can get the movies in the same week. If you send the movies to the slow viewers first they will keep them out longer and the fast viewers will have to wait a week or more to get them. This method would help Netflix keep their costs down, by keeping the number of copies needed down to a minimum, rather than by reducing their postage costs, and it would provide the best customer service for everybody.
17 - Natalie Davis
"It's good that Netflix is finally upfront about throttling, but it doesn't affect most customers, from what I can tell, only the heaviest users."
Oh, and the heaviest users don't count? Their only sin is that they took Netflix at its word when it offered *unlimited* rentals. If it would be better served by imposing a limit, then that is what it should do rather than punishing people for taking its offer of "unlimited rentals" seriously.
Must note that I am a former Netflix customer. When the turnaround suddently became slower after my trial period ended, I told the company to go fuck itself. Bitter, party of one, perhaps, but no one likes being lied to or being sucked into something under false pretenses. It sounds like fraud to me.
18 - Bliffle
Dave: "Throttling reduces overhead because it means they don't have to have quite as many copies of the movies in stock."
Yes, but at the expense of reducing volume. this makes them susceptible to competition, and unless they can form a coalition with competitors they will suffer. Unless, of course they can form a monopoly or oligopoly. But that would be illegal, wouldn't it?
19 - Dave Nalle
Don't they a;ready have a deal with Hollywood Video to provide them with local distribution centers?
Dave
20 - Nik
I have had next to no problems with Netflix in the nearly 5 years I've used them. Abandoned Blockbuster and their ilk long ago. I do find they're very good at getting new releases to me as long as I have them at the top of my Q prior to their release. If I wait until something is out and popular and then try to add it ("Flightplan" for instance which I decided to add) I'll often be in for long waits. Overall, though, it's a zillion times better than picking through the slim selection at most video stores, and I love the wide selection of films past and present, new and obscure.
21 - Mike K
My blog was also featured in the story, and I have some serious problems with the report. While Netflix does give priority to less frequent renters, the majority of customers will get movies quickly.
What is being declared as "decietful" is just a trade secret that Netflix didn't want to tell the competition about.
If you want to learn more, read my comments on the story:
http://www.hackingnetflix.com/2006/02/comments_on_the.html
- Mike K
www.hackingnetflix.com
22 - Jeanette
I have had netflix since 2002. I used to keep the same movies for a long time - sometimes as close to a month because I didn't have time to watch them, would forget to return them, etc. I switched jobs and started watching them more - made a conscious effort to watch and return much more frequently because it was a total waste of money the other way. Then I started to notice that they were not receiving the movies as quickly as they used to. I pass the Main Post Office here on my way to work in the morning - I drop the movies there, which is the PO where they have their PO Box. The used to get them the same day that I dropped them off. I started to notice that slipping off as I started making an effort to watch the movies more frequently - heck, Netflix made a killing off of me for the first three years that I had the service because I kept the movies so long. I returned two movies in the same envelope dropped off at the post office - they only report one as being returned and then send me something obscure from my queue - bypassing ten new and more recent releases to get to that one. It looks like I will never see a new release again since I started returning right away. I really feel like canceling because I can go to the video store and return right away and at least see new releases! Oh - I called netflix the first time I actually noticed that they took a week to receive my movies - I talked to customer service who totally lied to me - this was about a month ago. She said that they hadn't received my movies - it must be the post office.... I told her I dropped them off in the post office building where they pick up their mail - she said that netflix would have no reason to not report my movies had been received. I thought that the problem was in the Cleveland office - maybe someone wasn't doing their job. I have referred so many people to netflix because I thought that their service was great. From now on, no new business on account of my recommendation and if things don't change soon, my business will be gone as well!!!
23 - Scott Butki
Mike: Thanks for stopping by. I'll definitely be checking out your site
Dave: I don't know for sure about that.
Jeanette: I hear you. I've gotten many friends to join Netflix and I still think it's better than anything out there although Blockbuster is coming out with a program which may be comparable.
24 - James P. Walsh
Hi James,
Believe it or not I just recd. the following response from netflix!!
" Thank you for contacting Netflix.com customer support!
We appreciate you taking the time to provide your feedback and
comments regarding our shipping process. By prioritizing in this way,
we help assure
a balanced experience for all our members. Those that rent a lot of
movies
get a great value and those with lighter viewing habits are able to
count on our service to meet their limited needs.
If you have any further questions or concerns, please feel free to
contact us.
Thanks,
Ian,
Netflix Customer Service ."
25 - Bliffle
Like many others I will soon quit the Netflix account because they are starting to throttle me. $10 a month for 4 DVDs is not a good deal. $10 for 8 or 10 was OK.
This is a very bad business practice. Chasing away customers to attempt small profit increases is ultra stupid: better to lean on your suppliers. It's very costly to recruit customers, and difficult to get them on a monthly draw. Why chase that investment away?
Those DVDs probably cost about nothing to make, so just order up more copies if there are too many out.