Netflix 'Throttling' the Brakes on Frequent Renters?
SAN FRANCISCO — Manuel Villanueva realizes he has been getting a pretty good deal since he signed up for Netflix Inc.'s (NFLX) 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. (BBI).
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."
As a heavy Netflix renter myself, I've got to say this doesn't bother me that much beyond the subtle deception. I would rather go a day or two without movies if it means they'll be less likely to raise my payment.
(Besides, all the popular releases on my list are my wife's picks.)
I'm not sure yet how I feel about this. I'm on Netflix's 2-at-a-time plan. My first reaction was that I was very upset about this. I then realized that I'm not one of their heavy users, so this doesn't affect me personally. I'm still happy with the service and feel I get my money's worth, but like Chaz, I don't like the deception. If I were one of the heavy users I might be a bit more upset.
I wonder if the other online rental houses operate in the same manner?
Does UPS tell you which items they pack on their truck first? If you find out yours goes to the bottom of the pile based on how far it is from their headquarters, are they deceiving you? If your buffet waiter doesn't bring you new plates as quickly as you can fill them up and scarf them down (even if they're doing it intentionally) are they deceiving you?
No business should be forced to lose money and so it's either do this or pay a higher price for your two movies a month so that Gomez can rent his 72 a month.
The term "fairness" is a red flag to me. Reminds me of the bait-and-switch some ISPs do when they sell you "unlimited" service. Back when I was on dialup (in 1843 ), Mindspring used to send warning letters if you were connected for too many hours on their supposedly "unlimited" service. The e-mails were scolding in tone and referenced "fairness" over and over, trying to guilt trip the customer into saving money for a profit-making company under the guise of being "fair" to your neighbours. Netflix's use of that term bugs me in the same way, you know, if it doesn't really mean unlimited then just say so, or just deny the account further rentals and be done with it. Not this "BUT WHAT ABOUT THE CHILDREN (who rent DVDs)" misdirection. Or even better, deal with the relatively few SUPER-renters as part of the normal cost of doing business, and live with $10,000 less of their total $29 million profits.
The fairness argument is bull, of course, and on that point I agree with you, Linda. As to unlimited not being unlimited, yes, they shouldn't use the word unlimited (and I don't recall hearing the word in their radio ads for some time, but I haven't been looking for the word either). And I would just amend my service agreement to say if you rent more than x movies over y period you agree to pay z more a month for the next six months.
They just want so badly to be able to say UNLIMITED in their ads, eh? If they're really only allowing 13 per month as the article implies, that's a lot of rentals anyway. They should just say up to 13 per month, or up to 4 per week or something. (Corporatespeak gives me hives ...)
I can't see the similarity of behavior in your UPS example, James. My agreement with UPS is that they deliver my package on a specific day, not where they place it on the truck (that might affect what time of day its delivered, but not the actual promised delivery date.) What netflix did is still deception, and they treat two groups of customers who are both paying the same fee differently.
They should have been upfront in the beginning, and stated how things were going to be if you are a heavy users. There would be no deception, and they would just make less money, not lose any. But I can't say if that would be a little or a lot less money. I don't think that they'd go into the red, though.
About they only way they could concisely have advertised their service was to add the world "virtually" next to "unlimited". Chances are folks would still cry deception even if they had used "virtually". The example given got his 17 to 22 DVDs in one month to start with. Not seeing the deception myself.
I am not affected by this, so I should probably just leave it alone, but it blips my radar that they seemingly penalize people for using the service as was originally described.
I wonder whether one who gets marked as a heavy user could ever get off of that list? I would hope that something in the their system that marks for heavy usage is also designed to recognize when someone falls back into more 'normal' rental patterns. An easy example would be if I were to have a particularly heavy month, or whatever the determining period is, and got placed on the 'heavy users' list, would I then be penalized for the duration of my membership, or would the move to lighter activity have me removed?
I can understand the delay in shipping all of the DVD's to a heavy user, but why the pushback in the queue for new DVDs? That would really piss me off if I found out about that. Blanket delays, sure, I can handle 17 DVD's a month for 15 bucks or whatver the three-at-a-time price is, but there's no need for the double whammy.
I think that might depend on what you have in your queue. I've got some new releases in mine that get labeled "Long Wait" or "Very Long Wait", but I've also got 1960's Italian movies with no wait on them.
If somebody's queue is filled up with nothing but new releases and other popular rentals, it makes sense to prioritize them. It means I might be getting my movies not exactly in the order I have them in the queue vs. another customer getting nothing at all.
As for the other issue, is there any precedent with "All You Can Eat"-type cases?
I've gone on about this at some length in a certain other forum, so interested parties can see what else I have to say there. Basically I think it's perfectly appropriate for them to put some sort of limits on heavy-use customers like myself, but they need to be more upfront about it with us. To address a few other points:
James C. Taylor wrote:
About they only way they could concisely have advertised their service was to add the world "virtually" next to "unlimited". Chances are folks would still cry deception even if they had used "virtually".
Yeah, it's hard to summarize the complete policies in a quick ad, that's true. But I would argue they'd have been better off avoiding the word "unlimited" entirely here. It sends entirely the wrong message. Or on their website they could say unlimited* where the asterisk links to a short statement elaborating on what that really means. As it is, the How It Works page carefully avoids this issue. The closest they come is "The number of DVDs you rent depends on a number of factors, including how quickly you watch and return each of your DVDs and which plan you have selected." Pretty vague, and it would be reasonable to think this means that if you return your DVDs quickly, you'll be able to rent more. In fact, you get penalized. Thanks, Netflix.
If you go to the Terms Of Use you get a more honest explanation, under "Allocation, Delivery and Return of Rented DVDs": "In determining priority for shipping and inventory allocation, we give priority to those members who receive the fewest DVDs through our service. As a result, those subscribers who receive the most movies may experience that (i) the shipment of their next available DVD occurs at least one business day following return of their previously viewed movie, (ii) delivery takes longer, as the shipments may not be processed from their local distribution center and (iii) they receive movies lower in their queue more often than our other subscribers."
James C. Taylor wrote:
The example given got his 17 to 22 DVDs in one month to start with. Not seeing the deception myself.
The thing is that they start out giving you that many, and it seems like that's going to be the norm for them. Then after a couple months, throttling kicks in, and you get only 12-13 a month. It's a noticeable change from the way the service works for the first couple months. And they don't just come out and say, it's because your usage level is to high for us, please pay for a higher level if you want more. Instead I've had customer service people say things like "we can't control how quickly the post office delivers mail". That sounds reasonable, but the post office was very consistently prompt for two months, then they became very consistently slow, until I upgraded my membership level and the post office magically became efficient again. The previously-quoted Terms of Use is more honest about what's really going on, but unless you go to that specific page, Netflix seems to be trying to avoid telling you those details.
I've even observed the following: on Monday I return 2 DVDs (call them A and B) in the same envelope. (Something I do fairly often; it's not a problem in itself.) On Tuesday the website says A has been returned, but not B. And my next movie C (listed as "available now") is scheduled to ship that same day. Except later in the day, they decide it will ship tomorrow instead. Next day, Wednesday, they finally show B as having just arrived in the mail. No, it was really in the envelope yesterday, they just don't want to acknowledge it. And now movie D ("available now") is listed as shipping today. Except later in the day, they decide it will ship tomorrow instead. So ultimately they ship C on Wednesday, and D on Thursday. Except somehow C arrives on Friday and D on the following Monday. These shipments consistently took just 1 day, at least 95% of the time in the past. Now they're adding in extra time to receive, to get hold of the next movie, and to actually get it out of their shipping center.
Now, if they just had showed A and B as received on Tuesday, and C and D as shipping on Wednesday and Friday, with a link to an explanation of why high-volume users get their shipments delayed, and would I care to upgrade my membership? - THEN I would think they're acting like an honest business.
Admittedly, it may still make good business sense for them to conceal what's going on. While I personally would react better to more honesty, it may be that many other customers would protest more if they were being told directly that they couldn't have that many movies without paying more. I dunno. I would like to think that honesty would be the best policy here; it would work with me anyway. But I don't know for sure if the marketplace as a whole really behaves that way.
Ronny Sr. wrote:
wonder whether one who gets marked as a heavy user could ever get off of that list?
I believe this is possible, yes. They were just starting to throttle me last spring, then my job started taking up more of my time and my viewing rate correspondingly went down Recently I've I had more free time again, and I was able to get about 20 movies a month for a couple months, then throttling kicked in again, and I was at 12 or so until just this month I kicked up my membership level. On the 5-at-a-time plan there's no problem so far getting about 5 movies a week, and I don't usually watch more than that so I don't know if that's the maximum. Annoyingly it looks like I am still at the bottom of the list for new movies, but those are only a fraction of my overall viewing, so that's not too big a deal.
Actually, I was curious about Jess Franco and rented JUSTINE after reading the de Sade book. I've also gotten a couple of Dario Argento movies, and I've got a Mario Bava one in the queue.
Does UPS tell you which items they pack on their truck first? If you find out yours goes to the bottom of the pile based on how far it is from their headquarters, are they deceiving you? If your buffet waiter doesn't bring you new plates as quickly as you can fill them up and scarf them down (even if they're doing it intentionally) are they deceiving you?
No business should be forced to lose money and so it's either do this or pay a higher price for your two movies a month so that Gomez can rent his 72 a month.
Uh, I'd disagree with the verbiage you and they use, here. They're not being "forced" to lose money. The UPS and "all-you-can-eat" analogies are a little off, apple to oranges. UPS still provides precisely the quality service they offer, and the waiter can still provide you with plates beyond reason, but not at the expense of ALL his other business...you can still eat fer six hours, get me? But he also gets to help the other tables he has.
NetFlix is specifically targetting their heavy renters, and that isn't what is dictated in their policies and advertising. I don't think they'd be paying all that big a difference for those customers who are at this level of renting, but amend their literature for future customers. I think Linda's dial-up analogy is precisely relative; usedta feel the same way m'self.
I listened carefully to the NetFlix ads when they first came out, and their was some "lawyerspeak" at the end that specified limitations; enough to make me dismiss it as not suitable to my needs.
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