Netflix Penalizing Frequent Renters with Throttling
The popular DVD by mail rental company Netflix is holding its best movies back from its best customers.
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.”
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.”
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.
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.
While I understand their rationale, Netflix’ throttling practice amounts to fraud. Hiding the fact that they punish heavy users in the small print of a service agreement that nobody reads should not insulate them from the fact that they promote the service based on an entirely different business model. Intentionally holding movies an extra day before sending them out is especially egregious; it amounts to theft.
That they lose money on the most aggressive renters is hardly unsurprising. That, presumably, is true of the 400 pound guy who eats ten pounds of shrimp at the buffet or shoppers who buy large quantities of the advertised loss leaders from a grocery store and nothing else. The businesses recoup those occasional losses and much more by taking advantage of those people who either can’t do math or who are willing to pay a flat fee for convenience.