response 218 of 342:

Feb 11 00:33 UTC 2006

re #196
Friday, February 10, 2006; Posted: 6:46 p.m. EST (23:46 GMT) 
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