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Netflix and So-called Throttling
There has been a lot of talk around the net lately about the business practice that Netflix uses to optimize profits. Basically, they slow down shipments to frequent renters. Since they charge a fixed fee per month and, I'm sure, the licensing is on a per rental basis plus shipping.
But it doesn’t actually work that way. Using a technique called “throttling,” Netflix identifies customers who abuse the all-you-can-rent DVD service by viewing and returning movies too frequently. The nerve! Using an algorithm that notifies the company when a customer is going to start costing it money, it “throttles” them back by delaying the shipment of their next movie—and thereby ensuring its profit. Customers who rent infrequently—otherwise known as profitable customers—are also given preference for DVDs that are out of stock due to high demand. Frequent renters just have to wait. I myself have been waiting for more than a month to see Cinderella Man.Biz Bytes : Netflix Throttling: Anatomy of a Customer Hierarchy
What's interesting to me, though, is that I have not personally experienced this. We have had Netflix for a long, long time. So long, in fact, that we still get 4 movies for the price of 3. In any case, we are usually heavy users. We'll often watch 1-2 disks a night, when we have them (and especially when you count weekends). This means we send movies back very rapidly.
However, in all of the time we've had it, we've known the turn around time. In fact, we can usually rely on it for movie planning. The turn around time we get is almost always 2 days. That is, if we mail a movie back Monday, we'll have the next disk Wednesday. We've never noticed this to not be true. Now, we usually have a queue of a couple hundred movies at any given time.
However, it's occurred to me that we might not be heavy users. A person who sends all of their rented movies back the same day or the day after they are received might be considered heavy? How can someone do this, though? Well, they could easily be ripping the DVDs for watching later.
Not only would this hurt Netflix but I'm sure the studios won't like it much, either. After all, you don't have a fair use right to do that when you rent. (You could, fairly (IMO), rip it while it was rented onto a portable player, go on vacation, come back, return the video and delete the mobile version. But that's a lot of work and not the point of this.)
The interesting part about this is the definition of heavy. If someone is renting 8 DVDs at a time and sending all 8 back the day after or the same day they arrive every time, Netflix could reasonably assume that they might not be fully legal. They could, of course, have a few kids and a grandparent around watching movies, too, though. But, by doing what they are doing, they may also be keeping the studios off their backs for providing a really easy way to copy movies without buying them. I would doubt, this, though.
Now, they did add the ability to split up the queues across multiple people. We've done that. We have one queue for serials (Alias, West Wing, Lost, etc.) and another for movies. This shows Netflix that we have two people watching. Perhaps this is another part of why we usually get stuff right away, no matter what we request.
How do I feel about it? Given all of the buzz about it lately, it's been clear that many companies follow similar business practices. The usual business idea behind subscriptions is that, on average, people aren't going to use more of what they pay for in wholesale costs. This, then, means the company is profitable. This is how buffet restaurants can make money. Most people don't eat more than the cost of the goods they paid for. Will a buffet kick you out if you eat too much? No, but they don't let you take stuff out with you, either, and most won't let you hang out all day.
Does this mean Netflix has to do this to make money? Certainly not (or they couldn't have been around this long) but this can help them enhance their bottom line. As long as they don't vary how they do it to boost profits during certain times for financial reports, I really don't see anything wrong with it.
Should it have been hidden? Was it even really hidden? I don't know.
Will I think about switching away if it starts affecting me? Probably not. I think the only thing that would make me switch away is if, for the same cost, I could download the movies instead of having to mail DVDs back and forth. I'd want the same selection, though. Interestingly, though, this would likely raise the average use of everyone and therefor it would probably cost more. Not only that, but if you figure they might pay 10-15 cents for a gigabyte of bandwidth (no idea how accurate this is for high traffic sites -- I have to pay 50 cents a gig for overage) and I wouldn't be surprised if that was actually more expensive than shipping a DVD two ways. That is, I'm sure they have a great deal with the post office considering their volume.
Am I just rambling now? Absolutely. Enjoy. :)
Posted by Shane on February 28, 2006 10:25 PM | Permalink
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