I found this article very interesting. Apparently Netflix is controlling (“throttlingâ€) their most active customers:
SAN FRANCISCO – 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.
Hat tip: Outside the Beltway
The critics are right, of course: Netflix should live up to their “unlimited†advertising or change their advertising. I doubt that they’d lose many customers by placing reasonable limits on their rental plan.
But what really interested me was the actual algorithm. I wonder what they’re actually doing and how well their algorithm actually supports their business model. Do DVD rental outfits pay a royalty per rental or a fee for purchasing the DVD themselves or burning it or whatever they do or all of the above?
If they pay a royalty per rental, then limiting the number of rentals per customer is the only way to make any money in a fixed-fee environment. But, if they pay per unit, it’s counter-productive: “turns†would be key to making money since both rentals per unit and rentals per customer would be significant. Does any reader out there know enough about the intricacies of the inner workings of the DVD rental business to clear this up?
Netflix, from what I have seen, purchases the DVDs. They charge a flat fee to their customers, which includes shipping the DVDs out as soon as the previous ones are returned. Thus, their major cost per rental is postage out and back. By minimizing the per-rental fees by slowing the rental turnaround, they still have the same income, but less expense. And except for highly in-demand titles, they likely don’t have to buy a very large quantity of disks to meet the customer demand even if the customer keeps the disk longer or Netflix slows the turnaround.