Netflix Settlement Gets Poor Reviews

Times Staff Writer

Hell hath no fury like a movie junkie scorned.

That’s what Netflix discovered when its most devoted “heavy users” found that the movie rental service had an undisclosed policy during shortages of shipping films faster to those customers who rent the least.

In a class-action lawsuit filed against the nation’s largest online DVD rental company in September 2004, the company was accused of false advertising for its claims of “unlimited rentals” and “one-day deliveries.”

When it agreed to a settlement due to be finalized this month, Netflix denied any wrongdoing but conceded that it had a policy that sometimes allocated movies more quickly to those who rented less frequently.


That policy -- called “throttling” by some critics -- has unleashed a backlash as a vocal group of disgruntled users have attacked the terms of the settlement agreement, which would give Netflix customers the choice of one month of free rentals or an upgrade in their service plan. Critics say that instead of punishing Netflix, the agreement helps the company promote its service.

Just last month, the Federal Trade Commission joined several consumer groups in filing amicus briefs in the suit, decrying the settlement as potentially costly to customers.

Steve Swasey, a spokesman for the Los Gatos, Calif.-based company, denied critics’ claims that the practice is meant to save Netflix shipping costs by coddling customers who don’t fully make use of their subscriptions. The most popular plan is $17.99 a month to rent three movies at a time, with no late fees.

Swasey said, “100%-guaranteed customer exhilaration is very difficult for any high-volume consumer company.


“Netflix made the decision that if we had a shortage of DVDs that we would give them to lighter users. We are giving it to folks who have less alternatives for viewing.”

Netflix began acknowledging the policy in an online posting of its terms of use after the suit was filed. But even before the company’s explication of its shipping system, film nerds everywhere had scrambled to figure out why they weren’t getting prompt delivery of their movies.

For Mike Muegel, “Sweet Home Alabama” was the movie that made him start to feel the hurt.

Muegel, a freelance software engineer in Dallas, loves watching movies through Netflix. Such was his passion that for a while he watched about 20 movies a month. But in early 2003, he requested the Reese Witherspoon romantic comedy and was told he would have a “very long wait.”


Sensing trouble, Muegel set up test accounts in the names of his mom and his wife and plugged in the same movie. Suddenly, recalled Muegel, “Bingo ... ‘Sweet Home Alabama’ was mine.”

Muegel then spent 50 hours building a software program that analyzed the activities of test accounts. He published his findings on his website Yet even after discovering what he calls the “fishy” company policy, Muegel says he still loves the rental service.

“I don’t want them to go out of business,” he said. He just wants to be treated fairly, Muegel said.

That same desire led Frank Chavez to become the lead plaintiff in the class-action suit, he said. Chavez, a San Francisco accountant, believed that he wasn’t getting his movies -- usually about 10 a month -- fast enough. “Netflix wasn’t providing what it promised,” said Adam Gutride, Chavez’s lawyer. “People in general want there to be truth in advertising. They want to know that they are going to get what they are promised.”


Netflix prides itself on outstanding customer service, and 87% of new members join after a personal recommendation.

But the FTC says the proposed settlement could cost customers money if they opt to upgrade their service plans. Carol J. Jennings, an attorney in the enforcement division for the Bureau of Consumer Protection for the FTC, said because such upgrades would be free for only one month and then charged at full price, Netflix users could unwittingly pay more.

“They became automatically enrolled unless they did something affirmative to end it,” Jennings said. “We concluded it could end up causing more harm than benefit.”

Netflix maintains that only a “vocal minority” has been affected by the delivery policy, and it pointed to its performance as proof. For 2006, the company predicts profit of $29 million on revenue of $960 million. More than 4.2 million customers had subscribed by the end of last year, Swasey said. Netflix’s churn, or number of customers who cancel each month, is at the lowest level ever -- about 4%.


Joe McClellan, a graduate student studying Buddhism at Rice University, says there’s no way he’s canceling even though as a heavy Netflix user he has experienced long delays.

Rice says he uses Netflix to rent the “crazy experimental super-violent” Japanese movies he loves -- usually 12 to 15 of them a month. Sometimes he waits for weeks for a particular title. But he doesn’t mind, he says.

“I’m not picky because I still have 500 movies in my queue,” McClellan said.