If you use, you lose

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.

The $17.99 monthly fee he pays to rent up to three digital video discs 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 Mr. 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 Mr. 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 often are treated differently, depending on their rental patterns.

“I wouldn’t have a problem with it if they didn’t advertise ‘unlimited rentals,’” Mr. 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.”

Netflix didn’t publicly acknowledge that it differentiates among customers until it revised its “terms of use” in January 2005, four months after a San Francisco subscriber filed a class-action lawsuit accusing the company of deceptively promising 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 reads. The statement specifically warns that heavy renters are more likely to encounter shipping delays and less likely to be sent their top choices immediately.

Few customers have complained about this “fairness algorithm,”said Netflix Chief Executive Officer Reed Hastings.

“We have unbelievably high customer satisfaction ratings,” Mr. Hastings said. “Most of our customers feel like Netflix is an incredible value.”

The service’s rapid growth supports his thesis. The Los Gatos, Calif., company 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, Mich., 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 spawned several copycats, including a mail service from Blockbuster Inc.

Netflix’s most popular rental plan lets subscribers check out as many as 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.

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