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Netflix

Netflix, Inc. () is an American provider of on-demand Internet streaming media in the United States, Canada,[1] Latin America, the Caribbean, United Kingdom and Ireland and flat rate DVD-by-mail in the United States. The company was established in 1997 and is headquartered in Los Gatos, California. It started its subscription-based digital distribution service in 1999[2] and by 2009 it was offering a collection of 100,000 titles on DVD and had surpassed 10 million subscribers. On February 25, 2007, Netflix announced the billionth DVD delivery.[3] In April 2011, Netflix announced 23.6 million subscribers in the United States and over 26 million worldwide.[4] By 2011, the total digital revenue for Netflix reached $1.5 billion.[5]

Contents


History

Netflix was founded in 1997 in Scotts Valley, California by Marc Randolph[6][7] and Reed Hastings, who previously had worked together at Pure Software, along with Mitch Lowe. Hastings was inspired to start the company after being charged late fees for returning a rented copy of Apollo 13 after the due date.[8] The Netflix website launched in April 1998 with an online version of a more traditional pay-per-rental model (US $4 per rental plus US $2 in postage; late fees applied).[9] Netflix introduced the monthly subscription concept in September 1999,[10] then dropped the single-rental model in early 2000. Since that time the company has built its reputation on the business model of flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or per title rental fees.

Netflix developed and maintains an extensive personalized video-recommendation system based on ratings and reviews by its customers. On October 1, 2006, Netflix offered a $1,000,000 prize to the first developer of a video-recommendation algorithm that could beat its existing algorithm, Cinematch, at predicting customer ratings by more than 10%.[11]

Some 35,000 different film titles are contained in the 1 million DVDs it sends out every day.[12]

Netflix has played a prominent role in independent film distribution. Through a division called Red Envelope Entertainment, Netflix licensed and distributed independent films such as Born into Brothels and Sherrybaby. As of late 2006, Red Envelope Entertainment also expanded into producing original content with filmmakers such as John Waters.[13] Netflix announced plans to close Red Envelope Entertainment in 2008, in part to avoid competition with its studio partners.[14][15]

Netflix initiated an initial public offering (IPO) on May 29, 2002, selling 5,500,000 shares of common stock at the price of US $15.00 per share. On June 14, 2002, the company sold an additional 825,000 shares of common stock at the same price. After incurring substantial losses during its first few years, Netflix posted its first profit during fiscal year 2003, earning US $6.5 million profit on revenues of US $272 million. The company is well known for its worker-oriented culture, including unlimited vacation time for salaried workers and allowing those employees to take any amount of their paychecks in stock options.[16]

Netflix has been one of the most successful dot-com ventures. A The New York Times article from September 2002, said that, at the time, Netflix mailed about 190,000 discs per day to its 670,000 monthly subscribers.[17] The company's published subscriber count increased from one million in the fourth quarter of 2002 to around 5.6 million at the end of the third quarter of 2006, to 14 million in March 2010. Netflix's growth has been fueled by the fast spread of DVD players in households; as of 2004, nearly two-thirds of U.S. homes had a DVD player. Netflix capitalized on the success of the DVD and its rapid expansion into U.S. homes, integrating the potential of the Internet and e-commerce to provide services and catalogs that brick and mortar retailers could not compete with. Netflix also operates an online affiliate program which has helped it to build online sales for DVD rentals.

On September 18, 2011, Netflix announced its intentions to rebrand and structure its DVD home media rental service as an independent subsidiary company called Qwikster, totally separating DVD rentals and streaming.[18][19][20] Andy Rendich, a 12-year veteran of Netflix, would have been the CEO of Qwikster. The new service would carry video games whereas Netflix did not.[21] Then, in October 2011, Netflix announced that it would retain its DVD service under the name Netflix and would not, in fact, create Qwikster for that purpose.[22]

On October 24, 2011, Netflix announced it lost 800,000 US subscribers in the third quarter of 2011 and more subscriber losses were expected in the fourth quarter of 2011. Despite the losses, earnings for Netflix jumped 63 percent for the third quarter of 2011.[23][24]

On January 26, 2012, Netflix said it added 610,000 subscribers in the US by the end of the fourth quarter of 2011. The company announced it had 24.4 million US subscribers for this time period.[25]

In April 2012, Netflix filed with the FEC to form a political action committee (PAC) called FLIXPAC.[26] Politico referred to the Los Gatos, California-based PAC as "another political tool with which to aggressively press a pro-intellectual property, anti-video piracy agenda."[26] The hacktivist group Anonymous called for a boycott of Netflix following the news.[27] Netflix spokesperson Joris Evers indicated that the PAC was not set up to support SOPA and PIPA, tweeting that the intent was to "engage on issues like net neutrality, bandwidth caps, UBB and VPPA."[28][29]

International

In summer 2011, Netflix announced they will expand into the European market, starting in Spain by 2012.[30] In September 2011, Netflix completed the launch of streaming-content services in Latin America by launching in the Caribbean, Mexico, Central and South America. In October 2011, it was announced that Netflix would be launching in the UK and Ireland in early 2012.[31] Netflix was officially launched as a streaming-only service in the United Kingdom and Ireland on January 9, 2012, priced at 5.99 a month in the UK and 6.99 a month in Ireland. [32]

Services

Netflix is a subscription-based movie and television show rental service that offers media to subscribers via Internet streaming and via US mail.

Internet video streaming

Netflix offers Internet video streaming ("Watch Instantly") of selected titles to computers running Windows or Mac OS X and to compatible devices. Internet video streaming once came at no additional charge with Netflix's regular subscription service; however, only a portion of Netflix's content is available via the "Watch Instantly" option.[33] In its simplest form, video is streamed to the user using standard PC hardware, and requires Microsoft's Silverlight software to be installed. Viewing is initiated by pressing a "Play Instantly" button, and played back on the PC monitor. Films can be paused or restarted at will. According to a 2011 report by Sandvine, Netflix is the biggest source of North American web traffic, accounting for 24.71% of aggregated traffic.[34]

Initially, the feature offered subscribers one hour of media for approximately every dollar they spent on their subscription. (A $16.99 plan, for example, entitled the subscriber to 17 hours of streaming media.) In January 2008, however, Netflix lifted this restriction. Virtually all subscribers now are entitled to unlimited hours of streaming media at no additional cost. Subscribers with a plan of $4.99/two DVDs per month, one DVD at a time, are allowed two hours which can only be watched on a computer. The new terms of the service are a response to the introduction of Apple's new video rental services.[35]

According to Netflix Tech Support, Netflix's content library is encoded into three bandwidth tiers, in a compression format based on the VC-1 video and Windows Media audio codecs. Of these, the lowest tier requires a continuous downstream bandwidth (to the client) of 1.5 Mbit/s, and offers stereo audio and video quality comparable to DVD. The middle tier requires 3 Mbit/s, and offers "better than DVD quality". The highest tier requires 5 Mbit/s, and offers 720p HD with surround sound audio. , several devices also have the ability to stream Netflix content at 1080p resolution, including the PlayStation 3 console and Roku 2 series set-top boxes which require 8 Mbit/s.[36][37]

Netflix does not support playback on Linux PCs although the Linux-based Roku devices are supported. It is possible to connect the Roku device, game console, or Blu-ray Disc player to a Linux PC (or directly to the computer monitor) with an adapter. It is also possible to run Windows and Netflix in a virtual machine such as Virtualbox or QEMU. In a TechRepublic interview in August 2010, Netflix's VP of Corporate Communications stated that available Silverlight plugins for Linux, such as Moonlight, do not support the PlayReady DRM system that Netflix requires for playback.[38] Netflix does support the Android operating system, which uses the Linux kernel, although is otherwise separate from Linux.

The selection of available titles is based upon the user's IP address. For most users, this corresponds to the user's physical location. However, it means that, for example, a user in Canada who is accessing the Internet through a U.S.-based router connection will see the selection available to U.S. users.

According to a survey by Nielsen in July, 2011, 42% of all Netflix users make use of a stand-alone computer to connect to Netflix, 25% do so by using the Nintendo Wii, 14% by connecting their computers to a TV, 13% make use of a PlayStation 3 and 12% use an Xbox 360.[39]

History

On October 1, 2008, Netflix announced a partnership with Starz Entertainment to bring 2,500+ new movies and television shows to Watch Instantly in what is being called Starz Play.[40]

In August 2010, Netflix announced it had reached a five-year deal worth nearly $1 billion to stream movies from Paramount, Lionsgate and MGM. The deal increases the amount Netflix spends on streaming movies annually. It spent $117 million in the first six months of 2010 on streaming, up from $31 million in 2009. This deal adds roughly $200 million per year.[41]

As of 2011, Netflix's "Watch Instantly" service holds first-run rights to films from Paramount Pictures, MGM, Lions Gate Entertainment (through an output deal with Epix), along with back-catalog titles to films from Time Warner, Universal Pictures, Sony Pictures, Paramount Pictures, MGM, Lions Gate Entertainment, 20th Century Fox, Disney, and other distributors. Netflix also provides current and back-catalog TV programs distributed by NBC Universal, 20th Century Fox, Sony Pictures, Disney-ABC Domestic Television, with select shows from Warner Bros. as well. Netflix also previously held the rights to select titles from the Criterion Collection, but those were pulled from the streaming library when Criterion titles were added to Hulu's Hulu Plus streaming library.[42] Netflix has "pay TV window" deals with Relativity Media, FilmDistrict, and Open Road Films.[43]

On July 12, 2011 Netflix announced that it would separate the current subscription plans into two separate plans: one covering the instant streaming and the other DVD rental.[44] The cost for streaming would be $7.99 while DVD rental would start at the same price. The announcement led to a flurry of negative reception amongst Netflix's Facebook followers, posting negative comments on the company's wall.[45] Twitter comments also spiked a "Dear Netflix" trend with generally negative comments as well.[45] The company defended its decision during its initial announcement of the change. "Given the long life we think DVDs by mail will have, treating DVDs as a $2 add-on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs," Netflix wrote on its blog. "Creating an unlimited-DVDs-by-mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs-by-mail offering."[44]

In a reversal, Netflix announced in October 2011 that its streaming and DVD-rental plans would remain together under the Netflix brand.[46]

On September 1, 2011, Starz announced it would remove their movies from Netflix streaming on February 28, 2012. Since the agreement was strictly for streaming movie titles, DVD rentals through Netflix were not affected.[47] However, around that same time, it was announced Netflix would, in 2013, assume the pay-TV rights to films from DreamWorks Animation (those output rights are currently held by HBO).

Disc rental

Example from a DVD disc of Coach Carter. The discs are returned to Netflix in the same envelopes in which they are sent to customers.
Example from a DVD disc of Coach Carter. The discs are returned to Netflix in the same envelopes in which they are sent to customers.
In the United States, the company provides a monthly flat-fee service for the rental of DVD and Blu-ray Discs. A subscriber creates an ordered list, called a rental queue, of movies to rent. The movies are delivered individually via the United States Postal Service from an array of regional warehouses. As of March 28, 2011, Netflix had 58 shipping locations throughout the U.S.[48] The subscriber can keep the rented movie as long as desired, but there is a limit on the number of movies (determined by subscription level) that each subscriber can have on loan simultaneously. To rent a new movie, the subscriber must mail the previous one back to Netflix in a prepaid mailing envelope. Upon receipt of the disc, Netflix ships the next available disc in the subscriber's rental queue.

Netflix offers several pricing tiers for DVD rental of one to three DVDs at a time. Subscribers with accounts in good standing can upgrade to plans offering up to eight DVDs at a time. Gift subscriptions are also available. Since November 21, 2008, Netflix has offered their subscribers access to Blu-ray Discs for an additional fee.

In addition to its movie rental service, Netflix formerly sold used movies. The purchase was delivered via the same system and billed using the same payment methods as rentals. This service was discontinued at the end of November 2008.[49]

Starting January 6, 2010, Netflix reached an agreement with Warner Brothers Pictures to delay renting new releases for 28 days from their retail release in an attempt to help studios sell more physical media at retail outlets. A similar deal with Universal Studios and Twentieth Century Fox was reached on April 9, 2010.[50][51][52]

In 2011, Netflix split its service pricing so that customers must decide whether they want to pay for online streams, access to DVDs by mail, or both.

Qwikster

On September 18, 2011, Netflix CEO and Co-Founder Reed Hastings said in a Netflix blog post that the DVD section of Netflix would be split off and renamed Qwikster, and stated that the only major change would be separate websites for the services.[53] The new service was to carry video games for an additional charge, whereas Netflix did not.[21] Netflix subscribers who wanted DVDs by mail would have had to use a separate website to access Qwikster.

On October 10, 2011, following negative reaction from customers, Netflix CEO Reed Hastings announced the cancellation of the planned Qwikster service and said that the DVD-by-mail service would remain a part of Netflix.[54]

Profiles

In June 2008, Netflix announced plans to eliminate its online subscriber profile feature that fall.[55] Profiles allow one subscriber account to contain multiple users (e.g. husband and wife, or two roommates) with separate DVD queues, ratings, recommendations, friend lists, reviews, and intra-site communications for each. Netflix contended that elimination of profiles would improve customer experience.[56] However, likely as a result of negative reviews and reaction by Netflix users.[57][58][59] Netflix reversed its decision to remove profiles 11 days after its announcement.[60] In announcing the reinstatement of profiles, Netflix defended its original decision, "Because of an ongoing desire to make our website easier to use, we believed taking a feature away that is only used by a very small minority would help us improve the site for everyone." Then explained its reversal, "Listening to our members, we realized that users of this feature often describe it as an essential part of their Netflix experience. Simplicity is only one virtue and it can certainly be outweighed by utility."[61]

Programming

Original programming

In March 2011, Netflix announced plans to begin acquiring original content for its popular Watch Instantly subscription service, beginning with the hour-long political drama House of Cards, which will debut on the streaming service in late 2012. The series will be helmed by David Fincher, with Academy Award winning actor Kevin Spacey headlining the cast. In late 2011, Netflix picked up two 8-episode seasons of Lilyhammer and a fourth season of Arrested Development. Deadline.com reported Netflix is nearing a 13-episode series order, for both Orange Is The New Black and Hemlock Grove.[62][63][64][65][66] Netflix announced that Hemlock Grove, will be coming in early 2013.[67]

Movie library

Netflix currently has exclusive pay-TV deals with major and mini-major movie studios. Films featured on Watch Instantly include recent releases from Relativity Media (and its subsidiary Rogue),[68] as well as titles from DreamWorks Animation (DreamWorks Animation will stream their films beginning in 2013 when their current pay-tv deal ends with HBO),[69] Open Road Films,[70] FilmDistrict,[71] and The Weinstein Company (The Films from TWC are foreign language, documentary, and certain other movies from The Weinstein Company).[72]

Epix and Netflix have signed a five year streaming deal; the first two years of the deal Epix content are exclusive to Netflix (Epix films will come to Netflix 90 days after they premiere on Epix. These include films from Paramount Pictures, MGM and Lionsgate).[73][74] On September 1, 2011, Starz announced it had broken off talks with Netflix to renew its streaming deal. This meant any Starz movies and shows would be removed from Netflix streaming on February 28, 2012. Movie titles that are available on DVD are not affected and can be acquired from Netflix by this method.[75]

Device support

Hardware supported

List of Netflix-ready devices:[76]

Software support

Supported Web Browsers by Platform:

Other software options:

Video game consoles

At E3 2008, Microsoft announced a deal to distribute Netflix videos over Xbox Live.[94] This service was launched on November 19, 2008[95] to Xbox 360 owners with a Netflix Unlimited subscription and an Xbox Live Gold subscription[96] allowing them to stream movies and TV shows directly from their Netflix Instant Queue from an application on the Dashboard.[97]

In October 2009, Sony Computer Entertainment and Netflix announced that the service would also be available on the PlayStation 3 from November 2009. The set-up was similar to that on the Xbox 360, allowing Netflix subscribers to stream movies and TV shows from their Instant Queue to watch on the console. Unlike on the Xbox 360, the Netflix application was originally available on a Blu-ray Disc (available free to subscribers). On October 19, 2010, a downloadable application was made available through the PlayStation Network.[98] Users do not have to pay for use of the service other than the monthly Netflix subscription.[99]

On January 13, 2010, Nintendo and Netflix announced that the service would become available on the Wii. This service was launched in Spring 2010. The service allows the console to stream content in a user's Instant Queue. Initially, a streaming disc specifically for the Wii was required along with an Internet connection to the console. Besides a Netflix account with unlimited streaming, there are no additional costs for the service. In contrast to the other two consoles, the Wii is not capable of HD resolution.[100] The Wii streaming disc was released for testing to customers starting Thursday March 25, 2010, and was released to all registered Netflix members on April 12, 2010.[101] On October 18, 2010, the streaming disc on the Wii was no longer necessary as Netflix became a free downloadable application on the Wii Shop Channel.

On June 14, 2011, Nintendo's president Satoru Iwata confirmed that Wii's successor console, the Wii U, would also support Netflix.[102]

Netflix service launched for the Nintendo 3DS on July 14, 2011.[103]

Set-top boxes

In May 2008, Roku released the first set-top box to stream Netflix's Instant Watch movies directly to televisions. The device provides unlimited access to the Netflix streaming media catalog for all subscribers, starting at $7.99/month.[83]

Blu-ray Disc players

In October 2008 Netflix agreed to instantly stream movies to two of Samsung's Blu-ray Disc players.[104] They soon after announced a partnership to instantly stream movies to TiVo DVRs.[105]

Televisions

In January 2009 Netflix announced a similar partnership with Vizio and LG to instantly stream movies directly to their high definition televisions.[106]

In July 2009, Sony announced a partnership with Netflix that will enable Sony BRAVIA Internet Platforms to access instant queues for Netflix users. Any Netflix member with an Internet-enabled BRAVIA HDTV will be able to link up their account to their TV and stream videos from their queue.[107]

The 2010 line of Panasonic HDTVs with Viera Cast functionality gained the ability to stream Netflix content directly to the television.[108]

With 2010's release of the Google TV, a built in application was Netflix streaming.

Smart TVs, such as Samsung Smart TVs or LG Smart TVs, give access to Netflix through a downloadable Netflix app on the TV.

Handheld devices

  • In September 2009, Netflix CEO Reed Hastings expressed his desire to expand his company's video-streaming service to Apple's iPhone and iPod Touch mobile devices, once the Xbox 360 exclusivity deal expires.[109] In April 2010, the Netflix app debuted on the Apple's iTunes app store for use with the iPad.[110] The iPhone/ iPod Touch version was released on August 26, 2010 via the App Store.[93]
  • Netflix is also available on Windows Phone 7 devices.
  • On March 15, 2011, it was announced that Netflix was available for Android phones, but not all Android phones can use the application due to DRM issues.[111]
  • Nintendo announced that the Nintendo 3DS portable video game console would support Netflix video streaming in summer 2011.[112]
  • Netflix became available on July 14, 2011 on the 3DS, although no 3D content is available at this time.
  • In November 2011, Barnes and Noble began shipping Nook Tablets with the Netflix app preinstalled, and offering Netflix as an optional app for Nook Color devices.[113]
  • On January 9, 2012, Sony announced at CES 2012 that the PS Vita would have a Netflix app at launch on Feb. 22, 2012.[114][115]

Sales and marketing

The domain netflix.com attracted at least 194 million visitors annually by 2008, according to a Compete.com survey. This is about five times the number of visitors to blockbuster.com.[116]

On March 30, 2009 Netflix announced an increase in the monthly fee it would charge to customers who rent Blu-ray Discs, from $1 a month to $2 a month.

During the first quarter of 2011, sales and rentals of packaged DVDs and Blu-ray Discs plunged about 20 percent, and the sell-through of packaged discs fell 19.99 percent to $2.07 billion, with more money spent on subscription rentals than in-store rentals.[117]

Expansion

Netflix had preliminary plans to expand to the UK in 2004, but the expansion was cancelled as Netflix concentrated its services on the U.S. market.[118] Zip.ca currently markets itself as a Canadian equivalent to Netflix. On July 19, 2010 Netflix announced that in the fall of 2010 it would launch its instant streaming service in Canada, making Canada the first international market expansion for Netflix.[119] On September 22, 2010, Netflix became available in Canada for $7.99/month, but with a severely limited selection.

Netflix announced on July 5, 2011 that by the end of 2011 it would expand its services into 43 countries and territories in Latin America and the Caribbean, offering items in English, Spanish and Portuguese.[120] On September 5, Brazil became the first country in Latin America to introduce the service, followed by Argentina on September 7, Chile on September 8, Colombia on September 9 and Mexico on September 12, with the rest of the continent having the service in the next few weeks.

Netflix launched in the UK and Ireland on January 9, 2012.[121]

Competitors

Netflix's success has inspired a number of other DVD rental companies both in the United States and abroad, but none of the purely online companies appear to approach Netflix in terms of market share or revenues. Wal-Mart began an online rental service in October 2002, but left the market in May 2005 and now has a cross-promotional arrangement with Netflix. Netflix has also cited Amazon.com as a potential competitor,[122] which until 2008 offered online video rentals in the UK and Germany (now sold to LoveFilm), but has remained coy about any similar intentions for the North American market. Amazon bought Lovefilm in 2011.

Blockbuster Video, the world's largest in-store video rental chain, entered the U.S. online market in August 2004 with a US$19.95 monthly subscription service. This sparked a price war; Netflix had raised its popular three-disc plan from US$19.95 to US$21.99 just prior to Blockbuster's launch, but by October Netflix reduced this fee to US$17.99. Blockbuster responded with rates as low as US$14.99 for a time, but by August 2005, both companies settled at the (identical) current rates. On July 22, 2007, Netflix announced that it would drop the prices of its two most popular plans by US$1.00 in an effort to better compete with Blockbuster's online-only offerings.[123] Blockbuster's subscriber base after one year was roughly a third of Netflix's size and growing, including promotions such as the option to swap DVDs rented online at neighborhood stores and the simultaneous elimination of late fees altogether. Netflix has also been credited with playing a large part in the bankruptcy and shrinkage of several movie rental chains including Blockbuster and Movie Gallery.

Many in-store video rental chains now have unlimited rental plans similar to those of Netflix. Hollywood Video started its Movie Value Pass (MVP) service in late 2004, which enables customers to rent up to three movies at a time (due in five days) for US$15 a month. New releases, however, are typically excluded from the service for two to six weeks in the MVP "Basic" plan. Blockbuster started Movie Pass in 2004, which lets customers keep two to three DVDs at a time for US$25 30 a month, without restrictions or due dates. Hollywood's MVP "Premium" plan offers the same benefits for a comparable price. Both services still require the customer to travel to the store to rent and return the movies, and their respective selections are not as diverse as that offered by Netflix.

Redbox is another competitor that uses a kiosk approach: rather than mailing DVDs, customers pick up and return DVDs at self-service kiosks located in metropolitan areas. Coinstar, the owners of Redbox were rumored to be launching an online streaming service some time in 2011, but no news has come since early 2011. The cost of this service has been speculated at $3.95 per month.[124]

Netflix and Blockbuster largely avoid offering pornography, but several adult-video subscription services were inspired by Netflix, such as SugarDVD and WantedList.[125][126]

Time Warner

In a 2010 New York Times interview, Time Warner CEO Jeffrey Bewkes downplayed Netflix as a threat to more traditional media companies. "It s a little bit like, is the Albanian army going to take over the world?" Bewkes told the newspaper. "I don t think so." At the same time, he recognized that the company's DVD service may have contributed to a decline in DVD sales, and regarding the industry's willingness to make special deals with Netflix in the future, he added "This has been an era of experimentation, and I think it s coming to a close."[127] Bewkes later refined his position, stating during a 2011 conference call that "Things like Netflix are welcome additions to the infrastructure. They can monetize value for companies like Warner that maybe there wasn t in terms of efficiency for older product, wasn t as available before[...]Our view of Netflix has been very consistent. I ve tried at times to be humorous about it, sometimes to make a point."[128]

Finance and revenue

2010

In 2010, Netflix's stock price increased 219% to $175.70 and it added 8 million subscribers, bringing its total to 20 million. Revenue jumped 29% to $2.16 billion and net income was up 39% to $161 million.[129]

2011

In April 2011, Netflix is expected to earn $1.07 a share in the first quarter of 2011 on revenue of $705.7 million, a huge increase compared to the year-earlier profit of 59 cents on revenue of $493.7 million, according to a survey of 25 analysts polled by FactSet Research.[130]

At their peak, in July 2011, Netflix shares were trading for $299. Following the customer dissatisfaction and resulting loss of subscribers after the announcements by CEO Reed Hastings that streaming and DVD rental would be charged separately, leading to a higher price for customers who wanted both (on September 1), and that the DVD rental would be split off as the subsidiary Qwikster (on September 18), the share price fell steeply, to around $130.[131][132] However, on October 10, 2011 the CEO announced that the move to split the company would be scrapped. The reason being that "two websites would make things more difficult", he stated on the Netflix blog. On November 22, Netflix s share took a tumble, as share prices fell by as much as 7%.[133] By December 2011, as a consequence of its decision to raise prices, Neflix had lost over 75% of its total value from the summer.[134][135] Describing their business model as "broken," Wedbush downgraded Netflix's stock rating to "underperform," the equivalent of sell.[136]

Legal issues and controversies

Recommendation Algorithm and the "Netflix Prize"

In 2006, Netflix held the first Netflix Prize competition to find a better program to predict user preferences and beat its existing Netflix movie recommendation system, known as Cinematch, by at least 10%. CEO Reed Hastings didn t necessarily expect a lot of quick progress towards the prize.[137] "We thought we built the best darn thing ever," Hastings said.[137] But by June, 2007 Hastings said the competition is "three-quarters of the way there in three-quarters of a year."[138]Three teams -- an AT&T Research Team called BellKor, commendo's team BigChaos, and Pragmatic Theory -- combined to win the 2009 grand prize competition for $1 million. The winning team, called BellKor's Pragmatic Chaos, used machine learning techniques to find that, for example, the rating system people use for older movies is very different from that used for a movie they just saw. The mood of the day made a difference also; for example, Friday ratings were different from Monday morning ratings.[139]

In 2010, Netflix canceled a running contest to improve the company's recommendation algorithm due to privacy concerns: under the terms of the competition, contestants were given access to customer rental data, which the company had purportedly anonymized. However, it was discovered that even this anonymized dataset could, in fact, identify a user personally. Netflix was sued by KamberLaw L.L.C. and ended the contest after reaching a deal with the FTC.[140]

Throttling

In September 2004, a consumer class action lawsuit, Frank Chavez v. Netflix, Inc.,[141] was brought against Netflix in San Francisco Superior Court. The suit alleged false advertising in relation to claims of "unlimited rentals" with "one-day delivery." In January 2005, Netflix changed its Terms of Use to acknowledge what has commonly become known as "throttling". (Mike Kaltschnee, owner of the Hacking Netflix blog, says Netflix calls this practice "smoothing" internally.)[142]

In October 2005, Netflix proposed a settlement for those who had enrolled as a paid Netflix member prior to January 15, 2005. These earlier members would be able to renew their subscriptions with a one-month free membership, and those early members with current subscriptions would receive a one-month free upgrade to the next-highest membership level. Netflix's settlement denied allegations of any wrongdoing, and the case did not reach a legal judgment. Netflix estimated the settlement cost at approximately US$4 million, which included up to US$2.53 million to cover plaintiff lawyer fees. A controversial aspect of the settlement offer was that the customer's account would continue at the renewed or upgraded membership level after the free month provided by the settlement, with customers being charged accordingly unless they opted out after the month-long free period ended. After Trial Lawyers for Public Justice filed a challenge to the proposed settlement[143] and the Federal Trade Commission filed an amicus brief urging the rejection or modification of the settlement, Netflix offered to alter the settlement terms requiring customers to actively approve any continuation after the free month. The final settlement hearing took place on March 22, 2006.[144] Implementation of the settlement was delayed pending appeal the California Appellate Courts.[145] The settlement was affirmed on April 21, 2008, with the court saying, "the trial court did not abuse its discretion in approving the amended class action settlement agreement, approving the notice given to class members, or determining the amount of fees."[146] Interestingly, the court approved email notice and an online claims submission process.[147] The court said:

The summary notice and long-form notice together provided all of the detail required by statute or court rule, in a highly accessible form. The fact that not all of the information was contained in a single e-mail or mailing is immaterial Using a summary notice that directed the class member wanting more information to a Web site containing a more detailed notice, and provided hyperlinks to that Web site, was a perfectly acceptable manner of giving notice in this case The class members conducted business with defendant over the Internet, and can be assumed to know how to navigate between the summary notice and the Web site. Using the capability of the Internet in that fashion was a sensible and efficient way of providing notice, especially compared to the alternative Vogel apparently preferred mailing out a lengthy legalistic document that few class members would have been able to plow through.

The settlement was criticized because it paid out $2.5 million to attorneys for fees and costs, while offering only coupons to the class members.[148][149]

The Terms of Use have since been amended with terms that indicate such a suit would not be possible in the future:[150]

These Terms of Use shall be governed by and construed in accordance with the laws of the state of Delaware, without regard to conflicts of laws provisions. You and Netflix agree that the United States District Court for the Northern District of California and/or the California Superior Court for the County of Santa Clara shall have exclusive jurisdiction over any dispute between you and Netflix relating in any way to the Netflix service or Web site or these Terms of Use. You and Netflix expressly and irrevocably consent to personal jurisdiction and venue in these courts. The parties agree that in any such dispute or subsequent legal action, they will only assert claims in an individual (non-class, non-representative) basis, and that they will not seek or agree to serve as a named representative in a class action or seek relief on behalf of those other than themselves.

Releasing This Week

The Netflix website at one time featured a list of titles "Releasing This Week" (RTW) that enabled customers to easily view new DVDs the company planned for rental release each week.[151] On December 21, 2007, the company removed the link to the page without notice and replaced it with a slider system showing only four previously released movies at a time. The new page, called "Popular New Releases", does not list newly released DVDs for rental.[152] The listing of new releases is still active,[151] though no menu option links to the page.

On January 1, 2008, a Netflix employee unofficially stated on the Netflix Community Blog that customers used the RTW page to add newly released movies to the top of their queues, then complained about delays in receiving them after demand outstripped the supply of DVDs on hand. By removing the page, Netflix sought to quell complaints that these movies were not readily available. Critics, however, have suggested this was just another Netflix attempt at throttling.[153]

Dynamic queue, subscription & delivery methods

On April 4, 2006, Netflix filed a patent infringement lawsuit in which it demanded a jury trial in the United States District Court for the Northern District of California, alleging that Blockbuster's online DVD rental subscription program violated two patents held by Netflix. The first cause of action alleged Blockbuster's infringement of U.S. Patent No. 7,024,381 (issued April 4, 2006; only hours before the lawsuit was filed) by copying the "dynamic queue" of DVDs available for each customer, Netflix's method of using the ranked preferences in the queue to send DVDs to subscribers, and Netflix's method permitting the queue to be updated and reordered.[154] The second cause of action alleged infringement of Patent No. 6,584,450 (issued June 24, 2003), which covers in less detail the subscription rental service as well as Netflix's methods of communication and delivery.[155] The dispute was ended a year later, on June 25, 2007, with both companies declining to disclose the terms of their legal settlement, except for a statement by Blockbuster that it would not have a major impact on its future financial performance.[156][157] Blockbuster also said that the company planned to close 282 stores that year to shift focus to its online service. The company already had closed 290 stores in 2006.

In fall 2006, Blockbuster signed a deal with The Weinstein Company, that gave it the exclusive rental rights to the studio's films beginning January 1, 2007.[158] This agreement forced Netflix to obtain copies from mass merchants or retailers, instead of directly from the studio.[159] Netflix has speculated that the effect of the Blockbuster-Weinstein agreement could result in higher rental costs and/or fewer copies of the studio's movies, which would limit the number of each movie's DVDs that would be available to subscribers at any one time.[160] , Netflix continues to make available Weinstein movies, including Unknown, School For Scoundrels and Harsh Times, among others. The first-sale doctrine allows Netflix and other video rental businesses to offer movies released by the Weinstein Company, but the long-term effects of the Blockbuster-Weinstein deal remain uncertain.

Removal of Friends feature

Since 2004, Netflix subscribers could utilize a feature that allowed them to interact with friends who were also members. This feature was meant to tap into the growing popularity of social networking. With this feature, users could see how their friends rated a movie on that movie's page; view what DVDs their friends were renting; and allow them to leave their friends notes with film recommendations.[161][162]

In March 2010, as part of a redesign of its movie-details pages, the Friends feature began to be phased out. Users could no longer see their friends' ratings on movie pages, and what remained of the friends section was moved to a small link at the bottom of each page. The initial announcement about the redesign on Netflix's official blog made no reference to any changes to the Friends feature.[163] Hundreds of angry users posted negative comments, and the feedback prompted Netflix's Vice President of Product Management, Todd Yellin, to post a follow-up statement. While apologizing for poor communication about the changes, Yellin stated that the Friends feature would continue to be phased out, citing figures that only 2% of members used the feature and the company's limited resources to maintain the service.[161][162][164] Netflix users also began using the movie-reviews section of the website to post comments protesting the changes.[165]

Linux support

Netflix has consistently shown reluctance to support customers using Linux and other open-source operating systems.[166] The company continues to support only Microsoft Windows and OS X,and Android (operating system) relying on Microsoft Silverlight technology. Steve Swasey, Netflix Vice-President of Corporate Communications, told TechRepublic that despite the willingness of developers to implement Digital Rights Management measures in the media framework application Moonlight (which is an open-source implementation of Silverlight), Netflix cannot be "everything for everybody all the time". Netflix does support Android, which is a mobile variant of Linux optimized for cell phones.

, Google released plans for a Chrome/Chrome OS plugin that would allow users with the Chrome OS/browser to use said plugin to view and stream material on Netflix, including Linux users.[167]

On August 9, 2011, Netflix released a Google Chrome web store item for Chrome OS, PC and MAC, but it does not enable Netflix streaming on Linux machines. On Linux Machines running Chrome Browser, the extension sends users to Netflix.com [168] Common issues customers have experienced include the inability to use it while the device is in developer mode.

Closed captioning

In March 11, 2011, Don Cullen filed a national class action lawsuit [169] against Netflix alleging Netflix failed to caption streaming video library, and that Netflix misled deaf and hard of hearing customers. In June 2011, the National Association of the Deaf filed a lawsuit against Netflix for not providing closed captioning on all of its Watch Instantly movies. The group claims that Netflix is violating the Americans with Disabilities Act by not providing equal access on entertainment.[170] On November 11, 2011, the court denied a Netflix motion to dismiss the case.[171]

In March 2012, Netflix announced they had increased the number of programs that are closed captioned. Viewers must have a device closed captioned compatible such as the Roku 2 or Apple TV in order to receive the text.[172]

Technical details

Streaming

Netflix streams HD content using Microsoft VC1AP encoding at a maximum bitrate of between 2600 kbit/s and 3800 kbit/s (depending on the movie).[173] A lower bitrate feed[174] may be supplied if the user's network connection is not capable of handling the maximum bitrate available for the film in question.

Netflix recommends that people stream its movies over a broadband connection with a speed of at least 1.5 megabits per second (1.5 Mbit/s), and that people use an Internet connection of at least 3 megabits per second to get better-looking video on par with a DVD.[175]

Netflix provides users the ability to choose their download rates / quality of video on their site (https://account.netflix.com/VideoQuality)

"Throttling"

Netflix's allocation policy referred to by many as "throttling" gives priority shipping and selection to customers who rent fewer discs per month. Higher volume renters may see some of their selections delayed, routed elsewhere, or sent out of order.[176]

Netflix claims that "the large majority of our subscribers are able to receive their movies in about one business day following our shipment of the requested movie from their local distribution center."[177] However, not all shipments come from the subscriber's local distribution center, and shipments from distant centers are often delayed, as well.

Netflix API

On October 1, 2008, Netflix launched an Application Programming Interface (API).[178] The Netflix API[179] allows access to data for all Netflix titles as well as access on a user's behalf to manage their movie queue. The Developer Network includes a forum for asking and answering questions. The Netflix API is free and allows commercial use. A variety of services have been created around the Netflix API or have integrated the API. Examples include Rotten Tomatoes and The New York Times, which allow users to click to add titles to their Netflix queue or begin watching on Watch Instantly from their pages,[180] and Jinni, which additionally enables search within Watch Instantly and import of some user information like reviews.[181]

The API has allowed many developers to release Netflix applications for mobile devices. On November 16, 2009 Netflix released an official Nokia app that allows some trailer streaming.[182] An official iPhone app was released on August 26, 2010.[93]

IT infrastructure

In 2010, Netflix migrated its infrastructure to Amazon EC2. Master Copies of digital films from movie studios are stored on Amazon S3, and each film is encoded into over 50 different versions based on video resolution, audio quality using machines on the cloud. In total, Netflix has over 1 Petabyte of data stored on Amazon, and the data are sent to content delivery networks (including Akamai, Limelight, and Level 3) that feed the content to local ISPs. Netflix uses a number of pieces of open-source software in its backend, including FreeBSD and nginx[183], Java, MySQL, Gluster, Apache Tomcat, Hive, Chukwa, Cassandra, and Hadoop.[184]

See also

References

External links

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