FTC Opposes Netflix’s Settlement

By Davis Freeberg

Yesterday the Washington Post reported on the Netflix Class Action settlement being opposed by the national public interest firm, Trial Lawyers for Public Justice. They are objecting to the Netflix settlement because they believe that it overly compensates the attornies involved and because they see the free monthly upgrade as a promotional gimmick because customers must opt out of the program in order to avoid being charged a higher price the following month.

It turns out that TLPJ isn’t the only one that thinks that the settlement might be a little misdirected. The Seattle PI is reporting that the FTC has jumped into the controversy and has asked the California judge presiding over the case to dismiss the settlement because it “appears dangerously close to being a promotional gimmick.”

Personally, I choose not to participate in the Netflix settlement because I knew that I wouldn’t remember to cancel my service after the free upgrade took place and I didn’t really felt like I needed another DVD for the month. I also felt that the spirit of the settlement was misdirected from the start.

The biggest issue addressed by the settlement was Netflix use of “throttling” or smoothing as Netflix prefers to refer to it. Under the terms of the settlement, Netflix was forced to recognize that they use smoothing to slow down high volume renters and to provide an explanation to their customers.

My problem with the settlement was not that I felt that compensation was owed, but that Netflix really didn’t address the issue of smoothing with their update to their TOS. Sure they updated their terms of service to include some information about their smoothing process, but they don’t offer any real details about how subscribers can avoid smoothing or about how long it takes to get off their naughty list. They hint that 11 DVDs might be the magic number, but don’t ever come out and say that people who rent 12 DVDs a month will find restrictions placed on their account. Instead they opt for generic language that allows them to increase the restrictions in the future without notification to their customers.

We reserve the right to allocate and ship DVDs among our subscribers in any manner that we, in our sole and absolute discretion, determine. In addition, we will, in our sole and absolute discretion, determine the quantity of DVDs we purchase for any particular title and the level of staffing and number of shipments to be processed at each distribution center. As a result, we may not always send you the top choices from your queue, and we may not ship out your next DVD on the same day that we receive one from you.

I don’t mind if they want to limit the DVDs that one can rent or that they reserve the right to change their formula, but they need to be more up front and open with their customers about how we are impacted by the policy. How does “smoothing” impact my ability to get new releases for example. All that they tell me is that heavy subscribers “receive movies lower in their queue more often than our other subscribers.” There is no mention as to what percentage of new releases I’m entitled to each month or any mechanism to get removed from the smoothing list. They also don’t mention if the smoothing thresholds are different for the various plans that they offer. I would find it frustrating if I upgraded to their 4 at a time plan only to still find myself on their list despite my usuage not increasing.

While Netflix may not be too concerned about upseting their highest volume (and highest cost) customers, they do need to adequately address the issues brought up in the lawsuit. While I can applaud their ingenuity in creating a settlement that could result in higher revenues, I have to agree with the FTC that the settlement looks more like a promotion then a good faith resolution to this issue.

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