Counterintuitive: How Netflix Letting You Keep Movies Longer Decreases The Number Of DVDs It Needs

from the neat dept

Fri, Oct 7th 2011 7:39pm — Mike Masnick

It's always fun to recognize how some initially counterintuitive logic makes sense. A new paper looking at Netflix's (er... Qwikster's) early decision that it would let people keep movies as long as they wanted, discovered that this policy didn't just help Netflix from a marketing perspective, but also meant that Netflix had to buy fewer DVDs than if it had imposed time limits and late fees. This seems counterintuitive. After all, if people can keep DVDs forever, there's greater uncertainty, and Netflix could, theoretically, send out a disc and never see it again. So you might think it would need to stock up in order to account for these huge chunks of time that people might keep DVDs.

The problem with that thinking is that it's only looking at the "market" for a single DVD, rather than the larger market of all of Netflix's DVDs, and the kind of demand patterns it would expect. The researchers looked at that, and noted that by letting people keep DVDs longer, it actually slows down the rate at which they take out new DVDs, which decreases the amount of DVDs Netflix needs. In other words, if there's a time limit, people would return DVDs faster, meaning that Netflix would have to send another one out faster. This problem becomes especially noticeable for "hot" movies, like new releases:

To understand how Netflix actually profits from uncertainty, it is helpful to imagine a handful of idealized Netflix customers, as Bassamboo and his colleagues do in their paper. The only thing all the customers have in common is that when a hot new movie comes out, they all want it. If Netflix imposed late fees on its customers, the company could be sure that every customer who wanted a particular new release would return their last-viewed movie, and automatically be sent that new release, within a narrow window of a few days.

Bassamboo and his colleagues discovered that for a hypothetical Netflix-like service with late fees, the company would have to stock as many copies of a new release as it has customers. Given that all those customers would probably only rent it once, the company would be hard-pressed to either remain profitable or offer a compelling subscription fee.

On the other hand, when Netflix allows customers to keep DVDs indefinitely, the point in time at which they return old discs and automatically request a hot new release is staggered. Some customers are going to return a disc the day a new release comes out, while others will take a few days or even weeks to return their last movie and request the new one. The longer customers wait to request that next disc, the more times Netflix can rent out individual copies of its new releases. It is this re-use of discs, or �multiplexing,� that makes the Netflix model possible.

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Filed Under: counterintuitive, dvds, operations, supply
Companies: netflix, qwikster

30 Comments

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Anonymous Coward, 7 Oct 2011 @ 8:06pm

I must be their most disliked type. Rip it, return it same day, watch it eventually, delete it, repeat.
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Anonymous Coward, 7 Oct 2011 @ 8:07pm

They actually had to make a study to understand the obvious?
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monkyyy, 7 Oct 2011 @ 8:14pm

Re:
inb4 someone calls the mpaa to sue u
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Chosen Reject (profile), 7 Oct 2011 @ 8:56pm

Re:
Yes, a lot of times it is worth doing studies on what may seem like obvious things. Many times we learn that what we thought was obvious, was in fact, not really so. For example, warm water freezes faster than cooler water.
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Jeffrey Nonken (profile), 7 Oct 2011 @ 11:43pm

I wonder if something similar is going on at a video rental store I used to frequent. It's in Davis and it's called 49er Video. They've got at least two different kinds of rentals: new releases are one color, blue or something; once something gets old enough it gets put into a pink box. Pink boxes are 5-day rentals.

You get a discount if you rent 5 or more pink-box movies. It turns out that renting 5 costs almost the same as renting 3, only a few cents' difference. (In fact 5 might be slightly cheaper, I forget, but it's no more than a few cents more.) Not only that but if you walk up to the counter with 3 or 4 pink-box movies to rent they'll actually tell you that it costs less to rent 5 and encourage you to go find more movies. Every time, without fail.

When I thought about it I figured that it was the idea that movies sitting on the shelves weren't making any money, so they might as well be in customers' hands. And giving that kind of discount and active encouragement generated goodwill and happier customers, thus repeat business.

However, the Netflix model might be part of it, too. Here's a customer with 5 movies to watch. Chance are he's not going to watch them all in one sitting. The more he's got to watch, the longer he'll keep them. And the longer he keeps them, the longer it'll be before he comes back to rent that new release.

Could be a combination. But I'll tell you, it's difficult to walk out of there with three movies when you know you can rent five for the same price. Even harder to walk out with four when five is significantly cheaper!
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Sun, 8 Oct 2011 @ 12:33am

What if you're like me though that gets a new release and keep it for months? Those scenarios happen too... The whole example depends on the new release churning through various customers.
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The eejit (profile), 8 Oct 2011 @ 1:24am

Re:
That's still not a problem under the Netflix model: because you play into part of why they need fewer discs.
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Mr. Oizo, 8 Oct 2011 @ 1:57am

Convoluted ?
What an extremely convoluted manner to say that the peaks are blurred out and spread in time, which lowers the 'peak' amplitude, but not the throughput.
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ASTROBOI, 8 Oct 2011 @ 6:04am

Health Club model?
Health clubs, that is to say fancy gyms, knew this a long time ago. People pay to use the gym 3 or 4 times a week but lose interest and come only once a month. But they still must pay. Eventually the serious people who DO use the gym every other day are urged to stay away, maybe even kicked out for overuse of the facility. Netflix did the same thing, throttling customers that took them at their word that they had unlimited rentals. Anybody that returned their dvds the same day they arrived soon found that every title they wanted had "long wait" next to it. Apparently Netflix is a great place to rent movies if you don't really like movies.
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Rich, 8 Oct 2011 @ 6:28am

Re:
I love how people point out something is obvious after the fact.
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shawnhcorey (profile), 8 Oct 2011 @ 6:42am

Re: Lies, Damn Lies, Statistics, and Economic Theory
Yes, everything taught to a MBA is a lie. They have to rediscover the truth the hard way.
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abc gum, 8 Oct 2011 @ 7:37am

Re: Re:
The Mpemba effect is the observation that warmer water sometimes freezes faster than colder water.

the effect does not always appear, and cold water often freezes faster than hot water. The freezing point is governed by impurities in the water that seed ice crystal formation. Impurities such as dust, bacteria, and dissolved salts all have a characteristic nucleation temperature, and when several are present the freezing point is determined by the one with the highest nucleation temperature.
http://www.physorg.com/news188801988.html
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abc gum, 8 Oct 2011 @ 7:45am

Re: Re:
"I love how people point out something is obvious after the fact."

After what fact?

Something like this?
I'm rather positive that apple will fall to the ground if you let go of it because I have witnessed this effect before.

or something like this?
(DVD qty) = function of (subscribers, rental_duration)
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abc gum, 8 Oct 2011 @ 7:50am

Re: Health Club model?
"Netflix did the same thing, throttling customers that took them at their word that they had unlimited rentals. "

This sounds vaguely familiar .... where have I heard this before
hmmmmm
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sunk818 (profile), 8 Oct 2011 @ 10:05am

Re: Re:
The issue is that you've removed the most desirable rental as available stock. The model speaks to when I have an undesirable rental out thus delaying my delivery of a desirable product. When you remove the desirable product from circulation, this becomes an issue.
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Scott Gardner (profile), 8 Oct 2011 @ 11:53am

Re: Health Club model?
Has this been documented somewhere (Netflix throttling quick-turnaround customers) I never saw it on my account, even though I was frequently doing the rent/rip/return thing every day for weeks on end.

Also, if this is true, I would think that Netflix' shenanigans would be painfully obvious to the public, because you'd have some people with items in their queue listed as "long wait", while other people would have the same items in their queue listed as "available" (much like how Amazon charges different people different prices - clear your cookies and log in anonymously or log in as someone else, and all of a sudden "your" prices for particular items start changing.
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Chosen Reject (profile), 8 Oct 2011 @ 1:04pm

Re: Re: Re:
I'm not sure if you're agreeing with me or not on whether studies on "obvious" things are sometimes worthwhile. I chose that affect because it was something discovered fairly recently and it is certainly not obvious. But there are lots of examples through the ages of things that we accept now, but were not obvious at first such was helio vs geocentrism. Most (if not all) astronomers thought Aristarchus of Samos was crazy to propose heliocentrism, and I'm sure many of Copernicus' contemporaries thought he was crazy to do a study of it. In fact, a lot of people still go with what they think is "obvious"

In either case, one part of your link confuses me:
Scientists have known for generations that hot water can sometimes freeze faster than cold...
But from Wikipedia:
[Erasto Mpemba] first encountered the phenomenon in 1963....only to be ridiculed by his classmates and teacher. After initial consternation, Dr. Osborne experimented on the issue back at his workplace and confirmed Erasto's finding. They published the results together in 1969.
I'm curious to know how long Lin Edwards at physorg.com thinks a generation is.
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The eejit (profile), 8 Oct 2011 @ 1:04pm

Re: Re: Re:
And that right there is where the counterintuitiveness of Netflix comes in. Say I have three new releases queued a week. As I understand it, you're allowed X simultaneous DVDs at a time. If everyone wants those same three new releases, instead of everyone getting all of them at once, you can have everyone see one of the three (for example, you could have had Harry Potter, The Dark Knight and Random Blockbuster #3942856).

Instead of having some unhappy customers having to wait for the films they want to see most, what you get is essentially a revolving door of DVDs that everyone gets to see, in time.
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Anonymous Coward, 8 Oct 2011 @ 1:15pm

Re: Re: Re:
You got it right. It really is the very basics of a rental business, called "yield management" or "revenue management". Knowing how long your rentals are out for, and how long your turn around time is (total time of rental plus your back office handling time) tells you exactly what you need.

So, as an example, if the latest release is on the demand list of 25% of your users, and the average full turn around time is 5 days, then you need enough copies in theory for about 5% to make it work out. However, you can play with that number a bit, allowing for the occassional disappointment (not sending the new DVD to all customers on a given day), and profiting from users who cycle the new material back more quickly than average. Based on my experience (I did yield management in another field for years) they probably don't need much more than about enough units for 2.5 - 3% of the users.

The time duration is key, the flexibility in the system is also key, and historical customer demand can tell you a bunch. Taken "pre-orders" and allowing people to put a desired DVD on their wish list ahead of time also gives you a good chance to figure it out. If you go a little further and data mine all the users who are looking for it, you might be able to spot a longer or shorter turn around duration for those customers, and adjust accordingly.

I can't imagine they need a study to figure this out. It makes me think only that these guys have been incredibly lucky in business, not incredibly good.
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Sun, 8 Oct 2011 @ 1:36pm

Re: Re: Re: Re:
I thought the owner was a mathematician. He would think of scenarios like this as a nerdy person.
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Anonymous Coward, 8 Oct 2011 @ 2:33pm

Re: Re: Re: Re:
[joke]http://openpaleo.blogspot.com/2008/12/3d-slicer-tutorial.html

Depends really, one human generation or even ten no matter how you measure it, it is a small fraction of time compared to earth, the universe or something else, 50 years is not that much it is 2 generations or 2/3 of one generation, how do we count generations? as they appear or at the end of life of the last remnant of a generation?

On a different note completely because I tend to connect random things together I was impressed by the 3D Slicer, first because you just need to download and it is already pre-compiled with static libraries so it works just by clicking on the binary in Linux and secondly because the model looks truly gorgeous. Then it made me thing about brains in the last segment(part 6) where he creates a model of the brain cavity, which made me think if only I could find a CT-Scan from Mr. Palenti's skull I could measure his brain, you guys wouldn't have a DICOM set from him laying around would you?[/joke]
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Anonymous Coward, 8 Oct 2011 @ 2:44pm

Re: Re: Lies, Damn Lies, Statistics, and Economic Theory
There are just 10 things they teach an MBA.

1. Don't ever let cash flow be 0.
2.
3.
4.
5.
6.
7.
8.
9. Don't ever let cash flow be 0.

ps: This is a quote from memory from somwhere I don't recall who said it, but it was somebody commenting on MBA's and I believe he was from Harvard or was commenting on Harvard pointing out what one professor said there in a MBA class.
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Anonymous Coward, 8 Oct 2011 @ 5:52pm

So What...
Netflix Smetflix - who cares. Doesn't matter how brilliant they were, they are literally giving their customers away to their competition these days anyway.
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Anonymous Coward, 8 Oct 2011 @ 6:14pm

Re: Re: Re: Lies, Damn Lies, Statistics, and Economic Theory
That's 9 things.
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Anonymous Coward, 8 Oct 2011 @ 6:22pm

Re:
The late fees would pile faster on 5 movies than on 2 or 3. In such a case, the movie would make more money in the customer's hands than on the shelves.

Also, 5 movies for 5 days? It will take you longer to watch them all. This seems to imply you would be more likely to return them (all) late.

So the customers may feel like the employees are trying to help them save money, but really the employees are trained to get more late fees out of the customer.
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Dave, 8 Oct 2011 @ 6:57pm

Re: Re: Re: Re: Lies, Damn Lies, Statistics, and Economic Theory
No, it was 10 things. You just didn't catch that it was binary.
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Anonymous Coward, 8 Oct 2011 @ 10:10pm

Re: Re: Re: Re: Lies, Damn Lies, Statistics, and Economic Theory
1. Don't let the cash flow be zero.
.
.
.
10. Don't let the cash flow be zero.

There fixed.
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ASTROBOI, 9 Oct 2011 @ 7:50am

Re: Re: Health Club model?
"Has this been documented somewhere (Netflix throttling quick-turnaround customers) I never saw it on my account,"

Yes it has. First off, it actually happened to me. Second, I read several blogs where others reported the same thing. The suggestion was made to close the account and open a new one with the same list. I did this and at once the titles were all available. But after a while the throttling began anew on the second account. I always mailed my dvds back the same day I received them.

This was years ago. At first Netflix denied they did this. When several blogs published convincing evidence Netflix changed their tune and admitted they throttled but said it was necessary and would continue. Heavy users could sod off.

Based on the length of my list it would take years to see all the dvds I wanted. Since I could download many of them and borrow others from the public library for free I dropped their service. I can appreciate how those who prefer streaming would not care about this situation so maybe for them it's a good deal.
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Idaho Spud, 9 Oct 2011 @ 10:50am

"No late fee"
Don't have a comment on the main theme, but I have to say I think the term "no late fee" is a lie. When I rented from netflix, I returned them the same day because I calculated that I had to pay an extra dollar per DVD for every day I kept it. In practical terms, that's a late fee.
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Chargone (profile), 10 Oct 2011 @ 5:26am

Re: Re:
i figure, a smart shop owner would look at that and say 'hey, if we let them rent more things, cheaper, we make more money whether they return them on time or not than if we don't! win!'

neutral rather than good or evil, ya know?
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