It's not exactly news that Netflix
It's just a grim business reality. The average member of the company's most popular rental plan -- one that allows for three DVDs out at any given time -- rents a half dozen titles in any given month. If a user is renting more than 8-10 movies a month, Netflix is hard pressed to turn a profit on that particular account.
It's not just shipping costs, which inched up to $0.78 round-trip with last month's postage rate increase. Netflix also has to cover everything from fulfillment, DVD revenue-sharing deals, and unit purchasing costs. Under its current model, even if you're watching just three new films a week, Netflix is probably losing money on you.
That's why throttling has reared its ugly head. Netflix has long pitched itself as the source for "unlimited" rentals, but in reality, it never truly was. After all, there are only so many days in the week. It would take three days to see a movie, mail it out the next day, have another one ship out the day after that, and then start the process again. So even a frenetic Netflix patron -- whether a timely movie buff or a hobbyist pirate burning a copy of the discs and flinging them back -- could only go through roughly 30 monthly rentals, and that's in extreme cases. The current model and pricing strategy is built around less frequent renters subsidizing the losses on the speed demons.
Still, it's easy to sympathize with those who have a beef against throttling at Netflix. There would be widespread outrage if a buffet operator made heavier patrons wait in a longer line. If more active cell phone or Vonage users on unlimited plans had to wait longer to be connected, the uproar would be heard loud and clear.
In reality, Netflix probably wouldn't mind losing those being throttled. If you're blazing through 20 flicks a month on Netflix, you'l do it a favor by going to Blockbuster
Netflix isn't necessarily suffering from massive defections. The company's monthly churn rate is at a historic low of just 4%. Nonetheless, Netflix needs to clarify its marketing message and the ramifications of the service's value proposition.
Even if most McDonald's
Netflix and Amazon are Motley Fool Stock Advisor recommendations, so many Fools will likely be watching this situation closely. Driving just a few of the more hyperactive accounts away could be a big win for Netflix, widening its margins. But if the discontent begins to trickle down to more casual members, who get offended on principle -- well, that's where it could turn ugly.
Longtime Fool contributor Rick Munarriz is a Netflix shareholder and plans to stay that way. He has been a subscriber and investor since 2002. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.