from the neat dept
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.