October 31, 2006, 12:00 AM

Netflix bets $1 million it can fend off Amazon

Netflix, the leader in online rental of DVDs, is betting $1 million—the prize it will offer someone who can develop a way to improve its movie recommendation system—that it can improve its already leading shopping experience to stay ahead of the competition.

When you’re the leader in online rentals of DVDs-thanks largely to a popular personalization engine that recommends movies to watch-it’s tough to stay ahead of the competition. Especially when heavyweights like Amazon.com Inc.-which is putting its own personalization expertise behind its new offerings in online DVD and video on-demand services-are taking bold steps into the business of serving up movies to watch at home.

But Netflix Inc., the company to which Wal-Mart Stores Inc. turned over its own online DVD rental business, didn’t grab the market lead in online DVD rentals for lack of ideas. Here’s its latest: In an open competition it calls Netflix Prize, it’s betting $1 million that it can come up with an even better personalization engine that will assure its customers that the DVD they choose will be one they really want to watch.

Netflix says it will award $1 million to the first person or team that can develop a new personalization engine that will improve the accuracy of its movie recommendations by at least 10%. “Recommendation systems covering a wide variety of categories will play an increasingly significant commercial role in the future,” predicts co-founder, chairman and CEO Reed Hastings. “Right now we’re driving the Model T version of what is possible. We want to build a Ferrari, and establishing Netflix Prize is a first step.”

Netflix doesn’t expect to build its Ferrari in a day. If no one wins the grand prize in 2006, it will award a $50,000 progress prize for the most significant advancement each year until someone grabs the grand prize.

Contestants, start your engines.

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