(c) New York Times - August 16, 2007 :

HILLSBORO, Ore. -- Megan Funk had been on the phone for 30 minutes and had already untangled one billing knot, listened to a woman insist that she had returned a Pilates DVD when it was clear she had lost it and received one request to replace a cracked copy of "Hotel Rwanda" and another to replace a disappointing husband.

Andrew M. Daddio for The New York Times

Megan Funk, a Netflix call center veteran, has worked at the site for eight months.

Ms. Funk is one of 200 customer service representatives at the Netflix call center here, 20 miles west of Portland, where she is on the front lines of the online movie rental company's efforts to use customer service as a strategic weapon against Blockbuster's similar DVD-mailing service.

Netflix set up shop here a year ago, shunning other lower-cost places in the United States and overseas, because it thought that Oregonians would present a friendlier voice to its customers. Then in July, Netflix took an unusual step for a Web-based company: it eliminated e-mail-based customer service inquiries. Now all questions, complaints and suggestions go to the Hillsboro call center, which is open 24 hours a day. The company's toll-free number, previously buried on the Web site, is now prominently displayed.

Netflix is bucking several trends in customer service. Booz Allen Hamilton, a management consulting firm, and Duke University studied 600 companies last year and found a continued increase not just in outsourcing, but also offshoring, in which call centers are moved overseas.

"I don't think there's any trend to pull back," said Matt Mani, a senior associate at Booz Allen. "This is a unique strategy for Netflix. There's so much more competition, this is something they've done to get closer to the customer, because without that, there's really no connection a customer has to Netflix."

Netflix's decision to greet anxious consumers with a human voice, not an e-mail, is also unusual in corporate customer service. "It's very interesting and counter to everything anybody else is doing," said Tom Adams, the president of Adams Media Research, a market research firm in Carmel, Calif. "Everyone else is making it almost impossible to find a human."

In contrast, Blockbuster outsources a portion of its customer service, and when people do call, they are encouraged to use the Web site instead. Its call center is open only during business hours, said Shane Evangelist, senior vice president and general manager for Blockbuster Online, because the majority of customers prefer e-mail support, which is available 24 hours a day. "Our online customers are comfortable using e-mail to communicate," he said.

The decision to invest heavily in telephone customer service was an expensive one for Netflix, but it may be one advantage that the company with the familiar red envelopes has over its rival with the blue ones, analysts say. "It's vital in a world where they're no longer growing their customer base," Mr. Adams said.

Indeed, for the first time in its eight-year existence, Netflix has found itself losing customers. It is not the quality of customer service that is driving them away, but rather the heightened competition from Blockbuster. Late last year, soon after Blockbuster introduced its Total Access program, which allows members to swap a movie they have rented online for an in-store movie, the nationwide chain began gaining on Netflix's base of 6.7 million subscribers.

By the first quarter this year, after years of outstripping Blockbuster in subscriber growth, Netflix added 480,000 new subscribers while Blockbuster signed up 780,000 new members. And in the second quarter of this year, Netflix, which prides itself on customer loyalty, lost 55,000 customers. Blockbuster added 525,000, bringing its total to 3.6 million.

The Hillsboro operation, which occupies about 30,000 square feet of a low building in an office park, is intended to keep the red envelopes coming. Michael Osier, vice president for information technology operations and customer service, said he rejected cities like Phoenix, Salt Lake City and Las Vegas, which are known as call-center capitals, because of their high employee turnover rates. He settled on the greater Portland area because of the genial attitude on the part of most service workers.

"In hotels and coffee shops and the airport, it's amazing how consistent people are in their politeness and empathy," said Mr. Osier, who is based at Netflix headquarters in Los Gatos, Calif. "There's an operational language in the industry that people are so jaded about -- phrases like ‘due to high caller volume.' We're very consciously trying to counter that mentality."