The prize, offered in a contest beginning Monday, is part of Netflix's effort to sharpen its competitive edge as it continues a bitter duel with Blockbuster Inc. and prepares for an anticipated onslaught of services that make it easier to download movies onto computer hard drives.
By spurring engineers to develop a better way to decipher consumer tastes, Netflix is betting its market-leading DVD service will become more useful to its 5.2 million subscribers and attract new customers.
To win the prize, a software program must improve the accuracy of Netflix's current movie recommendation system by at least 10 percent. The differences will be tracked by a program that quantifies how well the recommendation systems predict which movies will be liked or disliked by a profiled consumer.
"Right now, we're driving the Model T version of what is possible," said Netflix CEO Reed Hastings. "We want to build a Ferrari and establishing the Netflix Prize is a first step."
Recommendation software is expected to play an increasingly important role in electronic commerce as Internet companies expand their databases of past consumer behavior.
As they stockpile more information about individuals' habits and preferences, online businesses theoretically will be able to make more money by anticipating what consumers want before they even realize it.
To fuel the contest, Netflix is releasing 100 million movie ratings pulled from about 500,000 of its current and past subscribers, said Jim Bennett, the company's vice president of recommendation systems. He said all personal information has been removed from the data.
If there is no winner, the company will pay $50,000 annually to a contest entrant who makes the most progress toward the final goal.
Entertainment industry analyst Dennis McAlpine doubts Netflix is going to get much bang for its buck.
"I'm a little surprised because their current system already works so well and the [customer] satisfaction level is pretty high," he said. "This looks like a marketing gimmick."