The Value of Personalized Recommendations: Evidence from Netflix

Personalized recommendation systems shape much of user choice online, yet their targeted nature makes separating out the value of recommendation and the underlying goods challenging. We build a discrete choice model that embeds recommendation-induced utility, low-rank heterogeneity, and flexible state dependence and apply the model to viewership data at Netflix. We exploit idiosyncratic variation introduced by the recommendation algorithm to identify and separately value these components as well as to recover model-free diversion ratios that we can use to validate our structural model. We use the model to evaluate counterfactuals that quantify the incremental engagement generated by personalized recommendations. First, we show that replacing the current recommender system with a matrix factorization or popularity-based algorithm would lead to 4% and 12% reduction in engagement, respectively, and decreased consumption diversity. Second, most of the consumption increase from recommendations comes from effective targeting, not mechanical exposure, with the largest gains for mid-popularity goods (as opposed to broadly appealing or very niche goods).

Orthogonal Low Rank Embedding Stabilization

The instability of embedding spaces across model retraining cycles presents significant challenges to downstream applications using user or item embeddings derived from recommendation systems as input features. This paper introduces a novel orthogonal low-rank transformation methodology designed to stabilize the user/item embedding space, ensuring consistent embedding dimensions across retraining sessions. Our approach leverages a combination of efficient low-rank singular value decomposition and orthogonal Procrustes transformation to map embeddings into a standardized space. This transformation is computationally efficient, lossless, and lightweight, preserving the dot product and inference quality while reducing operational burdens. Unlike existing methods that modify training objectives or embedding structures, our approach maintains the integrity of the primary model application and can be seamlessly integrated with other stabilization techniques.