That's remarkably reasonable. If I was LOVEFiLM or Amazon I'd be cackling with glee. I'm not though, so I'll just be depressed that one could hope to patent an algorithm. Not hardware that carries out an algorithm, but just an algorithm.
Although if I were a netflix shareholder I'd be pissed off that the company were giving away my funded research for free, when they could probably get it closed off and reap the rewards. Mind you, the amount of publicity that they have received - I know about Netflix now and I don't watch DVDs or live in the USA! - is probably more than worth it...
It's not selling yourself short to work on FOSS for a very simple reason. Work on FF, or Thunderbird, or open-sourcing a script that I wrote to convert music is free at the point of delivery. That is, anyone can use it without paying. Freely given, and freely distributed.
However, in this case the user of the algorithm is paying Netflix. Netflix takes the work that I have done, and closes it off from other people. My work goes not to benefit the community, but merely to benefit one company - a company that has paid me (cheaply) for my work. Since companies by definition only care about the bottom line, their intent is not to benefit the community, but to benefit themselves. You are effectively working for them for cheap, selling yourself short.
If netflix were to give away the algo for use by anyone else too, then it would be very generous and then you may be able to make a comparison with FOSS. I( have no idea if they will do that or not. However, if I were a shareholder, I would not want them to give away a potentially killer feature for which they paid $1m.
Saying that, if you enjoy playing with this, go ahead! Just be honest with yourself about. If you still want to do it, wallow in it. But it's an extremely pernicious thing to do to link this with working on something that is done to benefit everyone. It simply is not the same thing.
"I don't believe in sweeping social change being manifested by one person, unless he has an atomic weapon." -- Howard Chaykin