Just to be clear/nitpicky, you're talking about an algorithm that starts with the catalog Netflix could afford to license at some moment in time, and then maximizes the viewer's enjoyment for that limited set of content.
That's probably a vastly different level of enjoyment than starting with, say, the catalog of available content listed in IMDB and maximizing for the same thing.
A user can hit those constraints when they search for something that exists but is not available on Netflix.
That point becomes noteworthy when that same content (or portions of it) are available elsewhere on the net. In my experience this is typically through:
a) downloading a torrent of the content that is missing from Netflix
b) watching all or some portion of that content on Youtube
This is pretty much what fast-food chains do methinks? And I think that's an apt comparison to what people are lamenting with Netflix above.
There's definitely a DVD rental market for "every dvd that is or ever was in print."
It's like if a chef based a restaurant menu on the average diet of the average person. You may find neat patterns and be able to hyperstimulate some drive in people, but that's a very different thing than carefully designing a new or engaging thing people didn't know they wanted.
It's sort of a guaranteed averaging feedback loop.