Here is an overview of the basic rules. You can look at how the teams competing for the prize are doing here.
Here is the take of Economist Steven Levitt:
I love the Netflix approach to the problem. They could easily spend $1 million internally hiring some programmers or Ph.D’s to try to improve their algorithm, with uncertain results. Instead, by making it a contest and offering up data to outsiders, they will probably succeed in having 100 times as many person-hours devoted to the problem for the same price—or cheaper because they only pay out the million if someone really improves on what they are doing now. In addition they gets lots of free publicity. Truly a brilliant strategy.Do you agree that it is a brilliant strategy? Is there any downside to this strategy?
If you do agree that it is a brilliant strategy, why don't more companies use this method of innovating?
(Source: Freakonomics Blog)