The bottleneck is most likely not at Netflix's end. They use a number of CDNs, such as Akamai and Level 3. These CDNs usually co-locate a box right at your ISP. So, it is entirely up to your ISP how much of that bandwidth makes it through to you. I can assure you, Akamai content is fully capable of saturating your tiny broadband connection. I regularly download large files hosted on Akamai (commercial software) and achieve download rates of 2MB/sec on my 20 megabit Cablevision line.
However, ISPs do "manage" Netflix traffic. How they choose to manage it varies by ISP, but it might be something as simple as giving streaming traffic a different priority over web traffic, which tends to be more latency sensitive. Joe sixpack tends to complain when his browser takes longer than a few seconds to load a page, which ties up a customer service line. If your Netflix stream automatically switches from HD to non-HD, you might not even notice because they've made their software pretty good at adapting to changes in available bandwidth.
However, ISPs do "manage" Netflix traffic. How they choose to manage it varies by ISP, but it might be something as simple as giving streaming traffic a different priority over web traffic, which tends to be more latency sensitive. Joe sixpack tends to complain when his browser takes longer than a few seconds to load a page, which ties up a customer service line. If your Netflix stream automatically switches from HD to non-HD, you might not even notice because they've made their software pretty good at adapting to changes in available bandwidth.