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Silvana Fleischacker
Last month, Netflix reported a net loss of 200,000 subscribers in the first three months of 2022 and forecast a decline of another 2 million in Q2, citing various challenges including password-sharing behavior among more than 100 million households that do not pay for the service.
The lead plaintiff in the lawsuit is Fiyyaz Pirani, a trustee of Imperium Irrevocable Trust, which is a Netflix shareholder. The lawsuit names as defendants Netflix as well as co-CEOs Reed Hastings and Ted Sarandos and CFO Spencer Neumann.
The case is Pirani v. Netflix Inc et al., with docket number 22-CV-02672, filed in the U.S. District Court for the Northern District of California. The firm representing plaintiffs is Glancy Prongay & Murray, which specializes in class-action lawsuits involving securities fraud claims.
A federal judge in California has dismissed a proposed class action lawsuit against Netflix filed by a Texas-based trust that claimed the streaming service misled investors about problems associated with password sharing between subscribers and freeloaders.
The lawsuit was filed in spring 2022 after Netflix reported lower-than-expected subscriber growth for two consecutive financial quarters. Its first miss came with Netflix's year-end earnings reported in January 2022, during which the company told investors that it was "optimistic" about its "long-term growth prospects," believing a then-forthcoming slate of new original programming would lure additional paid subscribers to the service.
The proposed class action sought damages on behalf of investors who purchased Netflix stock between October 2021 and April 2022, with the plaintiffs accusing Netflix of knowing that its business prospects were worse than the company led its existing and prospective investors to believe.
The case largely relied on anecdotal testimony supplied by two former Netflix employees, who said the company actively monitored password sharing between paying and non-paying customers, and that the practice inhibited Netflix's ability to grow its paying subscriber base.
Coincidentally, two months before the lawsuit was filed, a consumer study offered by Leichtman Research Group revealed around one-third of Netflix subscribers surveyed by the firm admitted to sharing their passwords with people who live outside their home. (Netflix allows customers to share their accounts only with people who live within the same residence.)
Last Friday, a federal judge overseeing the lawsuit affirmed a motion filed by Netflix to dismiss the case, saying the plaintiffs had not proven that Netflix knew about the detrimental effects of password-sharing and other ill points of its business for as long as they alleged. The judge also appeared swayed by Netflix officials that claimed the ill-effects of freeloaders on its service were outweighed by its popularity during the global coronavirus health pandemic, when more people signed up for the service to watch television while stuck at home.
The judge agreed to allow the plaintiffs to refile their case if they are able to substantiate their claims with additional evidence, according to Reuters. It isn't clear if the plaintiffs intend to refile their lawsuit.
Prior to the shareholder lawsuit Netflix said it would introduce various measures to end password sharing. A limited test of the strategy launched in several Latin American countries in early 2022. There, customers were offered the opportunity to pay an extra fee for the privilege of sharing their passwords beyond their homes.
The same measure was put into place in the United States and other countries in May 2023. Despite suggestions that the password-sharing crackdown could hurt its business, the company reported lower churn during the first full month that the strategy was in place domestically.
Last October, Netflix said its customer base rose to 247 million global paying subscribers, an increase of 8.8 million customers compared to its prior financial quarter. The figure caused Netflix's stock price to increase 12% in after-hours trading.
Investors of the streaming giant have filed a class-action lawsuit claiming that they have suffered "significant losses and damages" on account of Netflix making "false and/or misleading" statements about its business, prospects and financial results.
In Netflix's Q3 2021 letter to shareholders, the company stated that it was "excited to finish the year with what we expect to be our strongest Q4 content offering yet, which shows up as bigger content expense and lower operating margins sequentially," while also claiming that the company was seeing the "positive effects of a stronger slate in the second half of the year."
At the end of Q4, a similar letter to shareholders was released, which stated that "even in a world of uncertainty and increasing competition, we're optimistic about our long-term growth prospects as streaming supplants linear entertainment around the world."
The loss of 200,000 subscribers as announced during the company's Q1 2022 earnings call (which is being blamed on an increase in password sharing between accounts, a stronger streaming competition subset and a price hike for members) was the company's biggest dropoff in over a decade, sending its stock price down a whopping 26% during premarket trading hours that same day.
Billionaire investor Bill Ackman (head of Pershing Square Capital Management) pulled his $1.1 billion investment into the streaming giant (in the form of 3.1 million shares) after Q1 2022 earnings were reported, just three months after his initial investment.
"While Netflix's business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty," Ackman said in a letter to Pershing shareholders at the time.
Netflix is facing a new class action lawsuit that charges the company with concealing negative trends in its subscription business and putting out false and misleading statements about contracts with content providers.
In the complaint, the plaintiffs point to various statements made by Netflix CEO Reed Hastings that purport to show how the company underestimated the risks of not seeing eye-to-eye with various content creators and the materially negative impact that would have on the business.
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Legal troubles continue to mount for Netflix as it faces another class-action lawsuit. This time, Netflix is in hot water for allegedly misleading investors by exaggerating its business growth. Last month, Netflix released its quarterly reports, and with them came some startling revelations. The largest streaming service in the world lost 200,000 subscribers in the first three months of 2022.
While the loss was mainly due to the streamer shutting shop in Russia, Netflix had previously forecasted that it would add 2.5 million new subscribers in the quarter, but it fell short of achieving that goal, adding only 500,000 customers during the period. Another 2 million users are expected to leave the service in the next quarter.
Netflix was once a powerhouse in the streaming industry. But due to rising subscription costs, frequent cancellations of beloved TV shows, and other services like Disney+, HBO Max, and Amazon Prime offering better content at more affordable prices, users are leaving Netflix on an exponentially large scale. Then there is also the issue of password sharing that has plagued the streamer for years. Netflix is now planning to adopt radical measures to combat account sharing and customer loss. And apparently, they include introducing ads and cutting down on the budget of its IPs. It remains to be seen how its user base reacts to these changes.
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