Netflix has won the first round of a case over allegations it downplayed the impact of account-sharing on subscriber growth, with a federal judge’s dismissal of the shareholder lawsuit.
U.S. District Judge Jon Tigar, in an order issued on Jan. 5, found that investors failed to point to specific statements from Netflix executives demonstrating that they lied about the extent to which account-sharing was hindering growth. The judge rejected allegations that the company knew more than it let on.
The suit revolves around Netflix, for the first time in a decade in 2022, disclosing subscriber losses. It attributed the shedding of roughly 200,000 users to a sluggish economy, increasingly stiff competition from other streaming platforms and the war in Ukraine (though it said in a shareholder letter that it would’ve gained 500,000 users if it hadn’t suspended service in Russia). Netflix’s stock tumbled 35 percent on the news, which came with a forecast from the streamer that it expected to lose another 2 million subscribers in the next quarter.
The suit from a Texas-based investment trust alleged that the company was overly optimistic about its business prospects despite it being aware of the impact account-sharing would have on growth. It pointed to Netflix chief financial officer Spencer Neumann commenting, for example, that “the business remained healthy as it had been throughout the year with churn at low levels” and that management expected stronger results “as we get past those initial market reopenings with COVID [and] past the COVID pull forwarding into the strength of our slate.”
Shareholders alleged the statements, among others, were misleading, betraying the reality that Netflix was actually exhibiting slower acquisition growth than in previous years. They relied largely on allegations attributed to two former employees, who said that the company extensively monitored account-sharing and knew the degree to which it would inhibit growth.
In an order dismissing the suit, the court concluded that the statements from the ex-workers don’t provide enough evidence that Netflix made false statements to survive dismissal. Tigar stressed that the former employees don’t disclose what was specifically discussed and by who. While the suit cites Netflix’s former director of program management from 2018 to 2021 stating that the company often discussed password-sharing during his tenure, he failed to specify “what was allegedly discussed regarding account-sharing other than that any efforts to restrict it would be paused in early 2020,” according to the order.
As for statements from a former product designer, who said that the company tracked IP addresses to determine the location of different users on the same account, the court flagged the same issue. Tigar said the suit lacked details over when this occurred and at what scale.
“Without more, the allegations do not establish at what level Netflix monitored account sharing during the Class Period, or that Defendants were aware of the extent of the account sharing problem,” the order stated.
Tigar explained this was “especially true” in light of Netflix’s justification that the impact account-sharing has on its subscriber growth was obscured by its boom in popularity during the pandemic.
Plaintiffs were allowed leave to amend, meaning they have the opportunity to fix their claims. Netflix didn’t immediately respond to requests for comment.
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January 09, 2024 at 06:17AM
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Netflix Staves Off Shareholder Lawsuit Over Subscriber Losses Tied to Account-Sharing Disclosures - Hollywood Reporter
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