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Netflix Hides Fall in Subscription Gains Securities Class Action

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Netflix allows customers to pay a monthly fee to watch streaming content on their personal devices. The monthly fees are its main source of revenue, and it has called subscription growth its “core performance measurement.” So investors were listening very closely to see what the result of a new price rise would be. The complaint for this class action says that the company issued false or misleading statements, artificially inflating the stock’s price.

The class for this action is all persons and entities who acquired Netflix, Inc. securities between July 21, 2014 and October 15, 2014 and were damaged thereby.

To attract and keep subscribers, Netflix must continually obtain rights to popular movies and TV shows. Between 2012 and 2014, the subscriber base grew quickly, but content obligations grew even more quickly. In 2011, the company imposed a substantial price increase to try to keep pace, only to lose 800,000 subscribers in one quarter as well as 37% of its stock value.

At the beginning of 2014, the complaint claims, the company began testing subscriber reaction to pricing structures, such as by testing price increases in one of its smallest markets. It finally decided to raise subscription prices by $1-2 per month, beginning on May 9, 2014. The complaint says that the company closely monitored the results with Netflix’s cloud-based database. Less than two weeks later, on May 20, its CFO said the company had seen only a “small reaction” to the price increases.

The company reported its second-quarter 2014 operating results on July 21, 2014, the first day of the class period. It said that results were mostly “in line” with expectations and “on par” with the same period as the previous year. Other phrases used to describe the reaction to the price rise were “pretty nominal,” “background noise,” and “no noticeable effect in the business.”

According to the complaint, however, these statements were false or misleading, in violation of the Securities Exchange Act of 1934. The complaint claims that subscriptions had slowed slow dramatically after the price increase, and only a boost from Netflix’s June release of the second season of its popular TV show, Orange Is the New Black, kept the numbers even close to targets.

According to the complaint, Netflix share prices climbed over the next three months, while investors were unaware of the falling figures.

On October 15, 2014, the company released its third-quarter results, which the complaint claims showed net subscriber figures so low that the company had to cut its earnings projects by nearly half. It admitted then that the cause was the price increase. At this news, the company’s stock price fell by approximately 20%.

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