Netflix Faces Class Action Complaint

Scott + Scott, LLC has filed a complaint against Netflix for failing to disclose the number of subscriber cancellations and misleading investors about the actual subscriber churn rate. It seems that 72% of the new customers who signed up in the 2nd quarter of 2004 replaced cancellations, so when using the same churn forumula as Sprint or similar companies (% of cancellations divided by the average number of subscribers), the real churn rate was really a much higher 7.7%. Combine this higher than reported churn rate with a steep $35 cost to acquire a new subcriber, and the Netflix stock price tumbled on the news. Then the lawyers started circling...

Sorry this is late, but it broke while I was packing the car for a week without e-mail and Web access.

Thanks to Aron for sending this in.

Comments

[Doug]

Personally I'm glad to see this. I hope the big wigs at Netflix will begin to treat us existing customers like we matter. For the past two months they have recieved my movies in the morning and delayed sending them by over 24 hours. EVERY last movie for 2 months has been this way, and what has Netflix had to say about this? All I have gotten from them is cut and paste statements from their customer service department. I cant wait till blockbuster starts their service up. Ill be switching right to them.

[Aron Miller]

I'm no attorney but I think Netflix is safe on this one. They do have an innacurate churn formula, but churn is not a GAAP or FASB-defined figure. Furthermore, the lawsuit incorrectly suggests that Netflix has withheld the total number of cancellations from investors but this just isn't correct.

As for Blockbuster Online, I'm getting 3-day delivery (for a 6-day turnaround). If not for that, I do think it's the better deal.

FWIW, My theory on delayed shipments is that Netflix utilizes ~95% of their inventory. If you are a heavy user then a light user will get priority over you for the same disc. When a slot for shipping a disc becomes available and the system sees no disc to fill it for that day, it then might estimate(statistically) that the disc will be received the next day and reserve that copy for you. I don't think Netflix has the disc in their hands and simply waits to send it out. Based on the fact that the average usage rate is a bit under 7 discs per month, a 2 or 3-day delay on occasion is unlikely to reduce how many movies the average person rents.