Netflix Is Vulnerable To A Subscriber Action That Could Sink The Company’s Stock.

The above image comes from 2015 research that showed Daredevil as the best viewed original Program in Netflix History. Yesterday Netflix cancelled it.

Netflix (NASDAQ: NFLX) is a Direct-to-Consumer subscription-based entertainment business that uses its subscribers’ viewing data to inform its content creation and acquisition decisions.

Netflix’s edge over traditional media (meaning not Direct-to-Consumer) comes from the knowledge it gains from advanced analytics performed upon subscriber data — data that it does not own.

Netflix is vulnerable to a subscriber action over viewer data abuse that would make its 2011 loss of 800,000+ subscribers and resulting 77% stock drop look paltry by comparison.

Now that Disney and WarnerMedia are both preparing to roll out their own competing streaming services in 2019, the clock is running on Netflix — a company that has convinced its board that it can run on debt with only one source of revenue (subscriptions), and then only if it meets its quarterly forecasts for subscriber growth.

Netflix has no meaningful IP other than its original content programming which takes approximately eighteen months to create from script to screen per project and for which it has invested over $8 billion in debt financing in 2018 alone. This is out of necessity as it will lose its most popular licensed content to competitive streamers like Disney, Hulu, Fox, WarnerMedia, etc. as their leases run out and as other studios enter the DTC market with their own competing streaming platforms so that they can collect their own viewer data and gain Netflix’s production and marketing efficiencies for themselves.

However, Netflix has an even more powerful edge — the viewing data that it collects from its 130m+ subscribers, and what it can do with it. Unfortunately, this data doesn’t belong to the company and as it loses customers it must also, by law, erase the customers viewing data (immediately if specifically demanded by the customer at termination or ten months from the date of termination if the customer says nothing). It just acts as if it does, and that could bring about its downfall faster than Disney should its subscribers come to realize that fact and take action. The October revelation of Netflix targeting black viewers by manipulating images in its thumbnail movie posters may ignite such an action or, at the very least, level further scrutiny against Netflix’s data privacy policies in the age of GDPR; something that no technology company is ready for. Or perhaps it’ll be increased scrutiny into the continuous A/B testing done on its subscribers without their knowledge or consent in order to keep them watching longer and therefore more likely to pay a higher monthly fee.

This article will look at the following areas more closely:

  1. Viewer Data Ownership
  2. Viewer Data Abuse at Netflix
  3. Past Subscriber Action and Adverse Consequences
  4. Possible Future Consequences of a Subscriber Action

Viewer Data Ownership

The viewer always retains ownership of his or her data. This includes Netflix subscribers. Recital 7 of the GDPR states “Natural persons should have control of their own personal data” and Recital 68 affirms the corresponding right to “erasure of personal data.” The California Consumer Privacy Act of 2018 includes the right of consumers to control every aspect of their personal data including whether it may be sold or not, which is the very definition of ownership.

There are companies who get it, like LinkedIn, who has gone on record by saying that its members own their data, and then there are companies like Vizio who just settled a $17M class action lawsuit over claims that it collected and shared audience viewing data without the consumers consent.

Netflix falls into the Vizio camp. In 2011, Netflix was sued by a handful of former customers in a class action lawsuit for keeping “digital dossiers” on their customers long after they had cancelled their subscriptions in violation of the Video Privacy Protection Act (VPPA). The case was settled out of court in 2012 for $9M. You might think that Netflix walked away from that case with a new-found respect for its subscribers’ data, but no, they were too busy lobbying Congress for a change in VPPA. They not only wanted to retain their customers data after cancellation, they were evangelizing their customers via the company blog to support a Congressional bill that would allow them to share their viewing data on Facebook via a Netflix app. Here’s what Jeff Roberts reported for GigaOm back on Septemer 23, 2011:

Poor Netflix (NSDQ: NFLX). On top of its other problems, an arcane law is spoiling its chance to participate in a new form of Facebook fun that lets users live-share their media experiences. The company is now renewing its push for Congress to revoke the law.

Netflix issued two blog posts yesterday urging people to support a bill repealing the Video Privacy Protection Act (VPPA), a quirky pre-digital law that prevents the company from sharing live information about what its subscribers are watching. Here is what Netflix hopes to accomplish:

The Netflix/Facebook integration empowers you as a Netflix member to share what you watch from Netflix with your friends on Facebook and to discover what your friends are watching both on Facebook and within the Netflix user interface. This makes it easier and more fun to find new television series and movies to watch.

Bottom line — Netflix aggressively went after as much viewer data as possible and worked to change the law to make it an even more efficient process. The class action lawsuit was just a bump in the road.

Fast forward six years to October 17, 2018 for a new Netflix data algorithm gone wrong scandal that made the news when Stacia L. Brown posted the following question on Twitter:

Other Black @netflix users: does your queue do this?

The Guardian interviewed Brooklyn film-maker Tobi Aremu who had the same experience as Stacia Brown with a movie called Set it Up — a love story about a young white couple, but Netflix made it look like a “two-hander” between Taye Diggs and Lucy Liu. “It’s beyond feeling duped,” he said. “Because if something is black, I take no offence in being catered to. I am black, give me black entertainment, give me more — but don’t take something that isn’t and try to present like it is. I wonder what the makers of those shows and films think. If it was me, I would be very upset.”

Georgetown law professor Anupam Chander told Wired that he thinks the company owes users more transparency. “The worry here is manipulation. The companies need to educate us about how their products and their algorithms work.”

Here’s how Netflix responded:

“We don’t ask members for their race, gender, or ethnicity so we cannot use this information to personalize their individual Netflix experience. The only information we use is a member’s viewing history.”

Well, that’s clearly a disingenuous if not utterly dishonest response, and one that flies in the face of Netflix’s successful lobbying to change the VPPA so that they could integrate with Facebook thus enabling the company to enhance what they know about each member which obviously includes race and (in Netflix’s own words) “make it easier and more fun to find new television series and movies to watch.

Netflix’s PR notwithstanding, the company aggressively pursues consumer data testing without informing its subscribers, it refuses to comply with requests by members to remove viewing data from its servers unless the member cancels his membership and even after cancelation there is no certainty that the company will delete the data or the aggregated proceeds of the data.

This lack of transparency is evident not just for customer data but for every shareholder frustrated by Netflix’s carefully orchestrated quarterly conference calls that “feature polite conversation by chosen analysts”, as Dan McCrum recently described them for his piece “This is nuts, when does Netflix crash?” in the Financial Times.

If this is as frustrating to you as it is to me, there’s good news. Netflix, as a subscription company, is uniquely poised to be vulnerable to a new form of protest — a subscriber action. Unlike a shareholder action that takes months of legal planning and lots of money, a subscriber action costs you absolutely nothing (remember, you’re cancelling something, not buying anything), takes less than a minute or two (at least in the case of Netflix), and requires only a bit of organizing with other like-minded folks (see the end of this article for that).

If you think that Netflix doesn’t care if you as a single individual cancels, you’re absolutely right. The company couldn’t care less if one or even a few hundred people cancel. They actually will tell you that if you request the company to delete your viewing data — “We are unable to delete your viewing data without deleting your entire account. If this does not meet your needs you are welcome to cancel your membership without penalty.” But when enough people cancel in the same quarter, it sends a message to the analysts and Wall Street.

The 2011 Subscriber Protest

The company’s market cap hit an all-time high of $15.9B on July 4, 2011.

July 12: Netflix splits its subscription plans into two and raises its rates by 60% in a blog post to its customers who almost immediately began unsubscribing.

The above image is a screen capture from a now deleted Netflix blog post that announced the rate change. Those were the first three comments of 5,000 that were left — all opposed to the rate change.

September 15: Netflix announces it expects to report one million fewer new subscribers in the third quarter than it anticipated.

October 24: Netflix reported 23.8 million total U.S. subscribers; down 800,000 from the second quarter.

October 25: CNN reports Netflix stock in a “nuclear winter” — down 74% from its high of $300 in July to $77 per share.

A corporation’s officers and directors have a fiduciary responsibility to the company’s stockholders. When the corporation is a subscription company like Netflix is, and when the subscribers’ provide not only all of the company’s income but also provide one of the richest repositories of viewing data on earth, the subscribers collectively control the fate of the company and there is little — actually nothing — that the company can do to prevent a subscriber action.

SUMMARY

In 2011, a loss of 800K subscriptions against a total subscription count of 24 million caused a “nuclear winter”. In 2018, considering the amount of the debt the company has, it probably wouldn’t take much more than that to cause the same stock drop even against 130M subscriptions.

In fact, the amount of people angry over the cancellation of Daredevil is probably over 5 million. If they all hit CANCEL at the same time, how far would the price of NFLX drop?