Could Netflix’s Password Sharing Crackdown Backfire?

Dan Meier 28 February, 2023 

While Netflix lost half its market value in 2022, the streaming company had its eye on shares of a different kind. Netflix alleges that over 100 million non-paying households are using shared passwords, costing the company an annual $6 billion by Citi’s estimates. Once a selling point for Netflix, the streaming giant is now cracking down on password sharing, rolling out a set of policies designed to “convert password sharing into paid accounts.”

The policy updates, trialled in Latin America and apparently posted by accident on Netflix’s Help Centre page before being removed, revealed the new rules on account sharing. These include “paid sharing” options, whereby a customer can pay an additional fee to add a user outside their home to their account, and blocking accounts that do not connect to the household WiFi once every 31 days.

Sharing is scaring

Time will tell whether the crackdown will have the desired effect, or risks further churn for the company that once infamously tweeted the slogan: “Love is sharing a password.” Indeed, research by Spanish consultancy Barlovento Comunicación found that 58.7 percent of subscribers in Spain would cancel their subscriptions if they could no longer share accounts for free. Netflix itself anticipates “some cancel reaction” to its U-turn, but expects the move to pay off when those users locked out of the service sign up themselves. Yet this supposes that viewers currently using a shared password would otherwise be paying for the service.

“An analogy for me is to think about the days of file sharing, in which pirated music and movies flowed from consumer to consumer,” argues Greg Ireland, Research Director, TV and OTT Video at IDC. “Making this no longer possible does not mean former ‘content pirates’ will choose to now pay for that content. Not everyone is a true potential customer and the degree to which this policy alienates some share of the subscriber base may cause this policy to be more damaging than helpful.”

That said, Netflix is home to some of the industry’s most in-demand content, and there will inevitably be a proportion of password sharers experiencing Bridgerton withdrawal who want back in on the action. “If Netflix manages to convert just 10 percent of password sharers to a paid tier, it’s looking at 10 million new customers which would generate tens of millions of dollars in new monthly revenue,” comments Brandon Katz, Entertainment Industry Strategist at Parrot Analytics.

But by no means does Netflix have a monopoly on attractive content. According to Parrot Analytics, Netflix leads in terms of US demand share (17.7 percent), but is closely followed by Hulu (15.5 percent) and HBO Max (15.2 percent). And with household budgets more squeezed than ever, lower prices could drive consumers to cheaper services or those that do allow them to share passwords. “In the case of Amazon Prime Video, the streaming service is a loss leader meant to provide added value to Prime subscribers while spurring increased product sales,” notes Katz. “The more people sampling Prime Video, even through password sharing, the greater opportunity to increase sales.”

U-churn if you want to

Netflix made another about-turn last year when it introduced an ad-supported tier, after maintaining for years that the company wants no part of the challenging (and often controversial) advertising business dominated by Amazon, Google and Facebook. “We’ve got a much simpler business model, which is just focused on streaming and customer pleasure,” then-CEO Reed Hastings said in 2020.

The promise of ad-free, password-swapping streaming forever turned out to be too good to be true, and Netflix is taking a more cost-conscious approach to an industry in transition. “The entire OTT market seems to be heading well away from the early days of ‘lots of content’ for a ‘low monthly fee’,” remarks IDC’s Ireland. “In some ways, being far removed from an original cheap, shareable and ad-free incarnation is just how the market continues to evolve.”

Even the company’s content no longer looks to be the driving force it once was; demand for Netflix originals fell by 4.1 percent in Q4 2022, according to Parrot Analytics’ US data, while overall demand for SVOD originals shrank by 1.6 percent. “The proliferation of entertainment distribution options and the overwhelming number of available programs may finally be stirring a bit of content fatigue amid audiences,” observes Parrot’s Katz. “That’s not just a potential concern for Netflix, but all of Hollywood.”

However, paid password sharing may be one feature that Netflix’s competitors do not try to emulate – and least for the time being. “There’s a reason Netflix itself supported password sharing throughout the 2010s – it helped expand the streamer’s cultural footprint and inspired brand loyalty,” says Katz. “Perhaps when other streamers such as Disney+ begin zeroing in on 220+ million worldwide subscribers, we might see a push to crack down on password sharing and increase ARPU. But until then, most major streamers will presumably be content to take the foundational value it brings.”

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2023-02-28T11:11:51+01:00

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