Netflix is betting that a password-sharing crackdown will reverse its dwindling revenue and wavering subscriber count. The company has historically never enforced its policy of one account per household. Now, by making members pay to share their subscriptions with people who live in other homes, Netflix will cash in on all those users they’ve been missing out on for all these years, right?
Well, it might not be that simple.
Netflix — where co-founder and now-former CEO Reed Hastings once said “password sharing is something you have to learn to live with” — told investors last year that password sharing contributed to the streamer’s first loss in subscribers in over a decade. After months of testing throughout Latin and Central America, Netflix finally brought paid sharing to Canada, New Zealand, Portugal, Spain, and now, the US. Under its new rules, Netflix wants users to pay an extra $7.99 per month to let just one person outside their household access their subscription.
Many questions remain about how Netflix will actually implement this — and whether it will actually help increase the company’s bottom line. Netflix has warned its investors of a “cancel reaction” several times in the past when talking about paid sharing, meaning that some people will cancel their subscriptions in response to the rollout in their locations. It has already seen that kind of reaction in Spain, where data from the analytics group Kantar found that the streamer lost 1 million users following the crackdown.
But to Netflix execs, the “improved overall revenue” will ultimately outweigh those lost subscriptions. In its last earnings report in April, Netflix said it was “pleased with the results” of its password-sharing crackdown in Canada, New Zealand, Portugal, and Spain while adding that its subscriber base in Canada is “now growing faster than in the US.” While Netflix assures investors that its results in Canada are a “reliable indicator” of what will happen here, Dan Rayburn, a streaming media expert and industry analyst, tells The Sports Grind Entertainment “that’s not a fair comparison,” as the number of subscribers and households in both countries are just “so different.”
Netflix also doesn’t take into account the number of subscribers who will choose to lower their plans instead of cancel them altogether, something Rayburn says also poses a big problem for the company. Without password sharing, Netflix’s more expensive plans lose some of their value, as some users might only subscribe to these plans just because of the perk that lets multiple people watch Netflix at once from different devices — and across different households.
While Netflix’s $15.49 per month Standard plan lets you watch Netflix on two devices at a time, the $19.99 per month Premium plan allows up to four simultaneous viewers. The shift toward password sharing could mean that some users will opt to go for the $9.99 per month Basic plan instead of canceling their subscription, which allows users to watch Netflix on just one device at a time. This potential trend could deal a blow to Netflix’s average revenue per user (ARPU), which sat at $16.18 in its last earnings report. “The cancellations will hurt, but the downgrades will hurt as well because Netflix can’t make that up in advertising,” Rayburn explains.
“All streamers face the same quandary of how to deal with password sharing”
Whether or not paid sharing ends up hurting Netflix’s balance sheet, it could have huge implications for the entire streaming industry. Other companies, like Disney, Warner Bros. Discovery, and Paramount, are likely looking to see how consumers respond to Netflix’s password-sharing crackdown. If all goes well, other services might want to follow suit, similar to the way we saw several streamers hop on the price hike bandwagon last year.
“All streamers face the same quandary of how to deal with password sharing,” Paul Erickson, the principal at Erickson Strategy and Insights, tells The Sports Grind Entertainment. “Everybody is going to take a look at this or take their cues from how Netflix handles this, how the American consumer reacts, or how they react and push ahead themselves.” With a streamer as big as Netflix getting into paid sharing, there’s always a chance that it will become an industry norm. Erickson says that he sees paid sharing as “part of the maturation” of the streaming industry, noting that “it had to be sorted out at some point, and it’s taking place now.”
Aside from Netflix’s investors, I don’t think anyone is happy about this change — especially since Netflix is the only service that’s making users pay extra. It’s still far too early to tell how many subscribers the streamer will lose over the change, how many will pick a cheaper plan, or how many will actually purchase add-on accounts. But Netflix has to be careful how it implements the change. After all, it doesn’t want to alienate all the paying customers who helped put the service in front of more eyeballs by sharing their passwords.