Justified Balancing or Cash Grab?

Password Sharing Crackdown by Streaming Giants

Whether you move out of your parent’s house or are taking advantage of an old friend’s (or significant other’s) account, password sharing across streaming giants has become an all too common practice. Why pay for a new subscription when you can simply make a new profile on that relative or friend’s account? What to us seems like a common practice has haunted the likes of Disney and Netflix as they miss out on revenue opportunities. While the average consumer should not be surprised that these streaming giants would implement measures to stop this money-bleeding practice, it seems that streaming platforms have underestimated the dissatisfaction such limitation would cause amongst loyal consumers.

With all that being said, the question then remains, is cracking down on password sharing a much needed strategic move by Netflix and Disney to ensure business growth in a growingly crowded market or is it a cash grab that places profits before consumers?  

Password Sharing: The Streaming Industry’s Greatest Problem

Whether password sharing is as detrimental of a problem as Netflix claims is unclear as Netflix’s first displays of concern over this issue came during their first quarter of subscriber decline in a decade. As the company tries to reassure shareholders and investors that they are still on the path to organizational growth, blaming the decline on password sharing could be an easy out. However, the numbers published by Netflix last May signal a serious concern over uncaptured revenue. 100 million households worldwide are supposedly using an account that belongs to someone living outside of that address. This is substantiated by a consumer research study by Attest, which found that of the people surveyed who have a Netflix account at home, more than 1 in every 5 households is using an account they do not pay for. Using this data to forecast US password sharing rates, it is possible that the password sharing user numbers far exceed what Netflix has presented in past announcements.

So now that it has been identified as a problem, how will anti-sharing measures impact subscriber rates and growth? Well, those numbers are becoming clearer each quarter since Netflix announced these changes this time last year. As of October 2023, Netflix added 9 million users globally and increased revenue in that quarter by 8% from the same time in 2022. The strongest growth has been seen in the lower tier plan offered by the streamer, which can be attributed to the pressures on consumer discretionary spending and wider recent economic downturn. According to a Netflix spokesperson, they have “now successfully taken action in every region in which [they] operate and [are] rolling it out as planned”.

But they’re not stopping at anti-password sharing measures. Price increases have been announced across all paying tiers on Netflix, a strategic move they claim is necessary to support growing Netflix Original productions and increased cost of operations. To be competitive in a saturating market that now includes Hulu, Paramount Plus, HBO, Prime Video, and many more, Netflix’s competitors must follow suit. In fact, announcements from the likes of Disney have already been made, stating their intention to improve detection processes of password-sharing accounts.

Figure I: Netflix Subscriber Count 2013-2023

Source: Searchlogistics.com

The New Policies: Netflix Timeline

What exactly do these restrictive measures that consumers are so enraged about look like? The timeline below seeks to highlight the measures (and reversals) proposed by Netflix.

March 2022: Netflix’s crackdown began in Latin America, where it announced that accounts deemed to be sharing passwords would face fees for their use. The resale black market of Netflix passwords in Latin America is one of the largest in the world, so Netflix’s decision to focus on this region isn’t suprising. These measures seemed to be effective as Netflix reported 1.2 million new subscribers in the second quarter of 2022.

February 2023: The same restrictions began to roll out in Canada, New Zealand, Portugal, and Spain. Their plan was to charge users with an account that is being used in a different household an “extra user” fee of $7.99 USD per month. Other measures include requiring users to set a primary address that all devices logged into the Netflix account must be present in according to a specified frequency. Further, to aid with the transition for those who want to buy their own account rather than paying the sharing fee, Netflix has enabled transferring profiles across various accounts to keep customizations.

May 2023: As a result of these measures, Netflix saw an increase in their stock price of 23 percent. Netflix revealed that it will use IP addresses, device IDs, and track account activity more closely.

Today: It seems that Netflix’s announcements have represented a pattern of “all talk, no action” as it has stated on multiple occasions that users who continue this practice are not currently getting banned from the service. This does not mean that this leniency will continue indefinitely as Netflix could simply be giving users time to make up their mind.

Disenfranchised User Reaction

#CancelNetflix was trending on X in June 2023 as has become tradition when an organization enrages millions of users. Users began throwing around terms such as “anti-family”, “cancelling my subscriptions”, “what’s your value”. Even politicians such as Shannon Freshour from Ohio accused Netflix of charging a heavy price tag for little value, instructing them to “sort their mess.”

Concern began to build amongst families renting out an Airbnb or with a second home regarding whether they will incur additional cost. For instance, Brandy Andersen is a traveling emergency room who relocates to a new city every three months. Evidently, she does not have the permanent home address that Netflix demands be set for each account and cannot “check-in” to a regular household as she moves from city to city. Brandy refuses to pay the additional user fee and is considering cancelling her account entirely as a result. Other users, including Airbnb owners have expressed concerns over not being able to verify their rental home devices with their main home address and fear having to pay an additional fee for a service they choose to make available for their guests.

Cost/Impact of Unhappy Users

Initial reactions such as the ones above prompted the digital community to expect a drop in Netflix users due to cancellations, but quite the opposite has been true. As mentioned, Netflix subscriptions are growing and so is organizational revenue. So why did people get it wrong when they expected users to ditch Netflix? Well, the exact reasoning is still up for determination as we are only in the immediate aftermath of these restrictions. Though one thing is clear, and it is that Netflix has become ingrained in 21st century culture and has become the go-to practice for relaxation. With a large 4K library, winning 26 Emmys in 2022, and encouraging user discussions when new content is released, Netflix remains the most prominent player in the on-demand streaming industry. In a world of credit cards and e-commerce, users feel the cost of paying less substantially and as creatures of habit, will stick to what they know and love. Recent increases in subscriber rates are evident despite price increases and password sharing guidelines.

Figure II: Table Comparing Netflix with other Streaming Competitors

Source: Cnet.com

With all of these alternatives entering the market and now offering average prices below those charged by Netflix, it is clear why Netflix’s market share is on the decline. However, it continues to outperform other streamers in website traffic and still maintains nearly 50% market share in the industry.

Figure III: Breakdown of Market Share in the Digital Streaming Industry

Source: similarweb.com

Netflix’s decline has had some very real consequences, particularly for employees. Since 2022, the first instance of declining subscriptions, Netflix fired 450 employees in the United States. In an attempt to bring back subscribers that have left or those who currently rely on other streaming services, Netflix introduced an ad-based subscription for only $7 per month, which has proved to be quite successful. This is just one example of companies adapting to the decrease in consumer disposable income during this inflationary period. However, when 100 million households are not paying for the service you are selling, you are losing out on billions of dollars in missed revenue. If any of us were shareholders of Netflix, we would be outraged. So while the initial reaction to these policies is outrage, an analysis of business strategy is paramount to understanding the industry.

Recommendations to Balance Strategic Needs and Customer Satisfaction

From a strategic growth perspective, as an industry giant facing plateauing subscriptions, it is completely understandable why Netflix would be looking to reduce password sharing. However, releasing sweeping changes without accommodations for specialized users leaves an organization vulnerable, and rightfully so, to consumer backlash or even boycott. With an appropriate communications strategy and public relations efforts, Netflix can reduce anxiety from frequent travelers, second homeowners, and Airbnb hosts while cracking down on black market password resales and cost-cutting account sharing by friends. Such a strategy may look like this:

Specialized Exceptions: By conducting detailed market research through focus groups, Netflix can put together a portfolio of exceptions to power sharing restrictions such as those for traveling nurses like Brandy and Airbnb owners. This will signal to consumers that it is truly the cost-cutting individuals who are sharing an account with 10 friends that Netflix is hoping to target in these efforts.

Communicate Re-Investment in Content: Through appropriate marketing channels, Netflix can clearly indicate how the additional revenue from these measures will be used to innovate content.

Listen to Consumers: By creating a platform for consumer feedback on these changes, users will feel heard. Netflix has already walked back some of their initial changes, so being able to admit when they got it wrong is necessary as future measures are introduced. The ad-based account is a great example of listening to consumers during a difficult time.

Ever since Netflix took down Blockbuster as the household provider of film and television entertainment, it has been a household staple. While stagnating growth does require difficult changes such as cracking down on password sharing, matters of consumer pricing need to be tackled delicately and in collaboration with the valued customer base. As it stands, many questions regarding Netflix’s future remain unanswered. Will subscriber rates continue to stagnate after the small increase post-crackdown? Is Netflix’s market share only going down from this point on? While the future of streaming is unknown, the market is only becoming more competitive each year and cracking down on password sharers does attempt to combat this competition, it is Netflix’s ability to innovate that will determine the answer to those questions.