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Password Sharing Is Streaming's Big Question Mark

By Stephen Lovely - Nov 12, 2019 at 10:13AM

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How will consumers change their subscription habits in an increasingly fractured streaming market?

The arrival of Disney's ( DIS 2.84% ) Disney+ subscription video on demand (SVOD) service has the potential to dramatically alter the current streaming landscape. With a stable of valuable IP that includes massively popular franchises like Star Wars, Disney+ is the latest -- and potentially the most dangerous -- competitor that Netflix ( NFLX 1.75% ) has ever had to contend with. That has sparked plenty of discussion about whether and to what extent Disney+ might be able to take customers from Netflix.

Netflix is projecting confidence. CEO Reed Hastings has said that cord-cutting's rising tide ought to lift all boats; with so many people kissing cable goodbye, the reasoning goes, there ought to be enough customers to go around. Others believe that a fractured streaming market will lead to more households with multiple subscriptions -- as well as to plenty of subscription churn as households rotate through subscriptions one at a time to catch their favorite shows.

But there's one factor in the financial equation that's very hard to predict: How will subscription and password sharing affect all these consumer discretionary giants?

Coins fall through a businessman's hands.

Image source: Getty Images.

Streaming's open secret

It's not at all uncommon for subscription streaming customers to share their passwords with other (nonpaying) streamers. Most subscription-video-on-demand (SVOD) services encourage streamers to share accounts only within a household. The services may offer family-plan discounts or the ability to create multiple user profiles within one account. But virtually all SVOD services ban password sharing beyond the household in their terms of service.

That doesn't mean that these companies do much about the issue, though. Netflix is well aware of the password-sharing phenomenon and has been pretty passive about cracking down on sharers. Despite the fact that as many as 28% of Netflix users may be sharing their passwords, Netflix has mostly shrugged off the issue.

Netflix doesn't say why it's so passive about this, but the company has presumably given the idea at least some thought. It's likely that Netflix has determined that most freeloaders would not become customers if they were cut off from their illicit streams. Or perhaps Netflix is considering the potential PR consequences of a crackdown -- or the exposure that the service gets through the password-sharing practice. So while some argue that password sharing costs Netflix billions in lost subscription revenue, it's not necessarily a sound assumption to say that all password sharers are lost customers nor that a crackdown would have the intended effect.

So Netflix has been passive. But will this stance still make sense when Netflix has bigger and more attractive competition?

Password sharing's potential new consequences

Password sharing hasn't been a huge issue for Netflix, but it could become a larger one very soon. It's one thing for Netflix to ignore password sharing in a pre-Disney+ world, when Netflix may reasonably assume that freeloaders are not potential customers. But in a more piecemeal market, it's easier to imagine freeloading among those who do have a streaming budget: Customers could pay for either Disney+ or Netflix, then swap passwords with a sibling or a friend in order to watch the other. In this scenario, Netflix freeloaders would be streaming customers (of competitor Disney+), not noncustomers of the sort that are getting free Netflix now.

Password sharing has the potential to cut down on the number of multi-subscription households (or the number of paying ones, anyway), and that could make a big difference in what a more fractured streaming market looks like. But since the streaming market right now is much less fragmented than it's about to become, it's tough for any tech investor to be confident about what the future of password sharing will look like. We have a sense of how widespread it is now, but that doesn't necessarily tell us anything about how people might share passwords in a more segmented market. It's probably safe to assume that current password sharers will continue their arrangements, but we don't know if current nonsharers -- people who pay for their Netflix and use it properly -- will become password sharers in significant numbers.

The streaming giants prepare

Disney seems to be thinking about this issue. Though we don't yet know much about the specifics, Disney has announced a partnership with internet provider Charter Communications that it says will lead to improved strategies for combating piracy and password sharing.

Other services may be following suit: The Alliance for Creativity in Entertainment (ACE), a euphemistically named Motion Picture Association of America spinoff dedicated to copyright infringement issues, has announced a working group dedicated to solving the problem of password sharing. ACE members include Disney, Netflix, AT&T's Warner Bros., and other media and streaming giants. Though Netflix and AT&T haven't publicly updated their laissez-faire attitude toward password sharing, the actions of ACE suggest that things are changing behind the scenes. If password sharing does end up having a big impact on streaming subscriptions in a more fractured market, investors should expect to see the streaming giants finally crackdown on the practice.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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