Netflix (NFLX +0.35%) started cracking down on password sharing this month, after years of passively allowing the practice. While it's always been against Netflix's terms to share login credentials with people outside your household, Netflix has been hesitant to enforce that rule.
But now the problem may be too big to for Netflix to ignore. Analysts estimate the company's losing billions in revenue due to password sharing.
Image source: Netflix.
It's almost weird if you don't share passwords
One-third of all Netflix users say they share their passwords with at least one other person, according to research firm Magid. That number is likely increasing as more streaming services enter the market. The options to "trade" subscriptions -- you pay for this, I'll pay for that -- with friends and family are growing.
If each of those one-third of subscribers shared their passwords with just one other person, that represents nearly 68 million freeloaders. If Netflix could get them all to sign up, that would equate to almost $9 billion in revenue based on Netflix's average revenue per subscriber of $11.02 per month.
Of course, not every password sharer is going to sign up if Netflix manages to cut them off. Citi analyst Jason Bazinet still thinks the opportunity is greater than $6 billion for Netflix. Bloomberg Intelligence is less optimistic, but still sees a substantial benefit. The research firm thinks a crackdown will increase revenue by 10% ($2.5 billion) based on a password sharing rate of 20% to 30% in the United States.
Bank of America analyst Nat Schindler didn't provide an estimate on revenue, but suggested the crackdown could act as a tailwind for subscriber net additions.
What could go wrong?
There's a reason Netflix has been hesitant to cut down on password sharing. There's no clear line to determine legitimate password sharing versus illegitimate sharers. "You have to learn to live with [it] because there's so much legitimate password sharing," CEO Reed Hastings said in 2016. "So there's no bright line, and we're doing fine as is."
Being too heavy-handed has the potential to upset and frustrate customers. That's something to always avoid, but with so many streaming options now available, it's more important than ever.
What's more, customers sharing passwords are less likely to churn or hop from one streaming service to the next. Canceling a subscription that you share with someone requires input from multiple parties. It's why wireless service companies love family plans and offer substantial discounts for them; they have much lower churn than single lines.
Netflix could see increased churn if password sharing is no longer an option. Some analysts see increased churn as a big risk factor in 2021.
There are billions of dollars in annual revenue on the line, though. If Netflix does this well, it could be a substantial boost to its top line. In its tests, Netflix is asking for users to verify their access to the account they're using, and if they don't, it offers a 30-day free trial. Netflix stopped offering free trials to the general public last year.
The best place for Netflix to test the crackdown is in the U.S. and Canada region. Subscriber growth in the region is slowing, and it's showing signs of having fully saturated the market. It also has the higher average revenue per subscriber. As such, curbing password sharing is likely to have the biggest effect in that region.
In markets where the media company's still growing quickly, Netflix ought to be more tolerant of password sharing. It exposes more people to Netflix and all it has to offer, and when users are in a position where it makes sense for them to subscribe on their own, they're more likely to. Former HBO CEO Richard Plepler once called password sharing "a terrific marketing vehicle for the next generation of viewers." Netflix shouldn't cut that off before it becomes a substantial opportunity cost.
While Netflix may be losing billions in revenue to password sharing, its best course of action is to try to capture that opportunity a small bit at a time. It can learn best practices and iterate, which is something the company is particularly good at.
