Media-streaming veteran Netflix (NFLX +3.42%) is kicking the tires on an idea that could boost the company's top-line sales. By way of a limited test run in three Latin American markets, Netflix is cracking down -- very gently -- on subscribers sharing their passwords with people outside their own households.
Netflix bears have been clamoring for a stricter attitude toward password-sharing for years. Will this experiment make a difference to the company's top and bottom lines? Let's have a look.
Image source: Getty Images.
What's new?
Netflix subscribers in Chile, Peru, and Costa Rica will soon have two new features available.
- Subscribers to the mid-range Standard plan and the top-shelf Premium service will be able to add up to two more people to their accounts for a small monthly fee. Each user gets a separate profile, login ID, and password.
- Customers under any tier of the Netflix service can transfer profile information, recommendations, viewing histories, and lists of bookmarked titles to a new account or a new sub-account.
As a reminder, Standard services normally allow for up to two concurrent video streams on different devices, offered in high definition. Premium plans provide for up to four concurrent streams and ultra-high-density quality. The Basic plan is meant for a single user and the video is shown in a lower resolution.
The surcharge for one extra sub-account varies from roughly $2.13 in Peru to $2.99 in Costa Rica. In all cases, that works out to an upcharge of approximately 25% per extra user under the Standard plan and 20% for the Premium service.
When the new fee-bearing features become available, the company will also start applying additional security checks in these markets. Netflix users logging in from devices outside their household's established network address may be asked to enter a password every once in a while, just to make sure that they aren't using an old login without actually knowing the password.
"Accounts are being shared between households -- impacting our ability to invest in great new TV and films for our members," the announcement states. In other words, Netflix should be able to offer more and better programming if everyone pays their fair share to access the content. That's the rationale for the new features and nagging password requests.
What's the big idea?
Analysts have been hounding Netflix about password-sharing since digital streaming became a paid service in 2011. For example, back in the third-quarter earnings call of 2017, the issue was raised in light of the company's recently issued price increases. Chief operating and product officer Greg Peters shrugged it off as a non-issue at the time. Two years later, the purported password problem came up again, and not much had changed from Peters' perspective:
"I think we continue to monitor it," he said. "So we're looking at the situation and we'll see, again, those consumer-friendly ways to push on the edges of that, but I think we've got no big plans to announce at this point in time in terms of doing something differently there."
That's just about all Netflix's management has ever said about password-sharing, but that hasn't stopped critics from viewing it as a revenue-sapping weakness. Enduring Netflix bear Michael Pachter of Wedbush Securities keeps bringing it up, arguing that roughly one-third of the 29 million members in early 2013 were freeloaders using someone else's account.
NASDAQ: NFLX
Key Data Points
What's next?
So the bears will watch the Latin American experiment closely, looking for signs that Netflix needs to roll out similar efforts to limit the sharing of passwords across every market.
If it turns out that they were right all along, and that password-sharing undermines Netflix's revenues to a meaningful degree, we'll see the company adopting some form of anti-sharing policies everywhere. Revenues will go up, followed by stronger earnings and cash flows, in line with the stated purpose of supporting the company's content production efforts through increased monthly fees.
On the other hand, it's also quite possible that Netflix will see no significant difference in its test-market revenues. In that case, it will be business as usual for the foreseeable future, as management goes back to brushing off questions about a proven non-issue.
I honestly don't know which outcome I would prefer. Stricter security and improved user policy compliance would boost the top line, which is an obvious win for the company and its investors. On the other hand, it would be nice to see that Netflix hasn't been ignoring a serious problem for a decade, so it's easy to root for a meaningless upside from the quelling of shared passwords.
So I'm curious about the outcome of this little research project, but I'm not worried about the final outcome. Either way, Netflix looks dramatically undervalued today and should be on every serious investor's short list for further research and consideration.
