OK, everyone, the jig is up. Netflix (NFLX -0.63%) knows you've been sharing your account with family, friends, cousins, and classmates. Until recently, the company was turning a blind eye to the activity, judging that the benefits outweigh the costs. For instance, some would be willing to pay a higher price for a service they can share with multiple people, and perhaps the monthly fee could be shared as well. I'd be curious to see how many electronic money transfers in the amount of 50% of a Netflix subscription transpired last year.
Whatever the total number of unauthorized sharing may be, it appears to have hit an inflection point. Netflix is starting to clamp down by initiating security measures and testing an additional fee to authorize account sharing. The rollout will begin in Chile, Peru, and Costa Rica and could expand beyond that if management likes the results.
Let's look at what that could mean for Netflix investors.
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The policy change could unlock subscriber growth for Netflix
Already, Netflix boasts 222 million subscribers worldwide. That was up 9% from the same time the previous year. Engagement and subscriber growth surged at the initial phases of the pandemic as hundreds of millions of folks were relegated to entertaining themselves exclusively at home.
Now that COVID-related restrictions are easing, folks are leaving their homes more often, and subscriber growth has slowed for Netflix. That could partly explain why Netflix has decided to clamp down on account sharing.
It could be a means to unlock millions of new paying members simply by reducing the number of people sharing a single account. The magnitude of the clampdown can also intensify. At the most extreme, Netflix could restrict each account to use on four devices. That means you must select which devices are authorized to use your Netflix account, and you cannot use your account on any additional gadgets. Three TVs and a phone; two TVs, a tablet, and a phone -- your choice. That would limit account sharing because folks would be more hesitant to give away their login and password.
The other side of the argument says that Netflix could lose millions of subscribers if it implements a strict policy. For instance, people who share an account and chip in to pay for the service may not find Netflix's subscription worthwhile if they have to pay the total amount by themselves. Netflix is already one of the priciest streaming service options for consumers; limiting the ability to share would essentially raise the price further.
What this could mean for investors
Interestingly, it does not cost Netflix that much more if an extra 30 million people are watching content it already paid for. In the year ended Dec. 31, Netflix generated $29.7 billion in revenue, spent $17 billion on content, and earned $5 billion on the bottom line.
The expense for Netflix is the opportunity cost: How much more revenue could it bring in if it restricted account sharing to a more substantial degree? In reality, Netflix does not know the answer to this question. It has not tried this before, and there is no telling if the total of new signups versus cancellations will result in higher revenue.
Therefore, it's good news for shareholders that Netflix is testing this strategy before making any global policy changes. Investors can tell if the move is working favorably if Netflix expands the rollout to more markets. Regardless, it will be interesting to watch, so stay tuned.
