Netflix (NFLX 3.04%) is starting to get serious about cracking down on password sharing.
It ran some experiments about a year ago, prompting users it suspected of sharing a password to set up their own account. That didn't amount to much. Now it's telling users if they keep sharing accounts, they'll have to pay an extra fee. The test is currently taking place in Chile, Peru, and Costa Rica. This one is accompanied by an official press release from Netflix announcing the new "feature," so it seems like it has more potential to curb password sharing than previous efforts.
Cutting down on password sharing is a huge opportunity for the global leader in subscription video on demand. It could be worth as much as $6 billion in annual recurring revenue.
Netflix's Singapore offices. Image source: Netflix.
How many people are sharing passwords?
You probably know someone who shares a login for Netflix or another streaming service. One-third of U.S. subscribers shared a password for a streaming service, according to a February 2020 survey from Magid. Netflix password sharing is most prevalent, with 11% of all American viewers mooching a login from someone else, according to an S&P Global survey from December.
With over 75 million subscribers in the U.S. and Canada, that means nearly 10 million households aren't paying for access to Netflix based on S&P's survey. When extrapolated globally, the number could be close to 27.5 million.
That's a big opportunity for Netflix. With an average revenue per user of $14.78 per month for users in the U.S. and Canada, 10 million additional accounts would be worth nearly $1.8 billion in annual revenue. And with a recent price hike, they may represent closer to $2 billion in lost revenue.
Last year, Citigroup analyst Jason Bazinet estimated password sharing cost Netflix as much as $6.2 billion globally. That's certainly on the high end of estimates, but there's no doubt password sharing is costing Netflix billions of dollars in annual revenue.
Will the crackdown work?
Netflix is notably testing the account sharing changes in a few Latin American markets. Those markets are significantly smaller than the U.S. However, the region was one of the first in Netflix's international expansion, so it may be showing similar signs of saturation as the U.S. and Canadian markets. Indeed, Netflix's subscriber count grew just 6.4% in Latin America last year, slightly slower than its global subscriber count.
Additionally, Netflix hasn't increased prices in these markets in 2022, while it has implemented increases in the U.S., Canada, and Europe. A successful test to effectively raise prices in these markets may mean the next price increase in North America and Europe comes in the form of a tax on password sharers. With Netflix now the most expensive on-demand streaming service in the United States, it may look to keep its base price close to the competition.
But subscribers have been vocal about their willingness to cancel if Netflix makes the change. Many have effectively abated the near-annual price increases by sharing accounts with friends or family and splitting the cost. That's evidenced in the fact that Netflix's average revenue per user has climbed faster than its price increases, suggesting many opt for premium plans that allow multiple simultaneous streams in order to make sharing easier.
And with lots of streaming services now available to consumers, subscriber churn is a bigger threat than ever to Netflix's continued subscriber and revenue growth. Consumers can opt for a cheaper streaming service -- one that doesn't yet care as much about password sharing.
But there's a difference between what people say they will do and what they actually do. Canceling a service, especially one shared among multiple people, can be difficult. So, the tests in Latin America will be key in seeing how password sharers actually behave.
If the test is successful, and Netflix expands the account-sharing feature globally, it could capture a large portion of the multi-billion dollar opportunity. Even for a company that generated $30 billion in revenue last year, that'll have a meaningful impact on its revenue growth.
