Netflix (NFLX -0.63%) has already begun testing a solution to its password sharing problem. The streaming leader said there's about 100 million households around the world that are watching Netflix without paying for it. In three Latin American markets, it's asking those households to pay a little extra to keep streaming.
Many Netflix sharers have been vocal about their willingness to cancel if the company tries to charge them more for sharing their login credentials. Netflix may not find it profitable to charge subscribers more for sharing passwords, but it needs to curb sharing somehow. A more profitable approach may be found in its plans for an ad-supported tier.
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People are getting tired of paying more
Netflix has steadily raised its pricing over the last decade, pushing its subscribers to pay more and more each month. Price hikes have occasionally resulted in some speed bumps in subscriber acquisition, but ultimately, the company works through them.
After raising prices again earlier this year, management said it saw low subscriber acquisition rates. That, combined with a slight uptick in subscriber churn (and shutting down in Russia), led it to its first reported subscriber loss in a decade.
One thing worth noting is that Netflix's average revenue per user has increased faster than its overall price hikes. That trend suggests many people are moving to higher tier-plans, perhaps with the intent of sharing. Netflix's higher-tier plans allow more simultaneous streams, but it means that lower-tier subscribers are essentially subsidizing these password sharers.
In a recent study by Aluma, 13% of respondents said they would cancel their subscription if forced to pay extra for sharing their passwords. That's about one-third of all password sharers in the U.S. and Canada based on Netflix's estimates. On the other hand, a similar amount said they would pay $3 per month extra to add a user. It's hard to square losing $15.49 per month in revenue from one group and replacing it with $3 per month from another group of a similar size.
That said, it's one thing for someone to say they'll cancel their service and another for them to actually do so. That's especially true when there are multiple parties that would have to agree to cancel the service such as in the case of a shared account. Netflix will need more than five times as many people to pay the upcharge than cancel in order to break even.
The greater benefit for Netflix, however, may be that it deters more free password sharing. That gives it more opportunities to get households to sign up for their own subscription. But there may be another way for Netflix to monetize password sharing.
Advertising could be a solution
Netflix also expressed openness to an ad-supported tier of the service, which would make the subscription more affordable for many households. It could also be a solution to its password-sharing monetization problem.
Since password-sharing accounts are likely to spend more total hours watching Netflix (multiple households versus single households), Netflix should be able to generate more ad revenue per subscription from them.
Ad-supported tiers generally end up generating higher revenue per user for streaming services than ad-free tiers. Walt Disney's Hulu and Warner Bros. Discovery's HBO Max and Discovery+ are examples where that's the case. Disney plans to introduce an ad-supported tier for Disney+ later this year.
If Netflix allows ad-supported subscribers to share passwords without charging extra, it could allow it to profitably grow subscribers and monetize its password-sharing problem at the same time. With long-term goals of double-digit revenue growth and operating margin expansion, Netflix needs to find leverage with its existing viewership in order to meet its marks.
