When Netflix (NFLX -1.56%) started talking about password-sharing subscribers taking a bite out of the company's revenues, many observers saw that as a brand-new idea. However, the company started to address this issue several years ago, with a significantly sharper approach beginning in June 2021. Management must have been thinking about this stuff for years -- the only news here is that it is taking more direct action to address it.
Where are those missing revenues? Image source: Getty Images.
The crux of the issue
Subscribers to Netflix's media-streaming services are supposed to pay for that privilege. Here's how the company's terms of service address that crucial business idea:
"The Netflix service and any content accessed through our service are for your personal and non-commercial use only and may not be shared with individuals beyond your household."
Elsewhere, the company clarifies what counts as a household, and why it matters:
"A Netflix account is for people who live together in a single household. This single household is the Netflix household and is associated with the primary account owner's devices and the devices used by other people who live in the Netflix household."
So it's all right to share your Netflix log-in info with other members of your immediate family. Otherwise, it wouldn't make much sense to charge extra for a higher-tier service plan that lets you play content on two or four different devices simultaneously. But that's where the account sharing is supposed to end. I'm not supposed to let friends, distant family, or total strangers log in to Netflix with my credentials. If they like the service, they should consider springing for their own subscription.
The active anti-sharing effort started quietly in 2018
This issue has been bubbling under the surface for many years. Analysts have seen it as a significant problem since the early days of Netflix's digital streaming. Very recently, management started to take direct, public action.
First, the company kicked off a test program in three Latin American markets, asking people to pay a little extra if they wanted to share their Netflix access with someone not living in the same household. The upcharge for adding a remote user is roughly half the price of a full single-user subscription. If these trials are successful, Netflix could expand them to other markets. If not, they are sure to try some different ideas to achieve the same result -- collecting a little bit of money from people who have been using Netflix for free.
According to data from the Internet Archive, Netflix's terms of service added the anti-sharing quote above in May 2018. Four months later, the company started sending emails notifying the account holder of Netflix sign-ins from a new device or internet address. The first version of this notification was all about security, asking the user to reset their password if they didn't recognize the new login attempt.
That warning remained unchanged for a couple of years. In July 2021, Netflix addressed the password-sharing idea for the first time. Since then, the email notifications contain this interesting language:
If this was you or someone in your household: Enjoy watching! Have you seen this one? [Link to a current hit]If it was someone else: Please remember that we only allow the people in your household to use your account.
This notification is a watered-down version of the more hands-on Latin American experiment. Netflix was setting the stage for its upcoming monetization attempt here, asking subscribers to make sure that nobody outside the household takes advantage of their log-in credentials.
So when the experiment started in Peru, Costa Rica, and Chile this spring, it was essentially just an amplified spin on an existing policy.
Can Netflix monetize password-sharing subscribers?
The early tests may or may not show what Netflix will stick with in the long run. In April's earnings call, COO Greg Peters noted that the company had been working on the current password-sharing mitigation for two years.
"It will take a while to work this out and to get that balance right," Peters said. "And so just to set your expectations, my belief is that we're going to go through a year or so of iterating and then deploying all of that so that we get that, sort of that solution globally launched, including markets like the United States."
Later in the same call, CFO Spence Neumann explained that the account-sharing sub-accounts will add to the company's revenues, but they won't count as new subscribers. So if this idea rolls out globally, we should see subscriber growth flatten out as people take advantage of this lower-cost sharing option instead of opening entire accounts. At the same time, revenues per account should rise and the total revenue stream should continue to grow.
In the end, it's the total revenue that matters most. Netflix has delivered remarkably consistent top-line growth in the digital streaming era, to the point where the onset of coronavirus was nearly invisible on a long-term chart:
NFLX Revenue (TTM) data by YCharts
That's the most important trajectory in Netflix's bag of business tricks. As long as the revenue growth continues, it doesn't really matter whether it happens because more accounts are added or because each subscriber becomes more profitable over time. The effort to monetize password-sharing customers should support that ambition over the next couple of years.
So it's business as usual, and Netflix is ensuring healthy growth where it matters most. Meanwhile, market makers are staring themselves blind at slower subscriber addition figures, and Netflix shares are back to prices not seen since 2017. That's a massive disconnect between tremendous business prospects and plunging stock prices. So, all things considered, Netflix is my favorite investment idea today.
