Following its rough first-quarter earnings report earlier this year, Netflix (NFLX +0.12%) announced a handful of strategies to tackle its declining subscriber numbers. Among those plans was a move to clamp down on account sharing, something that has long been in violation of Netflix's terms of service, but rarely enforced.
The company said it would begin trying out ways to dissuade users from handing out their log-in details to family and friends, or at the very least, to encourage such users to pay for the privilege.
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Testing, testing, testing
Netflix rolled out a plan earlier this year that charges users a little extra if the company believes accounts are being shared with others. The pilot program was deployed in Peru, Chile, and Costa Rica, and offending subscribers received notices of adjusted pricing because other households were using their log-in.
Many such customers have expressed their confusion, saying they believed a "household" to include all user profiles linked to a single account, even if those individuals didn't live under the same roof.
Netflix has since previewed a new test, set to go live on Aug. 23. It defines "households" as all viewers based at a single address. The pilot will deploy in Guatemala, El Salvador, Honduras, Argentina, and the Dominican Republic, and as before, extra fees will be levied if the company deems account log-in details are being shared with users at a secondary location. However, there are some notable holes in the plan, meaning it's possible this strategy could quickly unravel.
Netflix wants to watch your TV
Netflix says it will monitor smart-TV use, flagging additional TV sets that are not at the primary residence. The company notes viewers will have a two-week grace period when it identifies a secondary location, after which it will charge customers extra if they want to stay logged in on the additional device. At first blush, it sounds like a logical plan, but the devil is in the details.
Netflix has published a support page outlining just how it will monitor use to identify smart TVs in other households. The streamer states it will gather "information such as IP addresses, device IDs, and account activity" to help it determine when subscribers are running afoul of the rules. Unfortunately, none of these data collection methods are completely reliable indicators, and at least two aspects can be overcome relatively easily.
NASDAQ: NFLX
Key Data Points
An IP address is not equal to a home address
The first issue with Netflix's plan is its reliance on IP addresses. Internet service providers (ISPs) typically assign an IP address for a customer's broadband connection. This string of numbers and periods is dynamic, meaning it can (and does) change frequently, making it effectively useless to connect activity to a single property over a sustained period.
It's important to note IP addresses and related web activity can be linked to a physical location, but because ISPs control that information, it usually involves a warrant or some other judicial order. Netflix is almost certainly never going to seek anything as drastic as that, so it's probably anticipating limited insight from IP addresses. But what about device IDs?
Smart-TV device IDs can be spoofed
Netflix's decision to track IDs for smart TVs makes a lot of sense because such identifiers are tied to a physical device. And of course, unlike a smartphone or laptop, smart TVs by their very nature are usually fixed in one spot -- this alone makes them a better proxy for location than broadband IP addresses. Still, enterprising customers will always find a way.
Device spoofing is a technique that has long existed in the PC world. For the uninitiated, it's a technical process of changing a machine's factory-assigned MAC address, a code that networks use to identify individual machines. And because smart TVs are really just computers with nice displays up front, they can be manipulated in many of the same ways as a laptop or desktop PC.
Admittedly, swapping out a smart TV's MAC address to save a few bucks on a Netflix subscription might sound excessive, but there is precedent. Many who were around in the 1990s will remember the underground trade in so-called "black boxes," illicit TV boxes that let viewers access full cable packages free of charge. In short, if Netflix relies on device IDs to bill customers more, expect there to be plenty of online forums offering workarounds.
Perfect is the enemy of good
The fact Netflix is rolling out this strategy -- with such inherent flaws -- suggests the company knows there's no perfect method for stopping all password-sharing on its platform. But maybe the streamer is fine with that. After all, perhaps the goal is not to find the structure that truly works, but to land on a method that is good enough.
Since the early days of the streaming industry, shared log-ins have almost been treated as a promotional activity by Netflix and its ilk based on the following idea: Sure, lots of people aren't paying, but someday they will.
But with the company's future still uncertain, Netflix knows the time has come to encourage more of its viewers to pay up. These pilot strategies will hopefully provide insight into whether the company has found a "good enough" solution, or whether it'll be searching for a while yet.
