Netflix (NFLX +0.51%) has breathed a sigh of relief as its second quarter reports show the service exceeded expectations by losing 970,000 subscribers rather than the projected 2 million. The company has plans to further grow revenue by cracking down on password sharing, although that might not be the best way forward.
Here's why Netflix should focus on improving its image and boosting consumer satisfaction rather than setting limits on passwords.
A risky approach
In March, Netflix began testing methods of limiting password-sharing in Chile, Costa Rica, and Peru. The company added two new features in these countries, with one allowing Standard and Premium accounts to add up to two sub-accounts for those in separate households for between $2.00 and $3.00 extra. The second feature was applied to all subscription tiers and let consumers transfer a Netflix profile to an entirely new account.
On the surface, Netflix is designing its password-sharing scheme with the consumer in mind. The introduction of sub-accounts would allow millions of consumers to pay less than $5.00 a month for all the benefits of Netflix, costing substantially less than the Standard plan of $15.99/month. Netflix's continued subscriber losses clearly illustrate that the company needs to rethink its business model. Its password-sharing tests abroad can potentially increase revenue.
However, more recent reports on the crackdown are worrying. From August 22, Netflix members in Argentina, El Salvadore, Guatemala, Honduras, and the Dominican Republic will pay a fee for using their account for more than two weeks outside their primary household. The update will only apply to devices connected to a TV, not tablets and smartphones, and cost subscribers around $2.99. The move could push consumers to drop Netflix when traveling, leaving them open to seeking alternative streaming platforms and not returning.
Netflix has led the streaming industry from the start, designing the basis for what most streaming platforms look like today. Its password-sharing initiative is yet another innovation that has the potential to add a new standard to the industry. However, there's also a chance it could backfire if its competitors don't follow suit.
Waning consumer satisfaction
Increased competition in the streaming industry has pushed consumers to compare Netflix to better-valued services -- to the detrimental of the company. Consumer satisfaction and trust has sagged regarding Netflix's value and content quality. A crackdown on password sharing could push its members further into the hands of the competition.
In terms of consumer value, Netflix's offering is at the lower end of the spectrum. Its cheapest plan is $9.99 for one stream at less than 720p resolution, with its next tier being $15.99 for two streams and 1080p resolution. Consumers interested in 4K video quality and up to four simultaneous streams must pay $19.99.
Meanwhile, its biggest competitors, Disney's (DIS +0.72%) Disney+ and Warner Bros. Discovery's (WBD 0.71%) HBO Max, allow between three to four streams and have 4K resolution as standard for all members. Disney+ costs $7.99/month, and HBO Max is $14.99/month for ad-free video. Netflix has plans to rectify this with its upcoming ad-supported tier, but it will take time for the public to see the service in a new light.
Furthermore, consumers have long complained about the quality and consistency of Netflix content. The company's hits, such as Stranger Things and Squid Game, have significantly paid off, but that doesn't mean consumers can trust its new content to live up to the same standard. For instance, Netflix most recently released a series adaptation of the popular game Resident Evil. The show had the potential to pull in subscribers from a massive and well-established fanbase, but the series is now one of Netflix's worst-rated shows ever. Additionally, the company's reputation for canceling well-liked and unfinished series has only worsened matters.
Alternatively, HBO Max and Apple's (AAPL 1.29%) Apple TV+ have prioritized quality above all else. HBO Max alone walked away with 108 Emmy nominations on July 12, with 140 going to HBO as a whole -- an increase of 10 from 2021. Apple TV+ walked away with 52 nominations, a 40% increase from the previous year. Netflix did well to earn 105 nominations, but this figure decreased from 129 in 2021.
NASDAQ: NFLX
Key Data Points
Retaining subscribers
It's positive that Netflix is considering all options as it evolves its business to fit the altered streaming industry. Password sharing is an optimal way to increase revenue, but it is crucial for the company to factor in its competition when planning. If Netflix does not prioritize customer satisfaction before introducing password crackdowns in the U.S., subscribers could flock to platforms without such stipulations.
The company is obviously still working out the kinks with the new system, so not all hope is lost. Investors should watch out for how Netflix handles password-sharing in the U.S. when the update launches and whether or not the competition seems interested in implementing similar restrictions.
