According to Netflix (NFLX 1.74%) about 100 million of its global subscribers are sharing their passwords with those outside their household. And while such activity has long been against the company's terms of service, it's only within the last 12 months that the streamer has actively started to crack down on the practice. However, fresh insight from Netflix suggests the strategy is having a negative impact in some markets -- so much so that the company is rethinking its approach for the U.S.

Let's break down what's happening, why it matters, and what investors need to know about Netflix's plans.

Breaking the habit is hard

In March 2022, Netflix launched a pilot scheme in a handful of Latin American countries, charging customers additional fees when it detected accounts were being used in more than one location. Although the levies drew some backlash, Netflix committed to the strategy, saying it was an important part of maintaining a "sustainable business model."

In the first quarter of fiscal 2023, Netflix introduced account-sharing fees in Portugal, Spain, and Canada, with the U.S. slated to follow suit soon after. However, the streamer announced in the release of its 2023 Q1 earnings that it was delaying the U.S. rollout until sometime in Q2, acknowledging the clampdown has affected user growth in some territories.

Reading between the lines

Speaking on the company's Q1 results call, Netflix co-CEO Greg Peters said the streamer had seen an "initial cancel reaction" in countries where password-sharing fees had been introduced, but suggested things would even out "as borrowers sign up for their own Netflix accounts and existing members purchase that extra member facility."

On the one hand, Peters' reassurances may sound reasonable, particularly if Netflix can show that "initial cancel reaction" has eventually morphed into new subscribers. However, beginning with this most recent quarter, the company is no longer publishing its subscriber numbers, which makes it much harder for stakeholders to corroborate what Peters is saying.

The risk of Gen Z attrition

Many have predicted for some time that Netflix's decision to start charging for account-sharing would have a negative impact on the company. Earlier this year, Insider Intelligence projected the streamer could see its viewership dip by 0.5% in the second half of 2023. (The analyst counts viewership as those who pay for Netflix and those who watch via someone else's account.) Insider Intelligence predicted a 4.1% decline among viewers aged 18 to 24, and 2.1% for those aged 25 to 34.

For Netflix stakeholders, the risk of losing the Gen Z viewers and younger millennials will likely be of concern. After all, Peters may suggest that parents might carry the burden and pay for some of their adult children's Netflix accounts, but what if they don't?

Making sense of a muddy picture

Netflix noted that the "membership growth and revenue benefit" it had previously pegged for Q2 will likely not show up until Q3. But again, with Netflix no longer sharing subscriber figures, investors have to put faith in what they're told about the advantages of its password clampdown.

Peters discussed how things have gone in Canada since the company started charging customers more for sharing their accounts. "We're now in a positive member and positive revenue position relative to pre-rollout," said the co-CEO. "So that's a really strong confirmation that we've got an approach that we can apply in many different countries with different market characteristics, including our largest-revenue countries."

For those watching the market, Netflix's decision to delay the introduction of its password crackdown in the U.S. may raise eyebrows -- particularly considering the company's seeming confidence about its "largest-revenue countries." Of course, some stakeholders will likely be glad to see the company delay the rollout and any cancellation activity it triggers. But whether stakeholders are prepared or not, Netflix intends to introduce the fresh charges in the coming months.

Investors should pay attention to how the market reacts over the coming days. Netflix's share price dipped about 10% on the initial news before rebounding somewhat. But if the stock price begins to sag once more, it may be a sign that people don't wholly believe in the company's strategy for monetizing the 100 million who are watching but not paying.