Early last year, Netflix (NFLX 0.84%) revealed something that many investors already knew: password sharing was rampant on its platform. The company had previously encouraged account sharing as a way to drum up interest in its programming. What many didn't realize, however, was the extent of the phenomenon and how much it was costing Netflix.

In its 2022 first quarter shareholder letter, management estimated that over 100 million households were sharing their Netflix account, with over 30 million in North America alone. As a result, the streaming pioneer said this "means it's harder to grow membership in many markets." At the time, Netflix said it was working on "how best to monetize sharing -- the 100 million+ households using another household's account."

Looks like the company has finally settled on a plan. Viewers sharing their password should watch their email, as notices will begin going out beginning immediately.

A group of young friends sitting on the floor watching television.

Image source: Getty Images.

Prepare to pay up

In a notice posted on its website, Netflix said "Starting today, we will be sending this email to members who are sharing Netflix outside their household in the United States." The company went on to point out that each account is meant for one household, which family members can use "at home, on the go, on holiday," and touting features that foster adding new users, including Transfer Profile and Manage Access and Devices. 

The email will also included specific instructions on how to check who's using the account, by reviewing the connected devices, signing out any that aren't authorized, and a suggestion to "consider changing your password."

For those that want to "add an extra member," the company says "you can share your Netflix account with someone who doesn't live with you for $7.99 per month more."

While some members will balk, the cost is actually pretty reasonable, considering Netflix's basic plan is $9.99 per month, while the standard and premium plans clock in at $15.49 and $19.99, respectively.

Netflix has tested its paid sharing initiative in a number of global markets, including three in Latin America, to test the resistance of subscribers to the additional cost. Earlier this year, Netflix rolled out paid sharing in Canada, New Zealand, Portugal, and Spain, and was pleased with the results.

The high cost of password sharing

While sharing your account with your best friend, ex, or former roommate might not seem like a big deal, the cost in lost revenue opportunity for Netflix is enormous. For context, the company closed out the first quarter with roughly 232 million accounts worldwide. If Netflix were to bring all 100 million additional viewers into the fold, that would increase its subscriber count by about 43%.

From a financial standpoint, the numbers are pretty eye-opening. If all 100 million were to pony up the suggested $7.99 per month, that would result in nearly $2.4 billion in additional per quarter, or roughly $9.6 billion more per year. For perspective, Netflix generated revenue of $31.6 billion in 2022 -- so a nearly $10 billion increase would make a sizable difference.

The inevitable pushback

There's very little (if any) chance that Netflix will bring all the prodigal viewers into the fold. One only need check social media to see the visceral reaction that some subscribers -- and allegedly former subscribers -- are having to the news.  

Netflix initially delayed the widespread rollout of its plan, citing a "cancel reaction in each market when we announce the news," but the result is ultimately "increased acquisition and revenue." This suggests that after the initial fallout, many of those that stop their subscription eventually return. 

There will always be the vocal minority that will bemoan the situation, but given Netflix's measured approach to the situation, I don't expect any meaningful resistance. 

While the results of this bear watching, the password crackdown has been a long time coming. Expect to hear more when the company reports its second-quarter results, which typically drop in mid-July. The news will probably be good.