Netflix (NFLX 4.04%) has finally done it -- it's begun cracking down on password-sharing in the U.S. and the U.K. And while Wall Street has been anticipating the move for a while, the company has been opaque about exactly when it would clamp down, and what that enforcement would look like.

But now that the streamer has put its flag in the sand, some may question whether Netflix has made a savvy choice. Could it turn out to be a big mistake? Let's break it down.

The "100 million" issue

After losing millions of subscribers in the first half of fiscal 2022, Netflix decided it was time to deal with the approximately 100 million viewers accessing its content via other people's login details (also known as "sub accounts"). The company explained that, while subscriber accounts can host multiple profiles, there has been "confusion" among its users, leading to wide-scale account-sharing between households.

Netflix has long known that its customers were freely passing their login details to others, but for years the company framed it as a net positive.

"We love people sharing Netflix," said founder and chairman Reed Hastings in 2016. "It hasn't really been a problem," he proclaimed, suggesting that the practice induces nonpaying viewers to eventually sign up for their own accounts.

Of course, we now know Netflix's sub-account theory didn't work as it might have hoped, and so the company has been trying a different strategy -- charging subscribers for password-sharing.

Subscriber revolt

In March 2022, Netflix began testing a scheme in several Latin American markets, billing users approximately $2 to $3 extra a month for sharing accounts with other households. The practice caught many customers off-guard, leading to complaints. Despite this, Netflix opted to expand its testing to more countries, only to be met by further resistance.

In September 2022, Netflix introduced sub-account charges in Argentina, where many promised on social media to cancel their accounts. It's unclear how many ultimately terminated their subscriptions, but the following month, Netflix suspended the pricing trial in Argentina, along with several other Latin American countries.

Clamping down on its biggest markets

Netflix earmarked the first quarter of 2023 to introduce sub-account fees in the U.S. and the U.K. -- two of its biggest markets by user penetration. However, the streamer subsequently delayed the plan until Q2, acknowledging it had seen some "initial cancel reaction" in other countries, and therefore wanted to make improvements.

Netflix has now started contacting customers who have sub accounts, informing them of their options: Profiles can be transferred to a stand-alone subscription, or the account holder can pay an extra monthly fee. In the U.S., the cost of each added member is $7.99 per month, while in the U.K. it's 4.99 pounds (roughly $6.20). Additionally, Standard plan subscribers can only add one member, while Premium customers are capped at two. Subscribers on Netflix's Standard with Ads or Basic plans cannot add any extra members.

A risky strategy for boosting numbers

The eagle-eyed might note that, at $7.99 a month, the cost of adding an additional member in the U.S. is $1 more than Netflix's entry-level $6.99 a month Standard with Ads plan. ("Standard with Adverts" is 4.99 pounds a month in the U.K.) Between this and the caps on added members for Netflix's higher-cost plans, it seems the company is hoping sub-account fees will help drive new sign-ups for lower-cost offerings.

In effect, the streamer may be trying to leverage the crackdown as a way to boost its overall subscriber numbers. Netflix has indicated as much, noting that its delayed clampdown was also about finding a solution that "best serves the long-term business goals." But there are also notable risks -- not least of which is a bigger-than-anticipated "cancel reaction."

Last year, Aluma Insights published a study that showed 13% of U.S. respondents said they would cancel their Netflix accounts if the company tried to charge them an additional $3 per month for sub accounts. While there's no knowing how that figure changes now that Netflix has announced extra fees of almost $8 per month, one can speculate that the rate of those saying they'd cancel would probably go up.

To Netflix stakeholders, the company seems to be in a bind: Allowing 100 million non-paying viewers is leaving money on the table, but upsetting customers also has real implications. After all, look at Argentina.

Investors considering what to do may want to hold off until Netflix publishes its next set of numbers. If the streamer manages to offset cancellations with new sign-ups, then it might have hit on the right formula. But if it doesn't, Netflix may have made a costly mistake.