Netflix (NASDAQ:NFLX) has grown to over 54.5 million paying subscribers and DISH Network's (NASDAQ:DISH) Sling TV streaming live television service has gotten off to a promising start, but both properties face a growing concern -- cord cheaters.
These are people who access streaming services using other people's passwords. They get the benefit of Netflix's original programming as well as countless hours of movies and TV shows or access Sling's growing lineup of live-streamed TV, but they don't pay.
The problem is widespread -- about 20% of adults who use streaming services are cord cheaters, according to new research from The Diffusion Group. Cord cheating also affects other popular streaming services including Hulu Plus and HBO GO, which requires a subscription to the pay network through traditional cable.
"While it is widely acknowledged that 'cord cheating' is occurring, few comprehend how widespread the behavior has become," noted Michael Greeson, TDG Founder and Director of Research.
Twenty percent is a shocking number and a problem for services like Netflix and Sling, which have high programming costs that must be offset by subscription revenues.
How cord cheating works
The problem with cord cheating is that many of the perpetrators of the crime don't know they are doing something wrong. Neither Netflix nor Sling forbid sharing passwords among people who live in the same household. A married couple can share an account as can their children (as long as they still live at home).
Where it becomes illegal is when people start sharing their accounts with friends and family who don't live in their homes.
Both Netflix and HBO GO say their streaming services are designed to be used within "one household" and limit the number of concurrent streams (three for HBO GO and one, two or four concurrent streams for Netflix, depending on the plan), wrote MarketWatch's Moneyologist.
"Password sharing isn't having a major impact on our business," a Netflix spokeswoman told the financial columnist. "If we found password sharing were to increase to a level of concern, there are numerous tools we could implement to curb the practice."
That might be what Netflix believes, or just what it says publicly, but the company is wrong -- password sharing has to hurt at least a little. People who might otherwise pay are clearly sharing Netflix passwords and that costs the company subscribers. It can use technology to cut this off, and it should do so: even though it may result in a small backlash.
How big is the problem
Netflix may downplay the problem, but the actual numbers, according to TDG, are downright shocking.
As you can see on the chart below, the percentage of cord cheaters varies greatly by service with Sling TV having an astounding 26.5% of its users accessing the service illegally and Amazon's (NASDAQ:AMZN) Prime Instant Video coming in below 10%.
To put this in perspective, let's assume the Netflix numbers are accurate and 19.9% of people using the service are borrowing (or stealing) passwords from a paying customer. That's roughly 10.9 million extra people streaming the company's movies and TV shows for free.
If those people were paying, they would add around $97 million a month -- or about $1.2 billion a year -- to the pay service's coffers. Some of that money would go to the bottom line, but given Netflix's history it would also at least partly be spent on programming.
Essentially, cord cheaters aren't just stealing something others pay for -- they are also perhaps stopping the streaming leader from funding the next House of Cards or Orange Is the New Black. (On the plus side, they may also be stopping the next Adam Sandler movie.)
"This behavior reflects the unfortunate mind-set among many of today's media users that it's perfectly acceptable to 'share' digital media -- whether files or service access -- among friends and family," said Greeson. "Why should my daughter pay to stream Netflix when she can simply use my credentials to access the service with little fear of reprisal?"
The industry needs to stop this
The music industry was derailed when piracy and not paying became the norm. Once Napster and other pirated music services created a generation that believes the proper price for music is "free," it became impossible to put the genie back into the bottle. Music and musicians have suffered as album sales have dropped and even digital download sales have begun to fall.
Movies and television have, of course, faced their own piracy issues, but Netflix, Hulu, and the others have limited it because it's a better value to pay under $10 a month for those services than to deal with the hassle of finding content on illegal download sites. Sling is a different animal because it's live TV, but its high rate of cord cheaters suggests it has the most to lose if steps are not taken to cut piracy off.
It's time for the industry to take technical steps to shut the cord cheaters down in order to preserve the perceived value of their product. If they don't then it will become increasingly hard for streaming services to grow their subscriber bases.
Technology can solve this and companies can offer higher-rate plans that can legally be shared, but some action needs to be taken.
Daniel Kline has no position in any stocks mentioned. He has tried to share his Netflix password with his mother, but she had no interest in using it. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.