About 11% of U.S. households that access Netflix (NASDAQ:NFLX) are using other people's accounts, according to a recent report from Park Associates. This suggests that password sharing may be costing Netflix more than 4 million additional domestic subscribers.
While that may bode well for Netflix's long-term growth target, password sharing is a problem that seems fundamental to Netflix's business model -- one that may never be solved.
Account sharing by the numbers
Netflix had just over 41 million U.S. subscribers as of the end of last quarter. Assuming Park Associates' findings are accurate, the complete elimination of password sharing could boost Netflix's domestic subscriber base to more than 45 million (assuming all of the people currently sharing passwords would pay for their own accounts).
That would add an additional $100 million to Netflix's quarterly revenue, a gain of around 6%. Netflix could always plow that additional revenue back into content, but it's likely that at least some of it would show up in its bottom line. Netflix's domestic streaming costs have remained relatively stable over the last four quarters, rising only 6.5%, even as its domestic streaming revenue has climbed more than 17%.
Netflix's management has never been particularly concerned
Of course, these findings are far from a shocking revelation -- other research firms have attempted to assess the rate of password sharing in the past, and it's a question that Netflix's management has been asked about repeatedly over the years.
Netflix has historically downplayed it. On its first quarter earnings call in 2013, Netflix CEO Reed Hastings characterized it as a minor problem, remarking that he doubted there was much password sharing going on among "marginal acquaintances." Asked a similar question three quarterly calls later, he made a joke of the topic, using it as an opportunity to poke fun at rival HBO.
Stopping it may do more harm than good
Last year, a Netflix spokeswoman told MarketWatch that the company didn't see password sharing as a major problem, but that if it wanted to, there were "numerous tools" it could use to limit the practice. While some shareholders may want Netflix to crack down on password sharing, a change in Netflix's stance could ultimately be more of a negative for the stock than a positive.
It's hard to quantify, but it seems clear that Netflix's pro-consumer policies have been terrific for its growth. While its rivals in the traditional cable industry are famously among the most hated firms in the country, Netflix is highly regarded among consumers -- it even bests its streaming video rivals.
In January, analysts at Cowen & Co. published the results of a survey, which found that Netflix subscribers were far more satisfied with the service than that of other offerings. On a scale of 1 to 5, Netflix scored a 4.1 in overall satisfaction, compared to a 3.4 for Amazon Prime and 3.2 for traditional cable firms. Hulu and Showtime Anytime lagged far behind, scoring just a 2.9.
Interestingly, Park Associates found that password sharing occurs less often with other streaming services: Only 10% of households that accessed Hulu were using someone else's account, while Amazon Prime's rate of password sharing was only 5%. This may not be a coincidence.
Hulu caps the number of concurrent streams (how many different devices can stream video at the same time) at just one. This may curtail password sharing, but it's an obvious headache when two people in the same household want to watch something different at the same time.
Showtime Anytime allows for multiple concurrent streams, but caps the number of devices (smartphones, tablets, set-top boxes, and game consoles) that can be tied to one account at five. Perhaps a win for Showtime, but a pain for anyone with multiple tablets and TVs.
In contrast, some of Netflix's best features seem aimed almost at encouraging password sharing. Netflix limits concurrent streams to two on its standard HD plan, but offers a slightly more expensive ($11.99 per month) plan for those who want to access four concurrent streams. There are no limits on the number of devices a user can tie to an account, and Netflix is unique among its streaming rivals in supporting different user profiles.
These profiles track distinct viewing histories and give different recommendations. A great feature to be sure, but one that really wouldn't be necessary unless multiple people were using the same Netflix account.
Some good news
One great thing about Park Associates' findings: while 11% of households may use others' Netflix accounts, only 57% of U.S. broadband households use streaming video services at all. In other words, more than 40% of U.S. households have the means to watch Netflix but don't. Netflix likely can't capture them all, but even with password sharing, its long-term target of 60 million to 90 million domestic subscribers seems completely feasible.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), 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.
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