Netflix is fighting a battle. Users have been sharing their account passwords, eroding the streaming platform’s profits. Now Netflix has come back with a new feature. First launched in Chile, Costa Rica, and Peru, Netflix is testing a new programme that charges users for adding multiple profiles from different households to the same subscription. Will users stay or leave?
Sharing is not new. People can rent out their cars, apartments, jewellery, and in some rare cases, even their pets. Such “renting” practices are illustrations of sharing, allowing non-owners to use the services or products of an owner.
Password sharing is no different, although digitisation makes sharing easier than before. People share their passwords for digital newspapers, mobile applications, computer games, and online streaming services with their family members, friends, or roommates. Many of these consumers who use unauthorised passwords are light users. While it sounds “morally incorrect”, they choose to use others’ accounts and passwords simply because, by their calculation, their usage does not justify a full subscription account.
Service providers lose out on subscription fees when consumers share a single account instead of paying for separate accounts. Surprisingly, we don’t see many digital service providers fight password sharing rigorously. Sometimes, they even encourage it. Many digital services are two-sided markets that connect two sides of the market. For example, by providing a platform that connects readers and advertisers, news publishers get readers to pay for the news and advertisers to pay for ads space. Such two-sided markets benefit from a larger network effect—the larger the readership, the more the advertisers.
Naturally, news publishers prefer a bigger readership to attract more advertisers and charge higher fees to them. Such platforms do not see password sharing as a sin, especially those that earn most of their revenue from advertising. In extreme cases, platforms such as Facebook choose to provide services to individual users for free. Major news channels, such as NBC and CNN, have free channels on YouTube. For such platforms, the best strategy is to maximise the user pool to earn more revenue from advertisers.
The case of Netflix
Netflix earns its revenue from consumer subscriptions, not advertisers. For Netflix, a free rider is a free rider; the free rider does not bring in advertising revenue. Thus, Netflix has a stronger motivation than many platforms, such as news publishers, to curb password sharing, as that could hurt their potential revenue.
According to Cowen’s monthly survey of 2,500 consumers in the United States, about 10 percent of the country’s 116 million broadband households include someone who watches Netflix but is not a paying subscriber. To reduce password sharing, Netflix is conducting a trial on a new programme where account holders can add up to two extra members who don’t live with them for a subsidised price. The additional fee, which varies across Chile, Costa Rica, and Peru, is about S$3 to S$4 per member.
For Netflix, this decision might be a result of weighing the cost and the benefit. Piggybagging is not something new for Netflix. It did not introduce any curbing measures earlier, mostly because verifying the true account holder is too costly. Unlike TV, Netflix is watched on the go. The streaming company faces the challenge of verifying whether the user who logged in at a coffee shop is the same person as the one who logged in at a residential building. Two-step verification, a measure Netflix introduced last year, makes account checking much easier, paving the way for Netflix to begin reining in password-sharing.
According to estimates by Cowen & Co, by allowing users to share passwords across households but charge for additional members, Netflix stands to earn an additional US$1.6 billion (S$2.2 billion) per year, about 4% of the firm’s 2023 revenue projection of US$38.8 billion (about S$53.0 billion) if Netflix rolls the programme out globally. This estimate assumes that about half of non-paying Netflix password-sharing users will become paying members; and of those, about half will pay for a full subscription.
How will users react?
Whether Netflix could reap the predicted US$1.6 billion depends on many factors.
Consumers also weigh the costs and benefits of borrowing a password. If it only involves getting the login details from a friend, the cost is meagre. The two-step verification process makes password sharing costlier. If someone does not live under one roof with the subscriber, getting the verification code could be troublesome. It could be annoying if you have to call your friend every time you want to watch your favourite show.
This hassle may push some piggybackers to opt-in for the multiple-user feature. Paying a few dollars per month to get rid of this hassle sounds like a good deal. Even those who are not currently using Netflix might be interested in the multiple-user programme, considering the low monthly price they have to pay.
Yet, not everyone will sign up. Some very light users who borrow passwords may decide to leave Netflix completely. After all, watching a show once in a while does not justify the payment, and it is not an indispensable part of their life.
What complicates the picture is that some subscribers may renounce their full subscription, switching to the multiple-user programme instead now that it is legitimate to create multiple profiles under one account. The issue of “cannibalisation” could be more serious in some less-wealthy markets, although it might be negligible in high-income markets.
Multiple-user programme may pay off for Netflix in the long run
Like other digital service providers, Netflix faces a high fixed cost of procuring the content and setting up the infrastructure. But servicing an additional customer adds little to its cost. While S$3 or S$4 a month sounds puny as compared to the full subscription price of about S$20, the multiple-user programme could bring a lucrative profit, considering the low cost of serving each additional consumer. In fact, once the two-step verification system is fully rolled out, any charges could be a profit for Netflix.
While it is unclear how much revenue this new programme can rake in, it nonetheless signals Netflix’s new pressure in the face of slowing subscriber growth. As the market for online streaming services matures, Netflix needs to lock in its users before they flock to its competitors. Consumer behaviour is on its side. For digital services, they tend to stick to the same service provider and rarely consider switching unless it is absolutely necessary. Those who pay a few dollars under the multiple-user account might eventually get their separate and heftier subscription. Even if they don’t, Netflix wants them to stay rather than go to their competitors. After all, this group of people still generates profits for Netflix. In this sense, the new multiple-user feature might bring a long-term benefit for Netflix amidst the fierce competition.
The article is an abridged version of the one first published in CNA.