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The perils of Netflix’s rumored password sharing crackdown

There are potentially tens of millions of subscribers out there for Netflix—who already use the service via someone else’s login. Can it get them to pay up?

The perils of Netflix’s rumored password sharing crackdown
[Photo: Anthony DOUANNE/iStock]

There’s a lot going on for Netflix amid the battle of the streaming services.

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After an announcement that rival Disney made with Verizon that the wireless and broadband company will offer the Disney+ streaming service to customers who have the carrier’s unlimited plan for one year, starting November 12—a deal that also applies to new Fios Home or 5G Home internet customers—investors responded by battering Netflix’s shares down 4% on Tuesday.

The challenge is that Netflix does not likely have similar growth hacks at its disposal the way that Disney or Apple does (which is offering its Apple TV+ service, debuting November 1, free for a year for customers who purchase a new Apple device). In the U.S., Netflix, which added fewer than four million U.S. subscribers in the 12 months from September 30, 2018, is considered to have found all the customers it’s going to attract.

There is, however, one last obvious option for Netflix to grow its subscriber base, particularly in the United States: crack down on password sharing.

Password sharing is a victimless crime to consumers, but a survey late last year by the research firm Magid estimated that Netflix loses more than $135 million each month due to just under 10% of its customers sharing their passwords. That may not sound like a lot, but it amounts to about 13.7 million people. (If password sharing held steady as a percentage of Netflix’s total audience, that number would now be about 15 million.) If Netflix were able to get those consumers to pay, it’d add the equivalent of six months of its projected growth in subscribers, and it would improve its operating margins with the additional revenue it’d receive for a service it’s currently paying to deliver for free.

Password users are, as you might suspect, younger consumers, the kind Netflix is most interested in wooing, especially as the streaming wars heat up. That Magid survey says millennials are the biggest offenders, with 35% sharing compared with 19% of Generation X and 13% of Baby Boomers. This would make economic sense as it’s likely consumers helping out friends who might have less household income to have a recurring Netflix subscription.

There’s also the question of whether it’s actually piracy or just a community looking out for one another, particularly in cases where multiple households may collectively pay for one account, and that’s where things get more complex.

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The answer to the piracy versus community conundrum is that it’s both. Cracking down on password sharing is also a cybersecurity issue, due to password thieves, and there are companies with dedicated products dedicated to the task. For example, Synamedia, a London-based software provider, has been testing a cybersecurity software called Credentials Sharing Insight since last year with various cable and satellite companies that offer streaming—think Cox, Comcast, and Verizon. “Credential Sharing Insights is predictive analytics as a service, with the goal of detecting and allowing responses to credential sharing,” says Orly Amsalem, product manager at Synamedia. “We are also looking into cases where credentials are used fraudulently, meaning identity theft [and] organizations that are compromising [security] with different data breaches, and eventually, putting passwords on sale in marketplaces, jeopardizing the digital identity of those subscribers and of our customers.”

Synamedia declined to say if Netflix is a client or not, but Amsalem notes that companies are aware that while families and friends may knowingly share passwords, there are also actual pirates who steal data from paying customers and sell it to anyone who wants access to an authentic account at the expense of an unknowing subscriber.

Netflix has acknowledged that it’s thinking about the password sharing issue, but how does it plan to convince freeloaders—not to be mistaken for pirates—who haven’t been converted into loyal subscribers to actually pay for an account? Very gently. In response to an analyst’s question about policing password sharing more actively, Greg Peters, Netflix’s chief product officer, said, “We continue to monitor it, so we’re looking at the situation, and we’ll see those consumer-friendly ways to push on the edges of that. But I think we’ve got no big plans to announce at this point and time in terms of doing something differently there.”

In other words, Netflix understands that taking extreme measures to reduce password sharing could be risky. It could alienate not only potential subscribers into the arms of Hulu, Apple TV+, Disney+, or eventually HBO Max or Peacock but also its current subscribers, some of whom are the ones with passwords being shared. Weighing options potentially means utilizing software like Credential Sharing Insights and figuring out solutions that make customers—and by extension, the parties they share passwords with—feel valued and motivated enough to spend money. Spoiler alert: it’s actually not by limiting the devices that subscribers can watch at the same time, or even in decreasing prices, which reps from Synamedia say are common beliefs in the industry. “The opportunity that we see here is to monetize sharing, and by actually reviewing the motivation of the intentions behind the sharing, whether they are sharing with their family and friends and so on, and understanding what type of sharing can actually be used for monetization,” Amsalem says. “For example, if you can reveal that there are parents that are sharing with their kids that aren’t in their household anymore—for example, the kid went to college or lives in their own household—we can identify that, then the service provider can actually leverage that and offer an upgrade in a customer-friendly way and eventually monetize and maximize the subscriber’s value.”

This also applies to security and figuring out how to notify customers that they’ve been compromised. As far as marketing efforts are concerned, what will people do when forced to make a definitive choice? Imagine logging in to your sister’s account and being offered your own login and password for an add on of x-amount extra per month. Would you pay up?

Historically, people—assuming we’re talking about honest-ish password sharers—go where the shows with massive cult followings are, which helps explain why Netflix just announced plans to raise yet another $2 billion in debt to fund production, development, and new content acquisitions. However, if the industry is losing money, then that also affects the quality of content because it takes money to deliver good entertainment.

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Nothing breaks a password sharer like new shows and movies good enough to pay for.

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