Netflix says its plan to 'broadly' end password-sharing will juice revenue

8:13 am ET January 20, 2023 (MarketWatch) Print

By Jon Swartz

Never mind its lower-cost ad-supported subscription model or a foray into gaming. Netflix Inc.'s vow to crack down on password-sharing "more broadly" during the current quarter could be the single most important financial catalyst in its near future.

The video-streaming giant, which had put off such a strategy for years until 2022, on Thursday said it intends to enforce password-sharing rules by the end of the first quarter, suggesting sometime in April. The news was part of Netflix's quarterly earnings announcement.

Netflix co-Chief Executive Greg Peters said the goal is to "nudge" users to the right price points, rumored to be between $3 and $4 per paid-shared account. "We understand this will not be a universally liked decision, similar to raised prices that lead to churn for a period of time," Peters said on a video call late Thursday. But the end result, he said, should eventually lead to increased revenue at more advantageous pricing for more users.

Read more: Netflix stock leaps after subscriber success in final quarter with Reed Hastings as CEO

"While our terms of use limit use of Netflix to a household, we recognize this is a change for members who share their account more broadly," Netflix executives wrote in a letter to shareholders Thursday. "As we roll out paid sharing, members in many countries will also have the option to pay extra if they want to share Netflix with people they don't live with."

Netflix (NFLX), whose researchers have identified shared passwords as a major reason for eroding subscription growth since 2019, acknowledged it expects some "cancel reaction," but the long-term benefits of people paying for additional accounts will result in "improved overall revenue."

Also see: Netflix stock leaps after subscriber success in final quarter with Reed Hastings as CEO

"We anticipate that this will result in a very different quarterly paid net adds pattern in 2023, with paid net adds likely to be greater in Q2'23 than in Q1'23," Netflix executives said. "But as borrower households begin to activate their own standalone accounts and extra member accounts are added, we expect to see improved overall revenue, which is our goal with all plan and pricing changes."

Read more: What a Netflix crackdown on password sharing could look like

In Latin America, Netflix has been prompting users in Chile, Costa Rica and Peru to pay for an extra sub-account if it detected someone using an account who lived outside the paying subscriber's home. Users in Argentina, El Salvador, Guatemala, Honduras and the Dominican Republic can buy additional "homes" for anyone living outside the subscriber's primary household. A traditional subscription will give viewers the ability to watch Netflix in one designated home, but subscribers will need to pay an additional $2.99 for each new home in which someone would be streaming through a given Netflix account.

In the days leading up to Netflix's quarterly results on Thursday, analysts like Steven Cahall of Wells Fargo said they considered password-sharing as "the bigger focus of results, with the potential to drive an increase to consensus '23E revenues."

"While much of the sell-side and buy-side focus of late has been the [advertising-platform] launch, we actually think disclosure will be limited as will the impact on estimates," Cahall wrote in a note Wednesday. "Instead, we think password-sharing is the bigger catalyst near term. If it's put through in late Q1 it would likely mean higher churn in Q2 and then higher ARM beyond. As the Street better understands password-sharing, we see it as upside to revenue growth estimates."

Netflix has been pursuing several strategies it long avoided -- chiefly, an ad-driven platform -- until a slowdown in subscription growth amid increased competition from the likes of Walt Disney Co. (DIS), Apple Inc. (AAPL), Warner Bros. Discovery Inc. (WBD), Amazon.com Inc. (AMZN), Paramount Global (PARA) and Comcast Corp. (CMCSA).

-Jon Swartz

(END) Dow Jones Newswires

January 20, 2023 08:13 ET (13:13 GMT)