Netflix tests its staying power with global password crackdown

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Netflix is at a turning point where the company will soon discover whether or not its brand still has staying power and the ability to dominate in today’s streaming market, given the abundance of choice available to consumers. On Tuesday, Netflix announced its plan to roll out its password-sharing restrictions to a global audience, including the U.S., years after having encouraged the practice as a means of introducing its service to a wider range of consumers. These days, however, Netflix sees moochers as lost profits, estimating there are 100 million households globally sharing their user accounts, 30 million of which are in the U.S. and Canada.

To some extent, consumer backlash against the crackdown has to do with Netflix’s complete shift in its position on password sharing. There was a time when the company believed that people who benefited from a shared password would eventually convert to become a Netflix member — but that hasn’t always proven to be true.

In 2016, Netflix’s then-CEO Reed Hastings told reporters that the company loved it when people were sharing Netflix with family and friends, calling it a “positive thing.”

“We love people sharing Netflix whether they’re two people on a couch or 10 people on a couch,” he said. Hastings also likened subscribing to Netflix as just another coming-of-age milestone for young adults, adding, “As kids move on in their life, they like to have control of their life, and as they have an income, we see them separately subscribe. It really hasn’t been a problem.”

The following year, Netflix even tweeted, “Love is sharing a password,” — a post people have recently dug up in order to complain about the new password-sharing rules.

Netflix’s viewpoint on password sharing has changed, in part, due to the increased competition in the streaming market. Where Netflix was once the leading service for cord-cutters, consumers today have a range of services to choose from, including those with sizable IP catalogs, like Disney+; those offering live TV access, like Hulu; and those with must-watch shows, like HBO Max, newly rebranded as Max. The latter has benefited from pop culture sensations like “Game of Thrones,” previously, and now, “Succession,” to keep its viewers addicted.

Plus, there are other major services available catering to streaming audiences, like NBCU’s Peacock (now bundled with Comcast’s new NOW TV) or Paramount+ (which is soon to merge with Showtime). And there are free streamers, like Xumo, The Roku Channel, Amazon Freevee, Pluto and others, for those with price sensitivity.

More critically, there’s a generation of young people who no longer spend as much time watching TV as their parents, preferring instead to scroll through other entertainment apps, like YouTube and TikTok. Globally, a study of kids’ and teens’ app usage found that kids and teens ages 4 through 18 were watching 67 minutes of YouTube per day on average, compared with just 48 minutes of Netflix. TikTok had even gained more of their time, with an average of 107 minutes per day, the report found.

When free content created by a world of largely unpaid content creators is more compelling than scripted, well-crafted shows and films that take millions to produce, Netflix isn’t the only streamer possibly in trouble here. No wonder it’s grasping for any lost dollars.

Despite these competitive concerns, Netflix has managed to keep its finger on the pulse over the years, with recent hits like “Squid Game,” “Wednesday,” “Stranger Things,” “Bridgerton,” “The Crown,” “Emily in Paris” and “Love is Blind,” all which have become cultural touchstones. However, the company admitted last year, amid falling subscriber numbers, that it needed to make more series and films that consumers loved and release hits more often.

Another risk for Netflix is that its catalog’s composition has changed. One of the things that made Netflix a must-have in the past was the expansiveness of its content offerings, including back catalog fare and popular films. That’s suffered in recent years as rights owners pulled back their best shows and movies in order to beef up their own services. In addition to losing key IP, like Disney’s Marvel shows, which Netflix canceled as its deal with Disney concluded, it also lost the older, under-the-radar content that people often actually used Netflix for — like comfort TV and background viewing.

As it turns out, many Netflix users had been regularly streaming classic shows like “The Office” or “Friends” in their downtime.

“The Office,” for instance, was the most-watched show on Netflix, but exited to NBCU in 2021. “Friends” exited to Warner Bros. in 2020. Netflix hoped to shore up these losses by acquiring the rights to “Seinfeld” in 2021, but outside of a modest start in the Top 10 at launch, it quickly dropped off the list and has yet to return.

The timing of the crackdown is also a risky bet for Netflix, as economic uncertainty and post-COVID readjustments have led to high prices for food, gas and rent, which have consumers more closely watching their wallets — and dumping unnecessary subscriptions. As The Wall Street Journal reported in April. Cancellations for premium streaming services in the U.S., including Netflix and Hulu, were up 49% in 2022 from the previous year, the report said, citing Antenna data.

Netflix has ensured investors that the cancelations that will result from its password crackdowns will be a temporary setback. But it has yet to test that theory in the U.S.

During its first-quarter earnings, Netflix co-CEO Greg Peters said the results of the crackdown in the first test markets looked much like how subscribers reacted to price increases. It found that some moochers would sign up for their own accounts or people would pay for the extra members — like parents, perhaps, supporting their adult children living outside the home.

To what extent this strategy will be successful in the U.S. and other markets remains to be seen. Netflix missed Wall Street estimates on subscriber additions in Q1, with a net increase of just 1.75 million (up 5% year-over-year), versus the 3 million analysts forecast.

As Netflix begins its password-sharing crackdown in the U.S. and other markets, many consumers are worried about the details of the implementation. How will this penalize people who travel for a living, for example? Or those who often take vacations and other trips away from home? What about those who have a second home, like a beach house, which they regularly frequent? Why can’t kids in college just be counted as a screen, not a moocher?

Netflix has provided limited information on how it’s responding to these carve-outs, noting only that people traveling won’t have an issue accessing its service when traveling with a device from their household. At other times, it may prompt users to verify they’re traveling — a system that was criticized by consumers as being an unnecessary imposition — especially for a paid service where things like regional sports — which have to be tied to geolocation — aren’t being offered.

Though Netflix has no reason to make it harder for users to stream its service, the fear of those challenges weighs on consumers’ minds — and now, maybe their wallets, too.

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