During last week’s earnings call, Netflix executives discussed that in the future they could start cracking down on users sharing the password to their account with others. In completely unrelated news Google searches for the phrase “what is a budget?” among people aged 20-35 skyrocketed.*
Kidding aside, I thought this was a fascinating development. In some ways, less because of what Netflix could be doing and more because of how they haven’t addressed this for so long. I hardly know of anyone my age that isn’t using some relative or friends’ Netflix account. Apparently 35% of Millennials share passwords for streaming services, but anecdotally this figure seems understated to me. Apparently, the overall number of their users sharing accounts is relatively small, but even a small minority of their user base would translate into potentially billions of dollars a year of unearned revenue.
So why hasn’t Netflix decided to crack down on this account sharing before and why are they exploring doing so now?
Sharing is Caring
I’ve always been interested in Netflix’s decision not to crack down on sharing.
Because they could. Easily.
Anyone who has ever utilized a software subscription at work can tell you how aggressive companies can be in tracking usage to try to prevent account sharing. If Netflix wanted to, they could track IP addresses for devices and prevent usage outside of a geofenced area.
But they haven’t. For years.
My theory?
The lack of urgency with which Netflix was cracking down on account sharing was a calculated customer acquisition engine.
Netflix believes that their product is so compelling, getting it into someone’s hands will quickly render it irreplaceable. This is not a new phenomenon. Every subscription service under the sun utilizes some sort of free-trial option to help expose customers to their products.
But I can’t think of many services that so willingly turn a blind eye towards account sharing. So why does Netflix do it?
It’s all Demographics Baby
One word. Four syllables.
Dem.
O.
Graph.
Ics.
Why has Netflix been so chill with account sharing? Because the people who are doing the lion’s share of that sharing are the exact type of customers Netflix wants to cultivate.
Netflix hasn’t traditionally cared if you mooched off your parents for a few years during college because they knew that they could hook you on your favorite shows and that you would eventually pony up for your own subscription. And that because of your age, the lifetime value of you as a subscriber is MASSIVE.
Ever wonder why cell phone family plans are so much cheaper than individual plans?
Same reason.
Companies want to develop a relationship with customers while they are young because if they do so, there is a significantly higher chance that consumers will stick with them into adulthood.
The Times they are a changing
So if the most egregious account sharers are exactly the type of customer Netflix is hoping to cultivate, why change their tune now?
Now that is the interesting question.
To be completely fair, Netflix is not exactly doing a 180-degree about-face. When asked about the issue of password sharing, Netflix executive Greg Peters responded:
We continue to monitor [password sharing]. We’ll continue to look at the situation and we’ll see those consumer-friendly ways to push on the edge of that, but we’ve got no big plans at this point in time in terms of doing something different there.”
They won’t be cracking down tomorrow, but it does sound like they plan to somehow address it at some point.
Is this really a change in strategy or just a verbalization of Netflix’s long-time stance?
Honestly, I suspect it is more of the latter based on previous comments by the company’s leadership.
Be that as it may, it is still an interesting question to ponder.
What could lead Netflix, who has for so long been lethargic at best towards the issue of account sharing, to suddenly start stricter enforcement?
A few ideas:
Market Saturation
Netflix’s user growth in the US is already slowing down pretty dramatically. They have harvested all the low hanging fruit and it is going to become more expensive and less lucrative for them to acquire additional customers. They can (and are) expanding internationally, but closing the password sharing loophole could give them a meaningful lift in revenue even in saturated markets.
The Streaming wars get Serious
It is hard not to discuss any aspect of Netflix’s strategy without the context of the increasingly hot streaming wars. As Disney and others begin to double down on their own streaming platforms, Netflix may be looking for a way to stock up its war chest. Capitalizing on the low hanging fruit of password sharers could be a quick way to add some extra heft to the coffers.
The cost of marketing is too damn high
Netflix’s marketing spend is growing significantly. With escalating explicit costs, it may no longer be feasible to shoulder the opportunity costs of the missed revenue from account sharing. If some estimates are to be believed Netflix is missing out on $135 million of revenue a month from account sharing. This is more than it spends on marketing per month and if the company really does view account sharing as a customer acquisition tool, the costs might eventually simply get too high to stomach.
Now all this could just be a fun thought exercise. Despite what some headlines would lead you to believe, Netflix isn’t going to cut off access to the account of that sweaty kid from your freshman hall tomorrow. But they could at some point. The fact that they are talking about the potential is not ironclad, but it is a shot across the bow.
This is a fascinating case study in how sometimes it is just as illuminating to look at all the things that a company is actively choosing not to pursue as all the endeavors they are undertaking.
Until next week.
*This is not true.