For a decade, Netflix (NFLX)’s impressive growth was powered by its ability to add new subscribers every quarter. That streak is now over, undone by increased competition and what the company calls “multi-household sharing” a polite way of saying a lot of people are sharing passwords and watching Netflix for free.
Netflix has historically had a relaxed position about password sharing—you might even say its attitude was chill—reasoning that so long as people watched Netflix and not something else, that was good for the brand. But those days appear to be over, given the prominence with which the company blamed sharing as a factor in its disappointing earnings. The stock fell 32 percent in early trading on April 20.
More than 100 million households are essentially stealing Netflix, the company said in a letter to shareholders April 19, on top of the 222 million that pay for it. While the ratio of paying viewers to moochers hasn’t changed, the company can no longer count on adding subscribers at a fast enough rate to erase those losses. As a result, CEO Reed Hastings promised investors that will change
“We’re working super hard on it,” he said in a conference call after the company reported its earnings. “These are over 100 million households that already are choosing to view Netflix. They love the service. We just got to get paid at some degree for them.”
Asking Netflix subscribers to pay more to share passwords
The challenge for Netflix, however, is how to crack down on sharing without losing subscribers. From the company’s perspective, every one watching for free is a valuable customer in almost every way—they have accessed the service, they are spending their time watching the shows—except for one. The trick is to convert them into paying subscribers without appearing to be too punitive.
The solution, executives said, is asking paying customers to pay a bit more if they plan on sharing their password. The company has rolled out the plan in some Latin American countries and feels the time is right to take it to the US.
“So if you’ve got a sister, let’s say, that’s living in a different city, you want to share Netflix with her, that’s great,” Gregory Peters, Netflix’s chief operating officer, explained on the call. “We’re not trying to shut down that sharing, but we’re going to ask you to pay a bit more to be able to share with her and so that she gets the benefit and the value of the service, but we also get the revenue associated with that viewing.”
The plan may have another benefit for Netflix, as well: Because it means the company will potentially be making money off of non-subscribing viewers, it will reduce the importance of subscriber totals as a metric. Given the stock market’s violent reaction to the lower subscriber totals in its most recent quarter, Netflix is surely eager to find other metrics to report. It doubtlessly would be happier to report it has 320 million viewers and climbing, vs. 222 million subscribers and falling.
