A year ago, Netflix Inc. (NFLX, Financial) revealed the practice of users sharing thier account passwords was impeding its growth.
After acknowledging this challenge and proposing a plan to stop it in order to boost revenue, the streaming giant faced backlash from users and even lost subscribers in the first half of 2022.
The company believes that forcing non-paying users who now share accounts to become paid subscribers is one way to grow its user base. However, Netflix has delayed the global rollout of this strategy twice, and now says it will start enforcing it in the second quarter of 2023. The rollout was originally scheduled to occur during the first quarter.
Can Netflix successfully crack down on password sharing?
One reason for the delay is that Netflix wanted to learn from its trials in some countries, such as Canada, New Zealand, Portugal, and Spain, where it began testing its password-sharing clampdown strategy earlier this year. Members in these countries were required to set up a "primary location" for their account and manage who has access to it. However, during the first-quarter earnings call, the company noted its subscriber growth had been affected in some of these markets. For instance, users in Latin America canceled their subscriptions when they were asked to verify their accounts periodically. In Canada, however, the company saw members upgrading to a more expensive plan that allowed more devices to stream at the same time. Further, it said revenue growth in Canada has accelerated and “is growing faster than in the U.S."
In the first quarter, the company added 10.86 million subscribers, bringing the total to 232.5 million, maintaining its leadership in the streaming industry.
Although the trials yielded mixed results, Netflix compared this transition to the process of raising prices and said that users who borrowed passwords would eventually activate their own accounts, resulting in increased revenue. Recent data suggests it would not be as easy as expected to successfully execute a global crackdown on password sharing. In the coming quarters, investors should keep an eye on how the company tackles this major obstacle.
Netflix is also facing tough competition from other streaming services, such as Walt Disney's (DIS, Financial) Disney+, Warner Bros. Discovery's (WBD, Financial) HBO Max and Amazon's (AMZN, Financial) Prime Video, which have been attracting more viewers with their exclusive content and lower prices. This was also one of the reasons for slower growth in its subscriber base last year. Netflix said it needs more time to improve its content offering and customer experience before introducing a major change that could alienate some of its loyal users.
Despite the competition, Netflix is making progress. The company has adopted a consistent pricing strategy across most countries, while also adjusting prices to suit local conditions with a focus on increasing its market share. For example, in December 2021, Netflix lowered its prices in India by 20% to 60%, resulting in a nearly 30% year-over-year increase in engagement and an acceleration in revenue growth from 19% in 2021 to 24% in 2022. Building on this success, the company further reduced prices in 116 additional countries in the first quarter and plans to continue with this strategy.
The long-term outlook is positive
Netflix estimates there are over 1 billion households worldwide with broadband internet, out of which up to 500 million have access to a connected TV. Despite this large addressable market, the company has not yet captured more than half of its current opportunity and potentially less than one-quarter of its longer-term opportunity. In the U.S., Netflix accounts for only 7% of TV time, leaving ample room for growth. Additionally, emerging markets such as Mexico and Poland offer even greater growth potential. Fortune Business Insights estimates that the global streaming industry will grow at a compound annual rate of 19.9% per year and reach a value of $1.6 trillion in 2029. According to Nielsen data, Netflix and YouTube are the leading streaming platforms in terms of engagement, but there is a significant opportunity for growth as streaming still represents a minority of viewing in every country. This provides Netflix with a long growth runway, allowing the company to increase its share of total viewing by multiple factors.
To attract new customers, the company has also introduced a cheaper subscription tier called "Basic with Ads," which is priced at $6.99 per month. This tier includes advertising before and during programs. The plan currently offers about 95% of the same content as its commercial-free plans, thanks to recent licensing agreements. With the positive performance of the subscription tier, the company plans to upgrade its ad experience with more streams and improved video quality.
Takeaway
While taking bold measures on password sharing may pose some challenges for Netflix, it seems well-positioned to succeed in the long term. With a large addressable market and a leading position in streaming engagement, the company has significant potential for growth, particularly in emerging markets where streaming is still in its infancy.
Moreover, the company's consistent pricing strategy, combined with targeted price reductions and the introduction of a more affordable ad-supported tier, could help drive further adoption and revenue growth. While some users may choose to switch to other services, Netflix's strong content library and brand recognition should help mitigate these risks.
