Netflix is kicking the tires on a new way to extract money from people who have been leeching off someone else’s account.
In a test rolling out soon in three countries — Chile, Costa Rica and Peru — Netflix will prompt members who share their accounts with those outside their households with an option to pay for up to two additional users. The “Extra Member” price in the tests is less than what it would cost to sign up for a separate account: In Costa Rica, for instance, it will be $2.99/month to add a user outside your household, on top of the price of the primary account ($12.99/month for the Standard plan in the country).
To be clear, this is just a test: Rule-breakers in other parts of the world don’t need to freak out yet. Netflix might decide to not expand the Extra Member strategy outside the three test markets.
But after years of tolerating customers sharing their Netflix passwords with friends, which is explicitly banned by its terms of use, why is Netflix doing this now? In short: Netflix’s business strategy is shifting from a focus on high subscriber growth to higher yield per subscriber.
When Netflix’s No. 1 priority was to get big fast, it gave tacit approval to account-sharing behavior — and execs even touted the phenomenon. “We love people sharing Netflix whether they’re two people on a couch or 10 people on a couch,” co-founder Reed Hastings said at the 2016 CES tradeshow. “That’s a positive thing, not a negative thing.”
Fast-forward to today, and Netflix’s blistering-hot subscriber growth has cooled down, particularly in the U.S., its most mature market. Last year more than 90% of Netflix subscriber growth came from outside the U.S. and Canada. CFO Spence Neumann, speaking at last week’s Morgan Stanley Technology, Media & Telecom Conference, insisted there’s still plenty of runway for Netflix to add more members globally, citing relatively low penetration in much of the Asia-Pacific region and Europe, Middle East and Africa (EMEA).
With Netflix focused on improving profitability — it has told investors it expects to be free cash flow positive this year, after breaking even in 2021 — it needs to increasingly look beyond sub growth to drive top-line revenue. As Neumann put it: “We’re focused on healthy growth across a combination of memberships and pricing.”
The company has been pulling the most obvious lever to generate higher revenue per subscriber: Netflix earlier this year hiked prices in the U.S. (for the third time in three years) as well as in Canada, the U.K. and Ireland.
Netflix could get a healthy bump in incremental fees from password-piggybacking users. Given how widespread unauthorized password-sharing is, it’s potentially low-hanging fruit: about 36% of Americans said they share their Netflix account login with relatives and 13% do so with friends, according to an Advertising Research Foundation survey of 10,400 U.S. adults conducted in the second half of 2021.
As Netflix goes down the road of trying to convert password-borrowing users into paying members, it will have to walk a fine line — it wants to get paid its due, while at the same time not coming across as punitive, money-grubbing capitalists.
For the tests in Chile, Costa Rica and Peru, for example, there’s no plan currently to automatically tack on a surcharge for subscribers who continue to flout the password-sharing rules. The streamer is positioning the test as a prompt to let members comply with its terms, not a crackdown on rogue behavior. For now, Netflix is running the test of payment options for non-household users to evaluate whether (or how) to launch those to the U.S. and other markets.
Also note that Netflix’s password-sharing rules apply to individuals in a customer’s household — not the physical confines of a domicile. So it’s OK for, say, a kid away at college to use her parent’s Netflix account. But sharing it with everyone in the dorm, no.
One other point: The structure of Netflix’s tiered pricing plans already account for sharing among multiple users. The entry-level Basic plan allows just for a single stream at a time, making it pretty useless to share with a buddy whether or not they’re a “household member.” The Standard package is limited to two concurrent HD streams per account; the highest-priced Premium tier allows up to four simultaneous streams.
Netflix is scheduled to report first-quarter 2022 earnings on April 19 after market close, where it’s a good bet this new test will be discussed.
