As Netflix looks to shift gears with investors, it may find the need to do something about those who are getting a free ride.
When the streaming pioneer posts first-quarter results on Tuesday, the figures may show one of its weakest periods in years in terms of paid-subscriber growth. Netflix projected 2.5 million net additions for the quarter when it last reported results in late January, but that was before war broke out in Ukraine, which has driven Netflix and many other companies to suspend their business activities in Russia. John Blackledge of Cowen now expects Netflix to add only about 1.5 million new subscribers in the quarter.
Wall Street in general expects user growth to be a weaker driver for Netflix going forward, in part due to the company’s huge current base of nearly 222 million paying subscribers. Hence, revenue and earnings growth will need to play a bigger role in the Netflix story. Analysts expect revenue growth to average 12% annually over the next four years compared with a projected 8% annual average for subscriber growth, according to FactSet estimates. Some of that will depend on the company’s ability to raise subscription prices, but Netflix may also need to address the thorny issue of those using its service without paying for it.
How big of an issue that is depends greatly on whom you ask—and when. “Password sharing is something you have to learn to live with because there’s so much legitimate password sharing, like you sharing with your spouse, with your kids," Netflix founder and co-chief executive Reed Hastings said in an earnings call in late 2016. But a test program in the markets of Chile, Costa Rica and Peru announced last month indicates a possible change of heart. Under that program, subscribers can add “sub-accounts" for up to two people they don’t live with for about $3 a month. In announcing the program, Netflix noted that accounts being shared between households is “impacting our ability to invest in great new TV and films for our members."
Converting more viewers to payers could bring some significant financial upside. A February survey by Cowen found that 42% of respondents shared their Netflix password, though Mr. Blackledge acknowledged that some of those were likely subscribers sharing with family members in the same household. Password sharing does multiply the number of eyeballs on Netflix programming, which could still leave a significant number of viewers drawn enough to the company’s content to pay for it if pressed. According to eMarketer, Netflix had about 611 million global viewers who watched at least one time a month last year. That’s nearly three times the company’s actual subscriber base at the end of the year.
Still, a sharp crackdown by Netflix could bring other risks. A survey by KeyBanc Capital last month found that password sharing was greatest among the age 18-29 cohort. Many of those could simply be college students living away from home temporarily. KeyBanc analysts also noted that this age group tends to have a lot of other viewing options, so limits by Netflix “could ultimately lead these consumers to stop watching Netflix altogether."
In that light, the option to add people outside the household for a few bucks more is a wiser course of action than trying to make those viewers pay full price—especially since Netflix is now one of the most expensive services in a much-more crowded streaming market. “Certainly, having your 35-year-old daughter’s boyfriend’s cousin use Netflix is not in the acceptable use cases, right?" then finance chief David Wells said at an investment conference earlier in 2016. But the daughter’s boyfriend’s cousin can now watch “Ted Lasso" on Apple TV+ for half the price of Netflix’s cheapest plan. A lost eyeball may ultimately be more costly than one that doesn’t pay up.
This story has been published from a wire agency feed without modifications to the text
