After an unprecedented downturn in subscriber growth in the first quarter, Netflix executives are eyeing the millions of people using other subscribers’ accounts as a way to reverse the streaming service’s current trajectory.
Netflix NFLX, +3.18% executives said Tuesday that the service lost 200,000 paid subscribers on a net basis in the quarter, the first time the subscriber total has shrunk since Netflix had far fewer than 200,000 streaming subscribers in total, and they expect to lose 2 million subscribers in the current quarter. The unexpected decline slammed the company’s revenue growth projections and led the stock to plunge more than 25% in after-hours trading Tuesday.
Executives see an easy opportunity to make more revenue from a base of up to 100 million new subscribers: Cutting off password-sharing. In a letter to shareholders, executives estimated that many households are using the service without paying for it, by signing in under accounts of its 221.6 million paying subscribers, and that they hope to “reaccelerate” revenue growth “through improvements to our service and more effective monetization of multi-household sharing.”
Executives described cutting off password-sharing as “a big opportunity” in the shareholder letter, because “these households are already watching Netflix and enjoying our service.”
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Tests of how to cut off the ability to share passwords have already begun. In March, the company said it started two new paid-sharing features, where current members have the choice of paying for additional households, in three markets in Latin America.
In the company’s video interview with JP Morgan analyst Doug Anmuth on Tuesday, Netflix executives gave a few details of how the crackdown could work.
“The principle way we have is asking our members to pay a bit more to share the service outside their homes,” Greg Peters, Netflix’s Chief Product Officer, said in the video, adding that, for example, if you are sharing your Netflix account with your sister in another state, you will be asked to pay a little more. “We are trying to find a balanced approach here, a consumer-centric approach,” he added.
Peters also noted that the company has been working on ways to monetize this issue for the past two years, and the first big country testing began about a year ago. He suggested it would take Netflix a year to develop a final solution.
“My belief is that we’re going to go through a year or so of iterating, and then deploying, all of that so that we get that solution globally launched, including markets like the United States,” he said.
Wall Street analysts have been concerned with the sharing of passwords by Netflix customers since at least 2013, based on a search of the last 10 years of analyst conference calls and presentations to Wall Street, but executives until now have avoided a full-fledged crackdown. The company does have a hard constraint on concurrent streaming ability, and consumers who hit that limit are asked to upgrade their account.
“While we won’t be able to monetize all of it right now, we believe it’s a large short- to mid-term opportunity,” the company said. “As we work to monetize sharing, growth in ARM (average revenue per membership), revenue and viewing will become more important indicators of our success than membership growth.”
Another way Netflix is going to look for more revenue will be through finally having an ad-supported service. Co-Chief Executive Reed Hastings said in the video interview that Netflix is looking at creating a lower-priced ad-supported subscription tier, adding that the approach is currently working for some of its rivals, such as Disney’s Hulu.
“That’s something we’re looking at now, we’re trying to figure out over the next year or two, but think of us as quite open to offering even lower prices with advertising as a consumer choice,” Hastings said, after years of pooh-poohing suggestions that Netflix boost revenues through advertising.
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Netflix recently increased its prices in the U.S. and Canada, its most mature markets, and executives said nearly a third of the password sharers — roughly 30 million — are in that region. Executives also said that long-term growth is going to come from markets outside the U.S., and that their goal is to sustain double-digit revenue growth.
MarketWatch has warned investors repeatedly that judging Netflix by subscriber growth was a fool’s errand as the service got larger and faced greater competition from well-funded competitors such as Apple Inc. AAPL, +1.41%, Walt Disney Co. DIS, +3.23%, Amazon.com Inc. AMZN, +3.49%, Warner Bros. Discovery WBD, +1.37%, Comcast Corp. CMCSA, +2.67% and Paramount Global PARA, +0.86%. But now that competition has eroded the revenue growth that Netflix had enjoyed for years, executives are going to have to make moves that will anger some consumers used to receiving the service for free.
At least executives seem amenable to finding a way to offer a cheaper service with commercials, which will give customers who want to avoid paying $15 a month but still want to see the new season of “Stranger Things” a way to do so. The question for investors is if the changes executives are planning will actually move the needle, or are just a way to keep shareholders from fleeing — like some subscribers are doing.
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