Why Netflix won’t risk a true crackdown on password sharing

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Freeloaders everywhere were put on high alert last week after reports that Netflix had begun testing a way to prevent password sharing. While Netflix may want more paying users, it’s unlikely to initiate the no-holds-barred clampdown that moochers are worried about.

GammaWire reported March 10 that some Netflix users, on certain devices, noticed a warning on their accounts asking them to confirm they were authorized to access the service. “If you don’t live with the owner of this account, you need your own account to keep watching,” the message read. Netflix gave them three ways to proceed: verify the account with a code sent via email or text, verify later, or sign-up for a free trial.

The warnings prompted many observers to declare that, finally, after years of Netflix tacitly allowing password sharing, the end of the common practice was nigh. But the truth is probably less game-changing. Despite predictions that a crackdown on password sharing could yield Netflix billions in additional annual revenue, the company has more to lose in the long term if it strictly regulates its users.

A nation of password sharers

A third of streaming subscribers in the US alone admit they share passwords, according to the research firm Magid. Analysts say that could cost the streaming industry as much as $25 billion a year—or a little less than half what it currently generates in revenue worldwide. But Netflix has long looked the other way when its users shared login credentials, seeing it as a boon to both its growth and to its consumer-friendly brand. (The company’s terms of service state passwords “may not be shared with individuals beyond your household.”)

“We love people sharing Netflix whether they’re two people on a couch or 10 people on a couch,” Hastings said at the Consumer Electronics Show in 2016. “That’s a positive thing, not a negative thing.” Hastings later said it was something Netflix just had to “learn to live with.”

Much has changed since then. Netflix has nearly saturated the US market, and now faces formidable competition from the likes of Disney and WarnerMedia. But the company’s core proposition—that it offers a user-first, hassle-free, flexible streaming experience—has not changed. Being cool about password sharing is an unwritten but still fundamental tenet of Netflix’s pitch to consumers. Should you share your password? Ideally, no, but Netflix isn’t going to bang down your door to make you stop. That’d be seriously un-Netflix like.

Pirates are worse than moochers

While Netflix obviously wants everyone who uses the service to pay for it, the company would prefer users still use Netflix—even without paying—than steal its content in more nefarious ways. A crackdown on sharing would undoubtedly turn some moochers into pirates, who’d illegally download Netflix shows off Torrent sites. Netflix loses as much as 10% of its revenue due to piracy, according to a 2019 study by Freeloaders aren’t ideal, but pirates are worse.

A crackdown would also risk tarnishing the global perception of the Netflix brand, which the company has spent a decade turning into one of the world’s most admired names in business. The backlash to a universal effort to terminate all password sharing could cause a loss greater than the revenue Netflix relinquishes by allowing it.

Still, the test warnings make it clear Netflix would now prefer if fewer subscribers shared their passwords. They could be part of a strategy to jumpstart growth again in the US, where Netflix has hit a subscription wall. Especially as the pandemic recedes and consumers spend more time outside, the company could be looking for ways to stave off inevitable member attrition. Quietly discouraging users from sharing their passwords is one way to squeeze some extra revenue out of existing freeloaders without doing much damage to the brand.