March 20, 2023

Netflix plans to start cracking down on subscribers in the U.S. who share their password for the streaming service by the end of March. But how exactly would that work?

Initial reports and trials in other countries suggest the effort to deter password-sharing will be relatively gentle in its first iteration, relying on a combination of technology and user conscientiousness to prod serial over-sharers into paying more for the privilege.

Netflix will likely use a person’s geographic location, as determined by the IP address of any internet-connected device, to figure out which people count as “household” members who live together, Insider reporter Sarah Saril told CBS News.

“If you’re watching on a TV, it’ll provide exactly where you are,” Saril said. “They only want people in your household, at your address, watching.”

Netflix says on its website that the company uses “IP addresses, device IDs, and account activity from devices signed into the Netflix account” to determine which devices are in the same household. 

“People who do not live in your household will need to use their own account to watch Netflix,” the site says.

Stricter rules 

Netflix told investors last week that it would roll out more stringent sharing rules by the end of March. More than 100 million households currently share Netflix passwords, the service said. That “undermines our long-term ability to invest in and improve Netflix,” the company said in a statement accompanying its latest quarterly results.

It’s a major turnaround for a company that six years ago tweeted, “Love is sharing a password.” And Netflix executives know there’s likely to be backlash.

“This will not be a universally popular move, so there will be current members that are unhappy with this move. We’ll see a bit of a cancel reaction to that,” Greg Peters, Neflix’s recently promoted co-CEO, told investors on a call last week.

The company tried a version of this last year, when it limited password-sharing in Latin America and asked members to pay an additional fee to share with non-household members. The effort had mixed results. Tech publication Rest of World called the test “a mess,” reporting that the new policy was rolled out inconsistently. Many users were able to avoid the extra charges, while others were prompted to pay more and responded by canceling their accounts, the outlet said. 

Netflix predicted a similar response in the U.S. “From our experience in Latin America, we expect some cancel reaction in each market when we roll out paid sharing,” the company told investors, noting that could hurt its viewership in the short term.

The rollout poses a risk to the premier streaming service, said Paul Verna, principal analyst at Insider Intelligence.

“You have to tread very carefully with these things, because you can’t upset your customers,” Verna told CBS MoneyWatch. “You can’t charge a price point where people are going to be horrified and complain that this thing that’s been free for so long is suddenly costing a lot of money. And you also have to be sensitive about what you consider a household.”

Verna cited the example of a family whose children go to a sleepaway camp or go away to college, putting them geographically outside their “household.” That should be treated differently than a household sharing with a person who’s never lived there, he said.

Netflix has said it recognizes that the new policy is a major change for customers, and it has sought to cushion the blow by touting new features aimed at making the transition less painful. That includes letting members see all the devices using an account and making it easy for people to transfer individual profiles into separate accounts. Last fall, the service also introduced a dashboard that lets account users log out individual devices.

“Tough conversations”

Netflix hasn’t indicated how much these sub-memberships could cost. However, in trials in Chile, Costa Rica and Peru, sub-memberships increased the monthly cost of an account by one-quarter or one-third, according to Variety. U.S. analysts who track the company expect an added member charge of around $3 to $4 a month, according to Netflix’s most recent earnings call with investors.

“This is where these tough conversations come in — who is worth paying an extra fourth of your subscription cost every month?” Saril quipped.

If Netflix finds that too many locations are using the same account, it will deploy a technological nag: a prompt that asks users to “verify” some devices via authentication codes.

“When a device outside of your household signs in to an account or is used persistently, we may ask you to verify that device before it can be used to watch Netflix,” a company FAQ notes.

Speaking to investors last week, co-CEO Peters described this as a way to “give them a little bit of a nudge and to create features that make transitioning to their own account easy and simple.”

The company’s hope is to dramatically increase its paid viewership. Even though Netflix is the leader among streaming services in terms of subscribers, it commands only 8% of TV time in the U.S., executives said on the investor call. 

However, it’s walking a fine line between prodding users to pay more and not turning off too many casual viewers.
Netflix also says users will not be automatically charged if the system detects too many location streams, nor will accounts be canceled. That’s led some observers to question how effective the password crackdown will truly be.

“All signs indicate that the most aggressive Netflix intends to get in the first iteration of the paid-sharing rollout is to keep prodding violators with email reminders and notifications,” Todd Spangler wrote in Variety in November.

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