Netflix says that roughly 100 million households use a shared password. For years it encouraged the practice because the network effect (more people watching Netflix) had a positive impact on subscriber acquisition. That was then. Now, Netflix is facing headwinds.

It is losing subscribers and share prices are heading in the wrong direction. So, among other things, Netflix is going to try to increase revenue by cracking down on password sharing. Will it work? And, how will it work? Let’s explore.

The Proposed Solution

The plan is to warn account owners who share passwords (they know who you are, they always have) and then charge a small fee ($2-$3/month) for each additional household using the account. This approach has already been tested in Peru, Costa Rica, and Chile.

Netflix Chief Operating Officer Greg Peters said, “If you’ve got a sister, let’s say, that’s living in a different city, you want to share Netflix with her, that’s great,” during the company’s earnings conference call. “We’re not trying to shut down that sharing, but we’re going to ask you to pay a bit more to be able to share with her and so that she gets the benefit and the value of the service, but we also get the revenue associated with that viewing.”

The Obvious Consumer Response

There is data to suggest that the vast majority (80%) of Americans who borrow a password would not pay for the streaming service on their own. However, while several different software-based services feature individual and family plans, there is not much publicly available data about how existing streaming subscribers might respond to a request to pay more to share their passwords.

The serious shared password abusers will not be surprised by the warning or the request to pay. How many will comply is unimportant. Netflix is not getting any revenue from the additional viewers. So, at this point, less non-payers using the service is probably a good thing for Netflix.

What About the Network Effect?

Buzz is important for any product. The more people talk about you, the better off you are. The more people talk about a show on Netflix, the better off Netflix is. But awareness does not seem to be Netflix’s problem. Everyone knows what Netflix is and what it does. At this point, the company is losing hundreds of millions of dollars each month to password sharing, and it’s a good idea to test the best ways to get it back.

As always, the devil will be in the details. Once they get through the hardcore password abusers, they are going to run into all kinds of special cases: people with multiple dwellings, kids staying at grandparent’s houses or at sleepover parties, and on and on. The customer service calls may overwhelm Netflix’s ability to cope.

Making this too hard for Netflix customers may do irreparable damage. The good news is that Netflix is well aware of this, and one would guess that they will do everything in their power to make this as painless as possible for their customers. We’ll see.

A Bigger Problem

Netflix is losing subscribers. This should surprise no one. The company spends insane amounts of money on one-off, forgettable stories. They don’t usually build franchises or extend their properties to other media.

You can argue that their model is simply one of subscriber retention. But, to any industry observer, the costs of their content is too high when compared to the content’s useful life. We’ve all watched dozens of shows, movies, and series on Netflix that, like fast food, served a purpose. But it is a rare piece of Netflix content that most would classify as anything but disposable entertainment.

Of course the company produces some wonderful content, but it’s pretty easy to argue that Netflix is in the streaming business, not the entertainment industry. Now that Netflix has real competition in the streaming business, the numbers are beginning to tell the story. So, of course, we’re going to see tests like this.

We’re also likely to see a free ad supported model (just like cable TV) in the near future. Get ready for third-party Web3 services that offer to pay for your streaming subscriptions using watch-to-earn models. Content is more expensive than ever, and there are lots of people trying to figure out how to bring it to you as cheaply as possible. (Remember, “Free is very pro-consumer.”)

In 2017, during its ascension to the top of the streaming world, Netflix tweeted, “Love is sharing a password.” When awareness is your problem, the network effect is the best solution. In 2022, with subscribers leaving, revenue dropping, and competition heating up, it’s clearly time for Netflix to adopt a different strategy. Is reducing their bandwidth costs and increasing revenue from remaining subscribers a good idea? I guess we’re about to find out.