Netflix is ​​taking a necessary risk in fighting its 100 million free riders

When Netflix co-founder Reed Hastings proclaimed in 2016 “we love sharing people,” the company had a commanding lead in the streaming business and four years of rapid growth ahead of it. Nobody had heard of Disney Plus or the streaming wars yet.

But after the platform lost subscribers early last year, Hastings ended its lax stance on password sharing, which has led to an estimated 100 million Netflix free riders around the world.

The company started in the last few days Password Raid in the US, UK and more than 100 other countries. In the US, customers have been told that if they want to share their password, they’ll have to pay $7.99 a month to add someone outside of their home, or $6.99 if they’re willing to add one having an account with advertising.

The crackdown and new push into advertising reflects the harsh reality of the streaming business model that Netflix pioneered. During boom times, investors were willing to take eight- or nine-figure quarterly losses as long as subscription growth was strong. However, new registrations have since declined and competition is intense. In the US, the average household has 5.5 streaming subscriptions, notes Jennifer Chan, global strategic director at research group Kantar.

“Overall streaming penetration in homes hasn’t changed much since the end of Covid,” Chan said. “As such, the focus now for streamers is to retain their current customer base and become the subscription of choice so consumers don’t cancel – and if so, how to win them back.”

Meanwhile, investors want to see a path to profitability, which is putting a lot of pressure on most major streaming services to cut costs and innovate new cash-generation strategies.

Netflix is ​​profitable, but Disney Plus, Paramount Plus, and NBCUniversal’s Peacock are still posting big losses. Warner Bros. Discovery, which aggressively cut costs in a $40 billion merger after bringing the companies together last year, recently told investors it expects to make a profit Streaming business a full year ahead of schedule and that part of the business generated $50 million in profit last quarter.

Like Netflix, Warner has made big changes to its streaming service. On Tuesday, it merged its HBO Max service – home of successor, white lotus And game of Thrones – with Discovery Plus, which specializes in low-cost, unwritten programming, such as 90 Day Fiancé. The combined service has been renamed Max, and the company hopes the broader offering will increase customer numbers and engagement.

Disney CEO Bob Iger plans a similar move later this year, merging kid-friendly Disney Plus and Hulu, which focuses on general adult entertainment, into one app. Iger said it would boost sales of Disney’s subscription bundles with ads, which is another step toward achieving its goal of turning a profit in the streaming space next year. In the meantime, he also has to address investor concerns about subscriber growth — the company’s streaming services have been losing subscribers over the past two quarters.

Netflix could face similar issues with customer retention as the company restricts password-sharing capabilities. According to Kantar, Netflix stated in the first test versions that some users had stopped the service, which led to up to a million cancellations in Spain alone. While many are coming back — either by adding new accounts or opting for the cheaper ad-supported version — there’s still some risk, says Chan.

“If people cancel their subscriptions, they will be exposed to life without Netflix” and possibly switch to other services, she said. “I think people will come back, but they may not win back their entire subscriber base.”

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