Netflix’s impending password-sharing crackdown will come at a cost to the streamer, too

Netflix will begin cracking down on password-sharing in the US in the next few months, the company confirmed Tuesday. Prepare for a painful transition—for Netflix, too.

The streaming giant, which reported its quarterly earnings yesterday, warned investors that there will almost certainly be a dampening of subscriber growth as it tries to get more password-sharers to pay up, either by setting up their own accounts or through paid-sharing plans. Already, the company is seeing a slowdown: In the first quarter of 2023, it added 1.75 million subscribers, fewer than investors expected.

“We see a cancel reaction in each market when we announce [paid sharing], which impacts near-term member growth,” Netflix wrote in its quarterly letter to shareholders, pointing to a 450,000-subscriber quarterly loss in Latin America as evidence of the dynamic. “But as borrowers start to activate their own accounts and existing members add ‘extra member’ accounts, we see increased acquisition and revenue.”

Engagement rates may also be affected. “As we roll out paid sharing—and as some borrowers stop watching either because they don’t convert to extra members or full paying accounts—near-term engagement, as measured by third parties like Nielsen, will likely shrink modestly,” the company admitted.

Worth it? Regions with password-sharing crackdowns are bouncing back, Netflix said. In Canada, where the company implemented paid sharing earlier this year, the membership base is now larger than before the crackdown and revenue growth has accelerated, co-CEO Greg Peters said Tuesday during the company’s earnings call; the company anticipates a similar dynamic in the US. (Netflix does not break out Canada subscriber figures separately from its US numbers; this quarter, the company added 100,000 subscribers in the region.)

Ditto for engagement. Netflix expects to see “engagement growth resuming over time as we continue to improve our programming and borrowers sign-up for their own accounts,” the shareholder’s letter read.

“Win-win”: Netflix provided a few details abouts its nascent ad-supported tier, which will be on display during the company’s first-ever upfronts presentation next month, including confirming its work on a programmatic marketplace through Microsoft’s sales platform.

Engagement on the ads tier has exceeded the company’s initial expectations, Netflix’s shareholders letter said, and there is “very little switching” from Netflix’s ad-free plans to its ad-supported tier. “It’s kind of a win-win because it’s a lower price option for our members, and it’s both incremental revenue and incremental profit for the business,” Netflix group CFO Spence Neumann said during the company’s earnings call.

Shut it down: As Netflix looks to evolve the newer parts of its business, it’s winding down the old. The streamer’s legacy mail-order DVD business will cease operations later this year, it announced in a blog post ahead of earnings.