In a profit letter to shareholders on Tuesday, Netflix said it estimates that over 100 million households watch the service without paying by sharing accounts with households that do.
In March, the streaming company announced that it would be testing a new feature in Costa Rica, Chile and Peru that detects account sharing and allows for the creation of cheaper sub-accounts. This led many to believe that a broader crackdown on account sharing was imminent. Netflix’s shareholder statement acknowledged this as a focus for the company over the next year, citing the massive scale of the account-sharing practice.
“In addition to our 222 million paying households, we estimate that Netflix is shared with over 100 million other households, including over 30 million in [the U.S. and Canada]’ the company said. That would mean nearly a third of households using Netflix aren’t paying for it.
Netflix told shareholders that the large surge in its subscriber base during the pandemic has masked the fact that it faces a number of challenges in continuing to grow its massive audience — including things like increased competition in streamed entertainment and the adoption of connected TVs and data costs. These factors were responsible for the recent slowdown in growth. In the meantime, to boost revenue, it would look for ways to monetize the large number of households that aren’t currently paying for the service.
In relatively friendly language that appeared to be aimed at both customers and shareholders, Netflix said:
Another focus is on how best to monetize sharing – the 100+ million households that use another household’s account. This is a great opportunity as these households are already watching Netflix and enjoying our service. Sharing likely helped fuel our growth by getting more people to use and enjoy Netflix. And we’ve always tried to make sharing within a member’s household easy, with features like profiles and multiple streams. While these have been hugely popular, they have created confusion about when and how Netflix can be shared with other households. As such, early last year we began testing different approaches to monetizing sharing, and in March launched two new paid sharing features, giving current members the choice to pay for additional households in three markets in Latin America. There is a wide spectrum of engagement when it comes to sharing households, from frequent to occasional television viewing. While we won’t be able to monetize all of it right now, we believe it’s a great opportunity in the short to medium term.
While this passage bends backwards to avoid sounding threatening, it also explains why Netflix previously chose not to enforce its Terms of Service, which prohibit sharing accounts outside of a household. It sounds like the company saw the widespread adoption of Netflix via sharing as a useful viral marketing tool. But now, as the market nears saturation, turning some of those who share homes into paying customers has become imperative.
The paid sharing features tested allow each Netflix viewing profile to be spun off into its own full account – so things like personalized lists and viewing preferences aren’t lost – or into one of the new sub-accounts. Up to two sub-accounts can be added to Standard or Premium subscriptions, and they don’t cost as much as full Netflix subscriptions.
In an investor relations video released alongside the letter, Greg Peters, chief operating officer and chief product officer, said it would be a while before the company refined its approach and rolled out paid account sharing across all markets have. “I’m confident that we’re going to iterate for about a year and then deploy all of that so we can roll out this solution globally,” he said.