Netflix Password Crackdown increases the risk of losing users

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As Netflix Inc. takes a firmer stance against people sharing account passwords, it may soon find out just how many of its viewers will agree to pay to use its services. 

The video-streaming giant is testing a feature that prompts non-paying viewers to buy a subscription. A company spokesperson wrote that the test was “designed to help ensure that people using Netflix accounts are authorized to do so.”

A key question surrounding Wall Street is how many of Netflix’s non-paying users will become paying users. While several analysts have shown confidence in the quality of the shows on the platform saying that most users won’t want to give up access to shows like “Stranger Things” or “The Queen’s Gambit,” the question brings uncertainty at a risky time when rival services are adding millions of subscribers.

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As investors consider its post-pandemic prospects, Netflix has underperformed. According to a report by Bloomberg, “the (Netflix) stock is up about 3% over the past six months, compared with a 13% rally in the Nasdaq 100 Index. Shares fell 0.4% on Monday.”

Analysts see user churn as a notable 2021 risk

For Benchmark Co.’s Matthew Harrigan, the underperformance will probably continue “as global consumers are disgorged from their couches” amid the Covid-19 vaccine rollout. Additionally, he believes the password crackdown could dampen Netflix’s pricing power.

Last week, Needham, an investment banking and asset management firm, called user churn — the number of customers who drop their subscriptions — the top risk for Netflix in 2021.

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Meanwhile, BMO Capital Markets is more optimistic, saying the strategy could “help drive some incremental gross subscriber additions.” Bloomberg Intelligence recently wrote that a crackdown “could increase revenue 10%,” although the move “risks alienating users, which could prompt elevated churn.”

Forecasts by various firms vary on what percentage of subscribers share their accounts with people outside their households. Of Netflix’s 74 million domestic users, Bloomberg Intelligence said between 20% and 30% potentially shared that information, while market-research firm Magid, citing a survey it conducted last year, estimated that a third of subscribers did.

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