To share or not to share: A deep dive into the dilemma over OTT password sharing

“Love is sharing a password.”

Netflix proclaimed jubilantly in 2017 via a tweet. Five years down the line, that love seems to have vanished into the thin air due to a multitude of reasons and fast-changing circumstances. After it lost 200,000 subscribers in the first quarter this year, Netflix announced, inter alia, that it will stop the password sharing option by the end of this year, making the moochers blue and analysts scratching their heads.

Account-sharing is impacting “our ability to invest in great new TV and films,” said Chengyi Long, Director, Product Innovation, Netflix.

So, Netflix is trying to “find a balanced approach,” said Netflix COO Greg Peters. The translation is: the streamer wants to charge for password sharing!

Now, Disney+ is following in the footsteps of Netflix. It recently conducted a survey among subscribers in Spain, seeking to know the reasons for sharing their Disney+ passwords.

Why are both market leaders picking this risky battle with consumers now? How will the subscribers react to such a move? Will there be backlash, especially from markets like India? 

“I don’t think Netflix is yet to worry about account sharing in India, as its subscription number is still growing while penetration remains at a very low level. India has always been one of Netflix’s major targets and one it has yet to reach a substantial market share. Therefore, Netflix will focus on driving subscription uptake rather than increasing monetisation,” says Orina Zhao, Senior Analyst at Ampere Analysis.

Ampere estimates that Netflix now has 3.9 million subscriptions in India, which is much lower than leading Disney+ Hotstar, which has 48 million subscriptions, and other local subscription Video-on-Demand services. One main restriction of Netflix’s adoption in India is its much higher price than local rivals, says Orina Zhao.

In India in 2016, Zhao adds, Netflix’s prices were 5-6 times more expensive than local rivals. “Thus, to adapt to the mass mobile-first market, Netflix launched a significantly cheaper mobile-only plan and kept reducing its price in India. Proven effective in accelerating subscription uptake, Netflix will continue to adjust its pricing strategy and optimise content offering in India with the goal focusing on subscription growth, even at the expense of ARPU,” she says.  

According to Zhao, Netflix’s way to crack down account-sharing will likely be two-pronged: one, to ask account holders to pay an extra small fee to use the account outside of the main household IP address; two, to introduce an ad-funded cheaper tier.

“The price of the extra small fee will likely be similar to the ad-funded tier. Therefore, account borrowers will be left with the option of either pay to stay with previous subscription account and enjoy streaming without advertising interruption, or start their own subscription account with a cheaper fee but with the trade-off of advertisement,” she explains.

No one-size-fits-all solution

Password sharing is the need of the hour, because subscriber growth is the only growth driver; they can’t increase ARPUs in this price-sensitive market, remarks Karan Taurani, Senior Analyst at Elara Capital.

In the US, password sharing has led to massive losses in the OTT industry, Taurani points out, adding, nonetheless, for a country like India the problem is ARPU. “Had India been a market like the US, where you had ARPUs comparable to the US markets, you would not have faced the problem of password sharing. Those markets are not heavily fragmented and there is no content costs increase like in the Indian market. India is a double whammy; ARPUs are low. Content costs are phenomenally high and rising by the day. There has to be some kind of correction/ rationalisation,” he maintains.

Password sharing remains an on-going problem for all streaming media services, says Paolo Pescatore, Founder & TMT analyst at PP Foresight.

Pescatore feels that clamping down might help, but there might not be a one-size-fits-all solution. “There will be disgruntled subscribers who may cancel altogether. Netflix will have to experiment with different price tiers to cater to diverse audiences. In the first instance, a low cost AVOD offering might help convert freeloaders,” he says.

Terming password sharing as ‘incredibly common’, Teresa Cottam, Chief Analyst at Omnisperience, says that as per Netflix estimates, 100 million household customers worldwide are doing it. Specops conducted a study in 2020 and found that 51.5% of those surveyed admitted to password sharing with family and friends. Amongst Netflix users this rose to 67%, she says.

“In a price-sensitive geography like most of Asia, password sharing is seen as a consumer right,” notes TRA Research CEO N Chandra Mouli. “With content quality and variety not improving much, the consumer will move to where the quality content is,: he adds.

“Streamers will find Asia, especially India, the most difficult geography to crack. They have to look at innovative ways of monetisation, not one-rule-fits-all solutions. They have to also start with experiments, like sporting event content monetization, which could limit password sharing. An OTT cannot milk the consumer cow only for revenues,” Chandra Mouli further says.

Blame it on streamers themselves!

Streamers only have themselves to blame, says Teresa Cottam. She reminds us that in 2014, HBO CEO Richard Pleper had said it was a great marketing vehicle. “In 2016, CEO Reed Hastings had said that consumers sharing a Netflix account was “a positive thing”. And, as recently as 2017, Netflix sent a tweet promoting its own series Love in which it said: Love is sharing a password,” points out Cottam.

While they were building their markets, streamers saw password-sharing as a way to get more people addicted to their content and build a future subscriber base, she says. The problem, she argues, is that they have built up customer expectations that this is okay.

According to her, it is never good for a brand to reverse policies and decisions in this way. It’s often viewed by customers as both unfair and inconsistent.

According to Cottam, the reason they’re clamping down on password sharing is to claw back revenue from the 100-million stealth users that they have identified as benefitting from it. “This is a sign of stagnation, that is, they have no new ideas about how to expand their market or revenue streams and they’re gambling on how customers will react,” she adds.

According to Cottam, the options before customers are: pay up as requested, stop password sharing altogether, change their behaviour – such as invite their friends to their house to view the content, start using illegal content such as pirated DVDs or P2P sharing, move to another format that enables sharing (such as DVDs), or move to a rival.

Cottam explains that the concept of ‘rights’ – that the rights owner retains the ability to control what you do with the content – is somewhat unusual. “If you buy a sweater, chocolate bar, car, etc., no one tells you how you can use it and expects more revenue if you share it. Even in the content market, customers have always been able to share and resell. Rights owners, for example, had no control over the second-hand book or DVD market. So, there’s something new here,” she says.

Streamers under pressure

The pressure on revenues for all OTT platforms is very intense, says Chandra Mouli. Being listed companies, he maintains, Disney and Netflix have a responsibility to their shareholders.

“The recent guidance by Netflix, when it reported on lost subscribers for the first time in 10 years had resulted in a 25% share price tanking. Disney, on the other hand, saw a rise in number of subscribers, in fact, a bit more than the analysts’ forecast. But Disney’s pressures on revenues are due to Covid closures on parks across Asia. For Netflix, any more subscriber loss will intensify the revenue problem. For Disney, this is the only growing revenue stream in their basket. While the end objective of both is increased revenues, the reasons for trying to monetise passwords are equally compelling for both,” Chandra Mouli maintains.

Netflix is the market leader and is the benchmark for others, says Paolo Pescatore. According to him, all rivals are effectively mirroring Netflix’s strategy. He feels that a combination of factors has come together against Netflix.

“Restrictions have eased with people spending more time outside, coupled with the cost of living crisis having a negative impact on the company. Let’s not forget that the market is now awash with too many streaming media services chasing too few services. This will also impact other streamers in their ability to maintain steady user growth. Increasing revenue and driving engagement must be a priority. There are plentiful opportunities to offer other features, services and billing options. There are still millions of subscribers to acquire and in particular the emerging markets,” Pescatore says.

Netflix claimed that account sharing is one of the reasons that growth has stalled, says Orina Zhao. She points out that the streamer estimates that on top of their 222 million paying households, it is shared with over 100 million additional households, including over 30 million in the North America region. “Netflix believes that account sharing has inhibited its growth of organic households as many households have access to Netflix but are not home to a paying Netflix subscriber,” says Zhao.

Only larger streamers will do

The market dynamics are definitely changing, says Karan Taurani. It has been seven to eight years since the OTT platforms have come to India. And still there is no visibility in terms of these platforms being able to make a profit, because it is a highly fragmented market, he points out.

“Content costs are going up; and it will go further up from now on. I don’t think subscription growth is going to be so strong. In India, it will be much better than other nations. But it will not be good enough to support the economics. In India you can’t raise the price too much, because then it impacts the subscription. The only growth driver is scale and subscriber base. If password sharing has a negative impact on subscriber growth, then that is the reason why these platforms are looking to arrest that part so that they can normalise and regularise the subscriber base number which is there,” he says.

Taurani foresees two things. “You could have a certain quantum of subscriber base that will do a fresh subscription. The number of subscribers who would want to leave the account because of password sharing not being allowed will be a small number: close to 25%.”

He doesn’t think most streamers will follow. He points out that only the larger ones, who have a hefty content cost and expensive nature of content like sports, will stop password sharing.

“I don’t see all SVOD or premium platforms obstructing password sharing, because it will have a negative impact on their subscriber base; the churn rate for a non-established OTT because of stopping password sharing will be phenomenally high as compared to established ones. Hypothetically, if Netflix stops password sharing 15-20% of the customers will probably deactivate. Of the people who share passwords, 40-50% may take a new plan. But the number of deactivations will move up phenomenally high if you look at other platforms,” he explains.

Orina Zhao states that in addition to Netflix being poised to address account sharing by launching an ad-funded tier, an internal report sent out by Disney+ suggests that the rising streaming giant is also interested in introducing similar measures.

“With Hulu’s hybrid tier creating higher revenue from both advertising and subscription than its SVOD-only tier, and HBO Max also launching with ad-funded tier in the US, it shows that not only Netflix, but increasingly more SVOD services might shift away from the classic subscription-focused model. In crowded markets such as North America and Western Europe, a hybrid business model might be necessary to stay competitive,” she says.

Paid sharing or policing?

Netflix is looking to monetise account-sharing by asking account sharers to pay a bit more. How will the consumer take it? Experts feel simply blocking streams from out-of-home IP addresses might cause a huge consumer backlash, eventually causing increasing churn. So, is there a market for paid password sharing, especially in markets like India?

Out-of-home IP paid password sharing is a strategy they can adopt as a middle-ground in a price-sensitive country like India, says Taurani. “Paid password model is complicated because of too many security issues like log-ins, too many OTT requirements, etc. So, it doesn’t technically augur well to share passwords over a medium to long term perspective,” he says.

Cottam, however, feels that this isn’t workable. How do you know if the customer is roaming – example working away, staying with relatives or on holiday, she asks. According to her, if you make content geo-specific, then you take away much of the value of streaming (instant access wherever you are).

“Good luck to Netflix in trying to police the modern household. In Scandinavia, most people have second homes, where they go at weekends and in the summer – how would this be accommodated? In Europe and US families, you have equally complex scenarios such as families where mum or dad is working away from their home; divorced parents sharing childcare, with the children moving between two households; teenage children living away from home in term time while they study, etc. The complexity of modern households is not something streamers should be trying to police and a simple geo ban will alienate virtually everyone – why can’t you watch your favourite series when you go to the coast for the weekend?” she asks.

Will it work in India?

Cottam feels that there is a market for paid password sharing in a place like India. But essentially what you create is a reseller market. In this case, she maintains, those using the shared password don’t need to be family or friends at all.

“You create a hierarchy like we sometimes see in telecoms, where an individual can resell access, just like they can resell data. But if this is the case, it would be more innovative to stop focusing on controlling the modern family and instead enable micro-resellers. That could be perceived as a positive and innovative way of growing the market. If that’s the case streamers need to explore more features and functions to enable such a business such as time-limited access, pay-per-view support, and so on,” she adds.

Chandra Mouli feels that paid password sharing will be disastrous for Netflix in India. The consumer mind-set, he says, should be evident to Netflix and others, as was the case with the reduction of Netflix’s mobile-only price to Rs 149 in India.

“It was expected to draw new consumers. Unfortunately for Netflix, the consumer only downgraded their subscription. This is a crucial time for all of OTT, as the consumer has realised that you get fresh and quality content only in the initial period when you are a subscriber to OTT. The rate of new content creation has been slow by all, effectively making the content outdated within a few months of use. In trying to monetise password sharing India, Netflix will most likely be shown an exit from the consumer wallet,” he says.

Global scenario

In mature markets such as North America and parts of Western Europe, says Zhao, over 70% of households already subscribe to at least one SVOD service and around half of total households subscribe to Netflix.

“Account sharing lowers the “ceiling” of further subscription growth as Netflix’s actual household penetration is higher than its total subscriptions. Therefore, faced with uptake slowdown, addressing account sharing increases the monetisation of Netflix by asking the account holder to pay an additional fee, and might potentially break the ceiling of subscription growth by attracting account borrowers to a lower-priced ad-included tier,” she adds.

As for consumers, Orina Zhao adds, Ampere’s latest research found that account borrowers vary in North America and Europe. In Europe, 24% of all account borrowers are 18-24 years old; this is the largest group among all account borrowers, they are more likely to be unemployed students or in a part-time employment. In North America, it is more common that account borrowers are unemployed and much likely to be on lower incomes. The plan to introduce a small extra fee to add an external profile on a subscription account may find success among European account-borrowers, who are more likely to be students or fresh graduates borrowing from their parents. For them, paying an extra small fee is still much cheaper than starting their own subscription. Thus, the proposed plan resembles the “family plan” of Apple services or Spotify, thus might indicate an easier transition. However, such measures might run the risk of alienating the less affluent North American account borrowers, who might not be able to afford a full-priced subscription or be willing to pay extra for access, who, thus, might opt for free videos or cut off Netflix access. Therefore, Netflix might see increased churn among account sharers in North America.