Netflix Cracks Down on Password Sharing: What It Means and How It Can Benefit Users

February 7, 2023 By Andrew Ramspacher, fpa5up@virginia.edu Andrew Ramspacher, fpa5up@virginia.edu

News leaked last week of Netflix’s new password rules. The company could require all accounts and devices used for streaming to be linked to the same Wi-Fi network. So if you’re using the account of a friend or family member who lives in a different home – either down the road or a few states away – you may soon be blocked from logging into Netflix.

The potential change – which Netflix says now only applies to account holders in Chile, Costa Rica and Peru – seems inevitable for users in North America, where Forbes says password sharing happens in more than 30 million households.

To get a gauge of how this came to be, and what it might signal for the future of subscription video-on-demand services, we caught up with Anthony Palomba, an assistant professor at the University of Virginia’s Darden School of Business.

Fascinated by media, entertainment and advertising firms, Palomba is working on several research papers that analyze the dynamics of the subscription video-on-demand marketplace.

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Q. What is the main reason why Netflix is cracking down on password sharing?

A. A lot of people have stated that they don’t want to be followed by advertisers, though many surrender private information for free access to apps. We’re moving toward a digital cookie-less future, as Google now estimates it will eliminate third-party cookies from its Chrome browser sometime in 2024.

So if that’s the case, there’s going to be even more pressure to start measuring audiences well. And, if Netflix is on the other side of what Apple started with shaking up the digital advertising industry to give people choice over how they are tracked and to move away from cookies, this is the time to start refining audience measurements and tracking systems. This limiting Netflix accounts to single households is a way to do that.

Q. What was the tipping point that led to this change?

A. I think the tipping point came down to when the market was saturated with subscribers with churn rates up to 4% or 6% a month. You’re talking about 30 million subscribers over the course of a quarter that sometimes will change and cancel across services.

So, if you have that kind of churn rate going on quarter-to-quarter, you need to start thinking about how you will measure audiences to streamline content production that satisfies your audiences. Because now everybody’s kind of had a sample of everything, and you’ve created a situation in which people are used to binging video series or watching incredible content. This ratchets up their expectations for the next powerful or incredible series or content.

Since content is coming out at such rapid speed, people are just jumping to the next thing. Like, “Oh, ‘Euphoria’ is up. I’ll cancel Netflix and subscribe to HBO for a month.” When that happens, you now have incomplete and inchoate data sets. This can reduce your ability as an [subscription video-on-demand] executive to figure out, to some extent, what some people want.

Q. Why is it important for Netflix to have these data sets?

A. Possessing and creating pipelines for good data is a really big deal. I can’t emphasize that enough. It really does come down to the quality of your secured data, how you are piping data, and how you are managing model decay over time. If people are running around and jumping from one platform to another, you really can’t learn much about those people.

Anthony Palomba smiling and posing for picture

Anthony Palomba has expertise in audience analysis, media innovation and firm competition, and entertainment science. (Photo by Stephanie Gross)

Q. So if several people are using the same account, Netflix struggles to get a feel for their subscribers?

A. Absolutely. And then if you extrapolate that a bit further, if they’re going to relax the amount of content they’re producing on an annual basis, they really, really need to know who their target audience is, and what it will take to keep them subscribing to Netflix.

On a broader level, many tech companies, as we saw in the last month, laid off a bunch of people and have consistently stated that they’re going to be more conservative with their spending. If that’s the industry attitude, then they really need to know who their consumers are and not spend on content to simply offer more content to consumers who can’t possibly realize all of what is available to them. It’s not a good marketing tactic. Though it once appealed to Wall Street investors, they too are interested in diverse revenue streams and less about the girth and size of content libraries.

We might need to unwind the binge behavior that has been created in the last decade. The “Stranger Things” season four debut was stretched out in two parts across two months. More [subscription video-on-demand] services are taking this approach to reduce churn and create less frenzied television and video industries.

Q. While perhaps frustrating now, how can this change benefit Netflix consumers in the long run?

A. Season five of “Stranger Things” is positioned to be amazing and epic, as it is the last season! Do I really want them to break the season into part one and part two, as they did with the fourth season? Frustrations like this will exist in the short term, but fans will eventually get over these challenges, as there are few alternatives for premium content.

This is part of a larger conversation about how content is produced, distributed and exhibited to consumers. [Subscription video-on-demand] services have hijacked the premium content marketplace, and “low-brow” though wildly entertaining content has found its way onto Tik Tok, Instagram, YouTube and other online places. Middle content, found on CBS, ABC, NBC and cable television, will continue to struggle as a result of aging demographics and limited storytelling innovations. [Subscription video-on-demand] services will continue to be a destination for top-tier programs.

Finally, people might actually get to know the entire library of Netflix without having so much new content thrown at them! This is a great moment for Netflix to manage its brand a bit better, and truly understand what it might mean for different consumer segments, what its own service levels are for each segment, and accordingly manage its subscribers. A transactional-based (e.g., people who subscribe a month here or a month there) business is expensive to maintain. It’s important to have loyal subscribers.

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Q. Do you sense that other subscription video-on-demand services will soon also begin to tighten their password policies?

A. I should think all of them will. Amazon and Apple TV+ continue to be interested in sports league rights. It may be helpful to begin to track consumers who go to live sports games and are also fervent viewing fans in their own homes, right?

The technology companies that can create audience measurement ecosystems are the ones who will win in the next phase of the [subscription video-on-demand] wars. How well can you measure your audiences when they are not using your services? Do you know where they are? Where they came from? Where are they going after they’re done using your services?

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Andrew Ramspacher

University News Associate University Communications