When netflix (NFLX -1.78%) started talking about subscribers sharing passwords by taking a cut of the company’s revenue, many observers saw this as a brand new idea. However, the company started tackling this several years ago, with a much more focused approach from June 2021. Management must have been thinking about this for years – the only news here is that it’s taking more direct measures to address it. .

The crux of the problem

Subscribers to Netflix’s media streaming services are supposed to pay for this privilege. This is how the company Terms of use tackle this crucial business idea:

“The Netflix Service and any content accessible through our Service is for your personal, non-commercial use only and may not be shared with anyone outside of your household.”

Elsewhere, the company clarifies what counts as a household and why it matters:

“A Netflix account is for people who live together in the same household. This single household is the Netflix household and is associated with the primary account owner’s devices and devices used by other people who live in the Netflix household.”

So you can share your Netflix login information with other members of your immediate family. Otherwise, it wouldn’t make much sense to charge extra for a higher-tier service plan that lets you play content on two or four different devices simultaneously. But that’s where account sharing is supposed to end. I’m not supposed to let friends, extended family, or complete strangers log into Netflix with my credentials. If they like the service, they should consider getting their own subscription.

The active anti-sharing effort began quietly in 2018

This question has been bubbling under the surface for many years. Analysts have seen this as a significant problem since Netflix’s digital streaming debut. Very recently, management has begun to take direct and public action.

First, the company launched a test program in three Latin American markets, asking people to pay a small fee if they wanted to share their access to Netflix with someone who didn’t live in the same household. The additional charge for adding a remote user is about half the price of a full subscription for a single user. If these trials are successful, Netflix could expand them to other markets. Otherwise, they’re sure to try different ideas to achieve the same result – raising some money from people who use Netflix for free.

According to Internet Archive data, Netflix’s Terms of Service added the above anti-sharing quote in May 2018. Four months later, the company began sending emails notifying the account holder of the connections to Netflix from a new device or a new Internet address. The first version of this notification was for security, asking the user to reset their password if they didn’t recognize the new login attempt.

This warning remained unchanged for a few years. In July 2021, Netflix first tackled the idea of ​​password sharing. Since then, email notifications contain this interesting language:

If it was you or a member of your household: take advantage of it! Have you seen this one? [Link to a current hit]

If it was someone else: remember that we only allow people in your household to use your account.

This notification is a watered down version of the more practical Latin American experience. Netflix was setting the stage for its next attempt at monetization here, asking subscribers to make sure no one outside the household takes advantage of their login credentials.

So when the experiment started in Peru, Costa Rica and Chile this spring, it was essentially an amplified version of an existing policy.

Can Netflix monetize subscribers sharing a password?

Early testing may or may not show what Netflix is ​​sticking with in the long run. During the April earnings call, COO Greg Peters noted that the company had been working on the current password-sharing mitigation for two years.

“It will take some time to sort this out and find the right balance,” Peters said. “And so just to set your expectations, I think we’re going to spend about a year iterating and then rolling all of that out to get that, kind of a solution launched globally, including markets like the United States. United States.”

Later in the same call, CFO Spence Neumann explained that Account Sharing sub-accounts will increase company revenue, but they won’t count as new subscribers. So if this idea rolls out globally, we should see subscriber growth flatten out as people take advantage of this lower-cost sharing option instead of opening entire accounts. At the same time, revenue per account should increase and total revenue stream should continue to grow.

In the end, it’s the total income that matters most. Netflix has seen remarkably consistent revenue growth in the age of digital streaming, to the point where the outbreak of the coronavirus was almost invisible on a long-term chart:

NFLX Revenue (TTM) given by Y-Charts

It’s the most important trajectory in Netflix’s bag of business tricks. As long as revenue growth continues, it doesn’t matter if it happens because more accounts are added or because each subscriber becomes more profitable over time. The effort to monetize customers sharing passwords should support this ambition over the next two years.

So it’s business as usual, and Netflix is ​​delivering healthy growth where it matters most. Meanwhile, market makers are staring blindly at slower subscriber addition numbers, and Netflix shares are back at prices not seen since 2017. It’s a massive disconnect between huge business prospects and falling stock prices. So all things considered, Netflix is ​​my favorite investment idea today.