Business·Analysis

Why Netflix and HBO don't care if they lose $500M a year to password sharing

Streaming video services like Netflix and HBO are missing out on as much as $500 million a year in revenue because users share passwords, according to a recent report, but neither company seems especially eager to end the practice because it may actually help them in the long run.

Major streaming services seem to be in no rush to crack down on password scofflaws

Worldwide, customers will spend $11 billion on streaming services like Netflix. But according to a recent study, the industry loses as much as $500 million a year due to people sharing their passwords with each other. (Andrew Harrer/Bloomberg)

Streaming services like Netflix and HBO may be losing out on as much as $500 million US a year to people who share their passwords, yet on the whole there seems to be little appetite within the industry to crack down on the practice.

The eye-popping figure comes from a recent report by Parks Research analyst Glenn Hower, which says there's a large and growing number of people who access legal streaming services yet aren't captured in official membership numbers, because they share an account with someone else — who pays the bills.

Netflix's quarterly numbers reveal the company added 3.3 million subscribers in the past three months, its biggest quarterly customer jump since the company offered online streaming service as a sidestream to its core DVD-by-mail business.

All in all, Netflix now has 65.6 million paying customers, but the actual number of people with access to the service is likely much more, due to the ability to have multiple users on one account. Technically, Netflix's terms of service say "the Account Owner should not reveal the password to anyone" and describes access to the service as "non-transferable" but according to Hower's research, many people are doing just that by sharing passwords.

In many cases, that might be a child in college using their parent's account. In others, it's a boyfriend and girlfriend in different apartments — or platonic friends sharing an account to save money.

Whatever the case, "credential sharing has a measurable impact on video services [and] is especially troublesome as ... providers are investing large sums of money to boost their original content offerings," Hower said.

Worldwide, people will spend $11 billion US on subscriptions to video streaming services, "so if they're leaving $500 million a year on the table, you're talking about a significant chunk of potential revenue," Hower said in an interview.

His research suggests that almost half — 49 per cent — of all internet-connected households in America have access to Netflix, and for about six per cent of them, the streaming service is paid for someone who doesn't live in the household.

Not surprisingly, that figure is even higher among young people — almost a quarter of those between 18-24 admit they use a television service that somebody else pays for.

It's a major leak in the system, yet one that the major players in the space don't seem to be in any hurry to plug. As Hower put it, "credential sharing is … a popular form of piracy in the connected world, one that has received varying responses from service providers and content owners." 

In an interview last year, HBO's chief executive Richard Plepler was asked if the company was concerned about people sharing log-in credentials. 

"To be honest, it's not material to our business," he said. "It's not that we aren't mindful of it, but it has no real effect on the business."

That's likely because Plepler thinks anyone who accesses his company's content quickly becomes accustomed to it, and some will be willing to pay for it down the line. It's an old marketing technique that the industry is very much aware of, according to independent technology analyst Carmi Levy.

Like a drug pusher

"They want everyone to come on over from the cable dark side," Levy said in an interview. "They don't want to be seen as heavy handed, they want to get everyone locked in and then they'll figure out enforcement later on."

Levy says it's a bit like a drug pusher making their product available for free to get new customers hooked. "It's the marketing cost for building addiction."

"We're still early enough in streaming that they have to do everything they can to create the habit."

For Netflix's part, the company says while it doesn't encourage excessive credential sharing, for the most part it's happening between family members.

That's acceptable in the same household — in fact, the company recently rolled out a slightly more expensive, $12-a-month option that allows for up to four streams at the same time instead of the standard two. (Each user can have a separate identify on the household's one account.)

Crossing a line

It's when people in another household use the account with a shared password that a line gets crossed.

Hower says consumer aggregating themselves into groups to share the costs of these services is likely why Netflix rolled out this service option recently.

"We really don't think that there's much going on of the 'I'm going to share my password with a marginal acquaintance'," CEO Reed Hastings told analysts at the company's annual general meeting last year,

Major streaming players lke HBO and Netflix don't want to make it any harder than it has to be for potential customers to become aware of their services, but the same may not be true of everyone in the space.

Levy suggests that recent offerings, such as Bell's CraveTV and Shomi, owned by Rogers and Shaw, may have a different view.

Startups more vulnerable

"Netflix is the anti-carrier solution," he said. "Shomi and CraveTV are creations of traditional distributors trying to compete digitally so if anyone is going to crack down first — and there's no evidence that anyone is — it's them."

Hower agrees, saying startups are far more vulnerable to credential sharing than established players like Netflix are. 

Convergent media companies rolling out new streaming services have a drastically different business model because they have the possibility of earning revenues via multiple channels, not just subscriptions.

"Streaming by multiple users creates another need for their ISP services," Levy said. "If you've got four devices constantly streaming HD video, either you'll be charged for overage or you'll upgrade from the 100 gig to the 200 gig or the unlimited data plan" which is more money for the incumbents, he says.

"Anything that drives demand, they will encourage," Levy said, adding that's one of the reasons why Bell's streaming option CraveTV is half the price of Netflix.

Despite the $500 million revenue leak, on the whole the industry is largely happy with the status quo, Hower says. "Distributors are only going to secure their content as much as they have to according to the agreements they make with their content providers," he says.

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