Netflix moves carefully against casual password sharing

We have London-based Synamedia, formed from the remnants of Cisco’s video service provider group, to thank for raising consciousness about casual password sharing and now Netflix has flagged its growing concern. Its chief product officer Greg Peters has acknowledged the company was monitoring the situation with a view to taking proportionate and sensitive action against serial offenders. This notice came during the firm’s Q3 financials review, which was significant at a time when its domestic US market is saturating and intensifying as competition from several new big players such as Disney+ and Apple TV+ is looming.

The Q3 numbers for Netflix are in fact rather good and ahead of some analyst expectations. Global sales came in at $5.2 billion, 31% up year-on-year, which more significantly was higher than the 26% growth registered in the previous quarter. Accelerating revenue growth is usually a sign of financial health and an indicator that the strategy is broadly working, although of course it does not always mark headwinds to come. There was also a 20.2% margin on international streaming, in marked contrast to two years ago when there was a loss. This is a healthier place to be with the impending competition, suggesting that Netflix is no longer over-reaching itself in its dash for overseas subscriber growth and is ready to face newcomers.

But the new competition will make itself felt earliest in the US where the numbers were not quite so healthy, with only a 6% year-on-year increase in number of paid subscribers. This is a significant slowdown and growth has now almost ground to a halt, with just a 0.7% rise over the last six months from 60.2 million to 60.6 million paid memberships.

That is one reason why Netflix has started to worry over the impact of casual password sharing where subscribers hand over their credentials to friends not living in the same house. This is a grey area where all service providers must tread carefully to avoid annoying subscribers sharing legitimately, given that there is no absolute definition of what constitutes abuse. After all Netflix, like others, offers different tiers with the cheapest package allowing just one simultaneous stream, another two and the most expensive four.

There is no restriction over location of access or device used providing it is within the given country, with the understanding being that even with four streams they should be confined to members of a household. In practice, there has long been a high incidence of sharing, especially with the packages allowing two or four simultaneous streams, as has been confirmed in numerous surveys. It is generally considered that at least 10% of all access to subscription streaming platforms comes via casual sharing beyond a household, that is with friends permanently residing somewhere else, rising to 35% among Millennials. But we have seen a small survey suggesting that as many as one third of Netflix subscribers have at some time given out their passwords to friends on a casual basis.

It is very hard to estimate how much lost revenue this equates to, or how many of these casual non-paying viewers could be brought on board as paying members. But Netflix has now decided this segment is worth going after, even at the risk of alienating a small number of existing subscribers. The company will have noted Synamedia’s launch of casual password sharing monitoring around the start of 2019, its first product since its incorporation, on the premise that with the right approach this problem becomes an opportunity. Synamedia does not offer a strategy as such, just the ability to differentiate between legitimate and illegitimate sharing, almost irrespective of the definition.

Operators themselves can define the parameters of illegitimate sharing, which might be persistent access from a single location a long way from the subscriber’s home as identified by the IP address. By contrast, large numbers of accesses from locations dotted around the country and all during the working week in the evening would more likely be associated with a legitimate subscriber viewing while on the road for business.

Synamedia employs machine learning algorithms to sift out the likely illegitimate sharing so that the likes of Netflix can then employ whatever tactics they like, which could be a gentle suggestion to upgrade to perhaps a new grade of package that does allow sharing with friends wherever they are. The service provider could also link streams to given IP addresses of subscriber devices, although that runs the risk of denying service to a legitimate subscriber trying to access from a new device. Requiring users to register devices might impose unacceptable friction.

Another option that has been observed with some providers of live OTT services such as BT Sport is to monitor for regular access from a given device away from the user’s home and when this has occurred beyond a set number of times, the account holder would be asked to change the password. However, this only provides short term relief because the new password can be shared and again this brings slight inconvenience.

So, it looks like there is no ideal remedy for maximizing conversion and minimizing annoyance to existing users, but at least the technology to identify the situation is now there and being improved. It is not clear whether Netflix will be using Synamedia technology or its own, as the company declined to comment.