Netflix eyes password sharing crackdown, and bringing in ads

SAN FRANCISCO –

Netflix has been forced to reconsider its subscription service following a shockingly steep drop in subscribers. It is now considering changes that it has long resisted: reducing password sharing and creating a low cost subscription supported by advertising.

The changes made Tuesday night will help Netflix regain its momentum that it lost in the last year. The pandemic-driven restrictions that drove binge watching have been lifted. Meanwhile, deep-pocketed rivals like Apple and Walt Disney have begun to chip away with Netflix’s vast audience through their own streaming services.

Netflix saw a drop in its customer base of 200,000 subscribers during the January-March quarter. This is the first contraction since it became available worldwide outside of China six year ago. This drop was due in part to Netflix’s decision not to withdraw from Russia in protest of the war in Ukraine. Netflix projects a loss of 2 million more subscribers for the April-June quarter.

The erosion, coming off a year of progressively slower growth, has rattled another key constituency for Netflix — its shareholders. Netflix shares plunged more than 25% after the company revealed its disappointing performance. If the stock drop extends into Wednesday’s regular trading session, Netflix shares will have lost more than half of their value so far this year — wiping out about US$150 billion in shareholder wealth in less than four months.

David Wagner, Aptus Capital Advisors analyst said it’s now clear that Netflix is grappling with an imposing challenge. “They are in no-(wo) man’s land,” Wagner wrote in a research note Tuesday.

According to Los Gatos, California-based company, around 100 million households are using its service free of charge by accessing the accounts of friends or family members, with 30 million in the U.S., and 30 million in Canada. “”Those are over 100 million households already are choosing to view Netflix,” Hastings said. “We’ve just got to get paid at some degree for them.”

To prod more people to pay for their own accounts, Netflix indicated it will expand a trial program it has been running in three Latin American countries — Chile, Costa Rica and Peru. These locations allow subscribers to extend their service to another family member at a discounted rate. Netflix plans in Costa Rica are available for $9-$15 per month. Subscribers can share their Netflix service for $3.

Netflix didn’t provide additional information about the cost or how it might work. Hulu is another competitor that offers an ad-supported service tier.

Netflix believes that these changes will allow it to grow its 221.6 million global subscribers. However, customers may be dissatisfied with the move and cancel the service.

Netflix was hit by customer backlash when it revealed plans to start charging for its new streaming service in 2011. This service had previously been offered free of charge with its DVD-by mail service prior to its international expansion. After the change, Netflix lost 800,000. This prompted Hastings to apologize for letting the spin-off go through.

Tuesday’s announcement was a sobering comedown for a company that was buoyed two years ago when millions of consumers corralled at home were desperately seeking diversions — a void Netflix was happy to fill. Netflix added 36 million subscribers during 2020, by far the largest annual growth since its video streaming service’s debut in 2007.

Netflix CEO Reed Hastings believes that these outsized profits may have blinded management. “COVID created a lot of noise on how to read the situation,” he saidIn a videoconference Tuesday.

Netflix took a bold step in 2017 when it offered video games for free to subscribers.

The increase in inflation over the last year has also strained household budgets, forcing more consumers to reduce their discretionary spending. Despite that pressure, Netflix recently raised its prices in the U.S., where it has its greatest household penetration — and where it’s had the most trouble finding more subscribers.

Netflix lost 640,000 subscribers to the U.S. and Canada in the last quarter. This prompted management to emphasize that its future growth will occur in international markets. Netflix closed March with 74.6 millions subscribers in the U.S. & Canada.