Netflix Delays Account Sharing after Spike in Cancellations

Netflix Inc is delaying its crackdown on account sharing in the US and other countries after a “cancel reaction” was seen following the launch in markets including Canada and Spain.

The video streaming giant, which last night reported a lower number of new subscribers than forecast for the first quarter but higher earnings, is looking to roll out its “paid sharing” service in order to reduce the number of accounts that share their paid service for free with people outside their household. 

Netflix has pushed back the planned US rollout of its closely watched attempt to crack down on account sharing, a move it expects will weigh on memberships and revenues as it seeks to improve the quality of the new service.

The streaming video company estimated revenues would hit $8.24bn in the second quarter, less than the $8.47bn expected by Wall Street analysts, according to an earnings release on Tuesday. Its shares initially fell more than 10 per cent in after-hours trading before rebounding and recovering those losses.

Netflix said in a letter to shareholders that the “paid sharing” service — which lets customers share their account with people outside their household for a fee — had resulted in a “cancel reaction” after it was launched in some markets including Canada and Spain.

That initially hurt “near-term” growth in its membership numbers, but Netflix said the crackdown ultimately led to higher subscriptions and revenue as the borrowers activated their own accounts. In Canada, the paid subscriber base was now higher than before the launch of the “paid sharing service”, the company said.

Netflix said about 100mn households “share” their accounts globally. According to Morgan Stanley estimates, Netflix could potentially convert 20-30 per cent of those to paying members.

“This account sharing initiative is about creating a larger base of potential members,” Ted Sarandos, co-chief executive, said during a video presentation on Tuesday. “That’s why were focused so much on execution.”

After Netflix shocked investors last April by revealing it had lost subscribers for the first time in a decade, it announced two new programmes to increase its revenue: the crackdown on password sharing and the launch of an advertising-supported service, which debuted in November.

It said it was delaying the wider launch of paid sharing to the US and three other markets from the first quarter to the second, which would shift “some of the membership growth and revenue benefit” from the second quarter to the third. This could also cause engagement with Netflix’s service to shrink “modestly” in the short term, it said, although it expected that would recover over time.

Despite the rollout delays, Netflix said it was confident it could hit its full-year targets, adding it was “pleased” with the recent paid-sharing launches.

Spencer Neumann, Netflix chief financial officer, said new ad-supported services were still in “start-up mode”.

But the company said it had not seen many customers ditch their high-priced subscriptions in favour of the cheaper ad-supported options as some had feared.

Sarandos warned that a potential Hollywood writers’ strike next month would be “devastating” to the creative community and to viewers, but he added that Netflix has a strong foundation of international content that would help it weather a strike. “We really don’t want [a strike] to happen,” Sarandos said. “We’re at the [negotiating] table”.

Netflix added 1.7mn subscribers around the world in the first quarter, below Wall Street forecasts of 2.3mn. Its revenues rose 3.7 per cent to $8.16bn but net income dropped from $1.6bn to $1.3bn. Earnings of $2.88 a share were ahead of investor expectations.

The company also announced that it would wind down its DVD rental programme in September after 25 years, marking the end of a service that was the core of Netflix’s business model when it was founded.

Copyright The Financial Times Limited 2023

April 19, 2023