Analysis: Netflix Freeloaders Shift to Pricier Sub Tiers

NEWS ANALYSIS — When Netflix announced it would crack down on the self-proclaimed 100 million people worldwide who access the service through shared accounts, the presumption was that the majority of these freeloaders would opt for the streamer’s less expensive $6.99 monthly ad-supported plan.

Turns out that isn’t true.

A slight majority of freeloaders actually prefer subscribing to more expensive tiers, priced from $15.49, according to CFO Spencer Neumann.

“The ad tier is a healthy mix in general across our plans, but it’s in the minority because [new members] skew a little bit more towards ad-free [among] these spin-off [subscribers],” Neuman told an investor event last week.

That’s not a surprise to Michael Pachter, media analyst with Wedbush Securities in Los Angeles, who contends that most of the freeloaders are not household members (i.e., kids in college), they are are adults and either share a password with a friend or with a family member.

Under Netflix’s new shared account plan, a person sharing the password with a third party has to spend the $7.99 to keep them on the plan. Pachter said he will continue to pay for his recent college graduate children when they live on their own.

A family friend of theirs was also using Pachter’s account, just switched to her own full-price subscription. Pachter said the friend would never expect them to pay the additional fee, and the only way she could remain on their plan with their password was if they chose to pay for her subscription.

“The takeaway is that the [freeloaders] are mostly people who are not members of the subscriber’s immediate household, and that is not a surprise,” Pachter said.

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Netflix Rolling Out Shared Password Option This Quarter

Netflix announced it plans to expand rollout this quarter of a new password sharing option that enables existing subscribers to share their subscriptions with non-subscribers for an extra monthly fee.

The streamer has been testing the concept in Chile, Costa Rica and Peru, charging subscribers sharing a password about 25% (upwards of $4) of a standard tier subscription. Non-paying members also have the option to set up their own account with their existing profile and content history.

Netflix says about 100 million subscriber households share passwords with non-paying users.

“Today’s widespread [non-paying] account sharing undermines our long term ability to invest in and improve Netflix, as well as build our business,” co-CEOs Sarandos, Peters and CFO Neumann wrote in the shareholder letter.

The executives said paid shared password members going forward would be able to access Netflix content from mobile devices and televisions similar to regular subscribers. Netflix expects the transition from non-paying shared accounts to paid or independent subscriptions could negatively short-term viewership data as compiled monthly by Nielsen.

“However, we believe the pattern will be similar to what we’ve seen in Latin America, with engagement growing over time as we continue to deliver a great slate of programming and borrowers sign-up for their own accounts,” Sarandos, Peters and Neumann wrote.

Analyst Gives Thumbs-Up to Netflix Ads, Shrugs Off Account Sharing

Following the market’s outsized reaction to Netflix’s underwhelming first quarter results, including a net loss of 200,000 subscribers, the SVOD pioneer put in motion two initiatives designed to generate incremental revenue: Charging subs extra for sharing accounts and a less expensive ad-supported subscription plan.

Selling ads on the backs of Netflix’s 220 million global subscribers is being embraced by Wall Street as a legitimate revenue driver. Jason Bazinet, media analyst with Citi, believes the move could jumpstart subscriber growth and improve the fiscal bottom line.

“We believe an ad-based tier — which we expect in 2023 — will allow Netflix to resume sub growth and help narrow the ~$5 billion gap between [free cash flow] and net income,” Bazinet wrote in a note.

Citi analyst Jason Bazinet

Free cash remains a bone of contention among some Netflix analysts (notably Wedbush Securities’ Michael Pachter] who suggest the service spends too much money on content, among other costs.

Bazinet believes Netflix could generate $10 monthly from ad-supported U.S. subs and $3 monthly worldwide. The analyst says the ad-supported subscription plan could yield upwards of $3.6 billion in additional free cash flow from new subs, and $3.1 billion should existing subs downgrade to the estimated new $5.99 monthly ad-supported price point.

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“[This would] still generate incremental revenue from basic subs that spin down to a lower cost version,” Bazinet wrote.

The analyst doesn’t give much support to Netflix idea to charge existing subs an incremental fee when sharing account passwords. The concept is currently being tested in select markets globally.

The move is “unlikely to improve [churn] beyond current levels,” Bazinet wrote.

A separate report by The Information suggested Netflix could bump revenue up 21% with an ad-supported subscription option.