Netflix May Start Cracking Down on Password Sharing

Netflix (NASDAQ:NFLX) is starting a new trial that prompts certain viewers to sign up for their own account if they don't live with the person whose account they are using. The company displays this message to certain viewers: "If you don't live with the owner of this account, you need your own account to keep watching."

Netflix (NASDAQ:NFLX) starts password sharing trial

The Streamable was the first to report about Netflix's trial. A spokesperson told CNBC that they try "hundreds" of tests every year with select customers. The video streaming giant said in a statement that the test is aimed at ensuring that "people using Netflix accounts are authorized to do so."

The trial might not result in a widespread crackdown on password sharing. It could be applied to account security in addition to sharing passwords. Data from Magid indicates that approximately 33% of all Netflix users are sharing their password with at least one other person.

If Netflix convinces even a portion of those users to sign up for their own account, it could multiply its revenue significantly. Parks Associates estimates that password sharing cost steaming companies $9.1 billion in 2019.

According to Reuters, the trial is limited to a small number of viewers for now. It asks them to verify that they live with the account holder by entering information from an email or text message sent to the owner. Users can put off verifying and keep watching the streaming service, although the message may show up again when they open the app the next time. Eventually, they might be required to sign up for their own account before they can continue streaming.

Netflix stock underperforms

Netflix hasn't been very concerned about password sharing in the past, so it hasn't done much to halt it. The company has been bolstered by strong subscriber growth and a skyrocketing stock price, which have kept management from worrying about the issue. However, Netflix's terms of service state that all of an account's users must live in the same household.

Earlier this year, Netflix announced that it had surpassed 200 million subscribers globally. However, its stock has underperformed the S&P 500, driven by the rotation out of growth stocks and into value. Netflix is also battling a number of new streaming firms, such as Disney+, NBCUniversal's Peacock, AT&T's HBO Max and ViacomCBS's Paramount+.

Netflix is part of the Entrepreneur Index, which tracks 60 of the largest publicly traded companies managed by their founders or their founders' families. CEO Reed Hastings has been at the helm since he co-founded the company with Marc Randolph in 1997.