How Netflix Turned Password-Sharing Into a $3 Billion Revenue Opportunity Nobody Else Saw Coming

For many years, it was a joke that your parents, your roommate at college, your cousin who lives in a different city, and maybe your dentist all shared a single Netflix subscription. This wasn’t exactly discouraged by Netflix. At one point, the company casually, almost proudly, tweeted that “love is sharing a password.” That was in 2017. The marketing team most likely wishes they could take it back now—not because the sentiment was incorrect, but rather because it turned out they were giving away something far more valuable than they had anticipated.

An estimated 100 million households worldwide were using borrowed credentials to watch Netflix by the beginning of 2022. One hundred million. To put that into perspective, that’s about the population of Egypt, paying nothing at all while scrolling through someone else’s line. Observing this from a distance, the streaming industry had largely shrugged. It was widely believed that restricting sharing would lead to widespread cancellations, bad press, and no results. In print, a number of analysts stated as much. Password sharing had effectively become a casual aspect of the streaming experience, ingrained in how entire demographics perceived the service, so the worry wasn’t unfounded.

Netflix, Inc. — Password Crackdown Revenue Profile

In 2022, Netflix was particularly uncomfortable after investors were alarmed by an uncommon and truly shocking decline in subscribers. Following that earnings call, the stock lost over a third of its value in a single day—one of those infrequent occasions when a company’s share price acts as a kind of public humiliation. With the pressure mounting inside the Los Gatos headquarters, the company had the option to back down, cut prices, and hope for the best. Rather, it made the decision to carry out what initially appeared to be the worst course of action.

During its testing phase, the password-sharing crackdown was implemented gradually and purposefully globally, starting in Latin American markets before expanding to North America. Accounts would be linked to a primary household location, and anyone viewing from a different address would either require their own subscription or pay an additional monthly fee ($7.99 in the US) to be added as an authorized user. The mechanics were straightforward but strict. The responses were expected. Outrage filled Reddit threads. The logistics of being cut off from family plans were a source of loud complaints from college students. In the middle of 2023, Netflix’s cancellation seemed almost like a protest.

After that, the majority of them returned in silence. Or they didn’t really go.

After keeping a close eye on the numbers, Wells Fargo’s analysts released a research note in March 2023 that garnered a lot of industry attention. According to their estimate, the crackdown could increase revenue by between $900 million and $2.5 billion, with a more optimistic scenario pushing toward $3 billion, depending on the percentage of password borrowers who decide to become paying subscribers instead of just going away. Wells Fargo estimated that about 25% of the approximately 30 million shared accounts in the US and Canada alone would result in new subscriptions. Contrary to what many analysts had predicted, that conversion rate was actually quite bullish.

The industry had to stop acting as though it hadn’t noticed after the Q1 2024 earnings report. Even those who had been optimistic about the crackdown were taken aback by Netflix’s 9.3 million new members in a single quarter, which brought the total to almost 270 million active accounts worldwide. The profit increased to $2.33 billion. At $9.37 billion, revenue increased by nearly 15% from the previous year. It was a “very, very strong performance” propelled by a “definite tailwind” from the sharing restrictions, according to Simon Gallagher, a former Netflix director who had transitioned into entertainment investment. He anticipated that the effect would persist for another quarter or two. It might have gone on longer than that.

It’s easy to overlook, but Netflix realized that those who shared passwords weren’t freeloaders in the conventional sense. They had already made an investment in the product. They had opinions about the recommendation algorithm, had shows they were tracking, and were familiar with the interface. Acquiring cold customers was not the same as converting them. It was more akin to collecting debt from people who were already fond of you. While rivals were still fretting over subscriber attrition, Netflix appeared to understand the significant distinction between those two factors.

The most bizarre thing about all of this is not that it worked. It’s because it took so long, and before one company took the idea seriously, the industry treated it as radioactive for years. Disney, HBO Max, and Amazon were all involved in the same unofficial credential economy. They observed the Netflix figures. Whether or not others will follow is no longer the question. They are already. Why the conventional wisdom was so completely, stubbornly incorrect for so long is the only true mystery.