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Netflix has warned about a crackdown on password sharing. It’s looking like an empty threat

June 1, 2022, 7:13 PM UTC

After a catastrophic financial start to the year, Netflix is scrambling to fix its problems, starting with a crackdown on password sharing. But that may be easier said than done.

Netflix is desperate to right the ship after a disastrous first-quarter earnings which reported the loss of 200,000 subscribers and forecasted 2 million further exits this year. The company’s stock has slid more than 70% over the past six months, as its services have become less attractive to watchers no longer stuck at home.

To bring in more revenue and minimize losses, Netflix has since March been implementing a pilot program to crack down on password sharing—multiple households using the same password to log into the same account—in three relatively small Latin American markets: Costa Rica, Peru, and Chile.

Successfully eliminating password sharing would resolve one of the issues Netflix considers a primary driver behind its financial losses so far this year.

But the new pilot program is not going well, with Netflix failing to enforce changes and users upset with higher charges canceling their subscriptions, according to an investigation by Rest of World, a tech news site. And analysts say that this outcome may have been inevitable for Netflix.

“Based on the early crackdown efforts in secondary markets, it’s clear many consumers won’t comply,” Lou Basenese, founder and chief analyst at media analytics firm Disruptive Tech Research, told Fortune. He added that Netflix’s password use policies and extra charges may backfire by pushing more users to cancel their Netflix subscriptions and change to other, more affordable streaming services. 

“It’s too little, too late to change policies.”

Netflix’s impossible problem

Users from different households have been sharing their passwords for years, but the practice may not have been an issue for Netflix in its early days.

“Password sharing isn’t a problem when you’re initially scaling up in massive markets, but it becomes a major problem when the company approaches market saturation, which [Netflix] has done,” Basenese said.

Current Netflix competitors include Disney+, HBOMax, and Amazon’s Prime Video service. All three have built up market share significantly in recent years, becoming direct competitors to Netflix.

In the three target Latin American markets where Netflix is running its pilot program to limit password sharing, users can now add “sub-accounts” for up to two people from outside their households. Depending on the country, Netflix is charging between $2 and $3 for each sub-account with its own passwords, profile, and login info.

But many users have continued to share their passwords with friends and family who live elsewhere, with no response from Netflix or changes to service, according to Rest of the World’s investigation.

Over a dozen Netflix users in these countries interviewed by Rest of the World were either completely unaware of the policy change, were aware of it but continued to share passwords without repercussion, or were put off by the extra charges and had closed down their accounts altogether. 

With streaming service competitors ready to pounce more than ever before, these canceled subscriptions may be unavoidable.

“There’s no reasonable way to enforce the crackdown without losing more customers,” Basenese said. “This is an issue they should have addressed long ago before consumers got accustomed to password sharing.”

Most were confused by how Netflix defined a household, and when Rest of the World reached out to Netflix for comment, an anonymous representative admitted that customer service reps at the company were also unclear about how to explain the sharing policy changes.

Netflix did not reply to Fortune’s request for comment. 

Basenese said the company’s early attempts to limit password sharing doesn’t bode well for the company.

“It’s a perfect storm of bad market conditions for Netflix,” he said. “Topped-out growth in the world’s largest markets, an inflationary environment where consumers are much more cost-conscious, and low to no switching costs for newer streaming services.”

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