Netflix’s password-sharing crackdown, already in the testing stage, is officially coming to more markets in 2023—at the exact same moment as the streamer’s anticipated ad-supported tier is set to arrive.
Coincidence? We think not.
The company is pursuing its ad-supported tier and its password-sharing shift “independently” in an effort to better monetize subscribers, Netflix COO and CPO Greg Peters told investors during the company’s most recent earnings call. But applying economic pressure to households that share their log-in information far and wide may come with the added bonus of building out the service’s ad-supported audience.
There are “a range of folks who may be borrowing Netflix because they didn’t quite see as much value from the entertainment and the viewing,” Peters told investors. One way or another, Netflix wants to convert those people into paid customers—and motivating people to sign up for their own accounts will likely be made easier if Netflix can direct them straight into an ad-supported tier that costs less.
“What’s great about ads is that obviously we get to give folks that are seeing a little bit less value a lower price and be able to convince more of them to sign up through that ads plan,” Peters said.
That could make all the difference as the company builds out an ad-supported tier and looks to do it quickly and effectively.
“If you’re going to start to tighten things up, now you’ve given people choices,” Eric Schmitt, research director and analyst at Gartner, told Marketing Brew. “You can pay a few dollars more and get legit. If it’s too much money, you can dial back to the ad-supported version.”
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One challenge for streamers debuting ad-supported tiers is convincing a meaningful number of subscribers to pick up the ad-supported tier in order to deliver audiences advertisers want—without existing subscribers dropping down to less-expensive tiers en masse.
“The balance beam that Netflix has to walk is to make the ad-supported tier appealing enough to bring lots and lots of net new Netflix viewers in, or viewers who were previously pirating, and then on the other hand, not make it so attractive that they end up cannibalizing [its] own business,” Schmitt said.
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Netflix has one considerable card up its sleeve, it claims: a huge pool of customers who could potentially shift from being password-moochers to ad-supported subscribers. Netflix, which has more than 220 million subscribers around the world, disclosed in an investor letter that 100 million households already access the service without directly paying for it.
Other opportunities could include people who have previously unsubscribed, or those for whom Netflix’s price point has always been out of reach, Peters told investors.
Not all 100 million households will shift to additional paid accounts, of course. Netflix’s plan to limit password sharing includes efforts to charge share-happy households extra to add additional households or members to their account at a fraction of the cost of a new subscription. That’ll likely add some more money into Netflix’s revenue stream and offset the whopping $17 billion it spent on content this year alone.
But that won’t happen immediately. “Neither of these solutions will likely give Netflix an influx of revenue out of the gate, but they’ll accelerate over time,” Mike Proulx, research director at Forrester, told Marketing Brew.
Doing it right
The number of customers who will be convinced to sign up for the forthcoming ad-supported tier remains to be seen, especially since the company has still not announced what an ad-supported membership will cost. Just 8% of US online adults who do not currently subscribe to Netflix said they would consider subscribing to its lower-priced ad-supported tier, according to Forrester’s Consumer Energy Index and retail pulse survey from May.
One thing that’s evident: advertisers appear to be champing at the bit to get on the platform. Peters said the company has “seen a lot of excitement in our early discussions with brands, holding companies, and the agencies.”
Peters said the company is hopeful it can make as much, or more, from those who pay for the ad-supported tier as Netflix earns from subscribers to the service’s ad-free tiers, Peters said.
“We feel quite confident that as we grow into this, and we have more subscribers over time on these plans, that at least initially, the unit economics are going to be quite good,” Peters said.