Targeting Password Sharing Could Hurt, Not Help Netflix
Updated: Apr 29, 2022
Netflix plans to tackle password sharing, how will this impact the company?
Can the company make up for slow growth by cracking down on password sharing?
Down more than 40% since November, is it time to consider a Netflix investment?
How Netflix is using its brand to increase subscriber engagement.
Is It Worth An Investment
At its current price, Netflix ($NFLX) is trading near pre-pandemic levels. Just before the pandemic, the stock was trading below a June 2018 all-time high of $423. The stock was attempting, but failing to break above a resistance level of $392. The lockdowns caused by COVID-19 helped Netflix’s stock break through the $392 resistance, and blow past its old all-time high. The stock would eventually hit $700 per share in late 2021. But since hitting $700 last November, the stock has been in decline. Investors have fled the stock, believing that growth for the company would slow as the world moves past COVID-19 and the restrictions and lockdowns that came with it. The company gave investors more reasons to hit the sell button in January 2022, when it announced it only added 8.2 million subscribers during the fourth quarter of 2021. The number was below analyst’s estimates of 8.5 million, and below the company’s own estimate of 8.3 million. Though revenue in Q4 grew 16% year-over-year, the underwhelming subscriber numbers is what investors focused on the most.
In the past, buying Netflix after a big pull back always worked out. But due to its own saturation of the market, and the amount of streaming competition now, a bounce back may be more difficult this time around. With 221 million subscribers, the company wants to address the saturation issue by making users who share passwords pay a little more. Netflix is currently testing this out in Chile, Costa Rica, and Peru. Nearly 10% of the 116 million broadband households in the U.S. include someone who watches Netflix without paying for it according to a Cowen & Co.’s survey. Cowen & Co.'s also estimates that Netflix could earn an additional $1.6 billion in revenue by cracking down on password sharing. As for the streaming competition the company faces, Netflix’s plan is to diversify its offering.
Since September of 2021 Netflix has purchased three gaming companies, with the latest acquisition occurring last week when it purchased Boss Media Entertainment. Netflix is going all in on gaming, which will help set it apart from HBO Max, Paramount, Disney+, and Hulu. The Netflix book club is another initiative the company has taken to set it apart from the average streaming service. There’s also an expanded partnership with Spotify, where Spotify will host a Netflix Hub, which will showcase official soundtracks, playlists, and podcasts for top Netflix shows. This is something I thought Netflix should have done for themselves years ago, when I suggested that Netflix should purchase music streaming service Tidal. Investors should not underestimate Netflix's move into gaming. Games, like Netflix series, go viral often. Just a few years ago it was Among Us that was the talk of gaming, most recently it was Wordle, which was played by 300,000 people per day according to the NY Times. The NYT acquired Wordle in February for an undisclosed amount in the low seven-figures range. The mobile gaming market hit $98 billion in 2020, and is expected to grow to $272 billion by 2030.
Though I don’t love the focus on password sharing, I do like that Netflix is figuring out ways to keep consumers stuck to the brand and the platform. If we’re not watching a movie, we're playing a Netflix mobile game, if we're not playing a game, we can be reading a book from the Netflix book club, if we’re not reading a book, we’re listening to the catchy song from the newest Netflix hit on Spotify. Couple those activities with the stars from your favorite Netflix show, and Netflix will have found a way to increase consumer engagement beyond binge watching.
This Could Be Bigger Than Netflix
During the Great Recession I worked for an insurance company. During one of the most difficult financial times the world had ever experienced, that insurance company didn’t lay off one employee. On top of not laying anyone off, the company made a profit in ‘07, ‘08, and ‘09, and the employees received profit-sharing bonuses for each year. Before you lose it and curse me out, the profit sharing checks were peanuts compared to Wall Street bonuses during that time, but I was very thankful for them.
How the company survived the recession can be attributed to genius, magic, or witchcraft. But when things were going well in late 2006, early 2007, the company applied to the state for a rate hike, and the hike was approved. The hike caused the company to lose customers initially, as the rates for some customers surpassed the rate quote they had received from the competitors. Then the recession happened, and money got tight for our competitors. Money got so tight at some insurers that claims were delayed, and customers that left the insurance company I worked for after our rate hike ended up coming back. For the competition, it would’ve been a public relations nightmare if they had asked for a rate hike during the recession, and so many of them did the best they could to get through it, but it was tough.
What Does Insurance Have to Do With Netflix?
The proposed crackdown on password sharing, it’s the Netflix version of the rate hike. Initially, I questioned why the company that once promoted password sharing with a tweet stating “Love is sharing a password” would move off of that position, but then I remembered the rate hikes of 2007. Netflix is likely getting ahead of something that all of the streamers in the streaming wars will eventually end up doing sooner or later. So if you don't want to pay Netflix or HBO extra money for your exes' binge watching, update your password now.
It's Not What You Say, It's When You Say It
When my former employer put in the application for the rate hike, the stock market was still going up, the housing market was showing signs of cracks, but only intense market gumshoes like Michael Burry noticed, most everyone else still had an optimistic outlook. The rate hike was an easier sell at that time. Netflix did the opposite. In the midst of high inflation and Russia preparing to kick off another war in Europe, Netflix announced that it would be increasing its monthly subscription fee, and also announced the crackdown on password sharing. The news felt like an insurance rate hike in the middle of a serious recession.
The Economics of Sharing
Streaming companies have done a great job of curating original content for their services, which has left the average 9 to 5er with a few questions, like which streaming service do I get or how many can I afford to get? Password sharing helped people avoid asking that question. Sharing a Netflix password with a friend who is willing to share their Hulu password is gaming the system, but it is still a win for Netflix. Instead of one person singing the praises of a Netflix show, there's a possibility of having two people talking about it. The more people talking about it, the more social capital Netflix earns.
Password Sharing Builds Social Capital
Putting a dollar amount on social capital is difficult, but we all know it exists. The memes and social media commentary that followed Sandra Bullock’s Bird Box on Netflix, that has to be worth something, right? What about the weeks following the release of Tiger King? The memes, social media commentary, articles, and think pieces that followed when everyone was in lockdown. It was the best - and cheapest - advertising Netflix could get, but what was that worth?
Netflix eventually did the research themselves on social impact, and using their own undisclosed system landed on a number. Following the success of the Netflix series, Squid Games, the company estimated that Squid Games would deliver $891 million in “impact value” according to leaked documents obtained by Bloomberg. Because this came from an internal memo, we don’t know what metrics the company used to arrive at the nearly $900 million number. What we do know is that Squid Games was the company’s most viewed original series, with over 142 million households tuning in. I know that my social media feeds, the ones I use for friends and family and the ones dedicated to investment news, were filled with commentary on Squid Games, so I assume almost everyone else’s was too. We also know that YouTube creator MrBeast’s version of Squid Games, where he recreated the challenges from the Netflix series, pulled in over 137 million views in less than a month. After its release, the Squid Games hype was unmatched, and people wanted to be a part of the social commentary surrounding the series. That has to be worth something, is it $900 million, is it more, or is it less?
“For Netflix, it’s far more important to dominate the cultural conversation than to have millions of people actually watch its programs.” - The Atlantic
It Works For Theatrical Movies, Will It Work For Netflix
It’s no secret that movies that get great reviews from our peers are the ones that we’re likely to see. If our friend says the new Batman movie is great, we’ll likely pay for a ticket to go and check it out so we can be a part of the social commentary surrounding the movie. If our friend says the movie is terrible, we’ll second guess that ticket purchase, and will likely wait for it to hit HBO Max or digital streaming services. By cracking down on password sharing, Netflix will be betting that the people on the outside of the conversation will sign up for the streaming service. Will a crackdown on password sharing dull the hype around the next great series Netflix pops out? It definitely could. The amount of social capital the company has enjoyed in the past I believe is too valuable to disturb. They should ignore the password sharing issue for now.
Is Netflix worth investing in? Yes it is. With growth slowing, Netflix’s next move and best move is to extract more money out of the users it already has, think Apple’s hyper focus on services a few years ago when iPhone sales started to plateau. Gaming is the beginning, but there are other places the company can go. Have you seen the Netflix shop? Netflix’s collaboration with streetwear fashion house Bathing Ape produced Squid Games inspired T-shirts that retailed for $119, and they sold out. Thinking about Netflix’s past success, while browsing their shop exposed how lackluster they’ve been in the past of merchandising their success. Not to say every kid wanted or needed a Joe Exotic action figure, but there is an opportunity there for Netflix. They’ve proven they can move luxury T-shirts, what other Netflix show branded luxury items could they sell? In addition, there’s old reliable, which is streaming. Netflix will have another hit, because that’s just what they do, they make content that goes viral.
Down 38% in 2022, now may be the time to buy Netflix. The stock has a habit of pulling back, trading sideways, and then going hyperbolic. In 2015, shortly after the stocks 7-to-1 stock split, the company hit $129 per share, retreated, retested the level again in December of 2015, and then sold off hard and fast, bottoming out in February 2016. The stock would trade sideways for eight months, before going on an almost two year bull run, which took the stock price from $99 to over $400. The catalysts for the amazing rise in the stock price came from the company’s earnings for Q3 2016. Netflix missed Wall Street’s earnings expectations and it missed on subscriber growth in the U.S. during that quarter, but growth in international subscribers was enough to make inventors want to be in the streaming business. We do have to consider that times were different then. In 2016, there wasn’t a Disney+ and HBO Now was barely off the ground. Still, my thought since the beginning of the streaming wars is that Netflix emerges victorious, and I still believe that it will be the king of streaming platforms. The simplest of investment strategies is to buy the industry leaders when they’re down, and Netflix is down bad.