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Netflix braces for user exodus after cracking down on password sharing

Yahoo Finance Live anchors discuss Netflix’s password-sharing policy and how users may react to the streaming company’s profitability push.

Video transcript

[AUDIO LOGO]

JULIE HYMAN: Netflix is preparing to crack down on account sharing sometime in March, as it seeks to boost sagging profits. But the crackdown could trigger an exodus of users from the platform. That's according to a new survey from Jefferies. Sozz has got a take. Sozz, already on social media, I have seen a lot of complaining about this pending policy.

BRIAN SOZZI: Yeah, and this is the day of reckoning for many Netflix users. Those years of sharing your passwords or bar-- scrubbing off passwords off of friends and family are done or likely done sometime in March. The precise date unclear.

But a good survey out of the team over at Jefferies, Andrew Uerkwitz, who follows this company. First chart we here-- we have on the board, he surveyed current Netflix users. 62% of them say they will stop using Netflix once that password sharing ends. That's-- that is a major red flag. Now, of course, you never know what consumers will actually do. Maybe they are, in fact, hooked on Netflix and maybe that is a lower percentage. Who knows. But still that is a jarring number there, that does not suggest good things ahead for Netflix.

Next up here, we're looking at why they would stop using Netflix. And the number one response here, they could replace Netflix with other services, followed behind that is, they don't enjoy the content enough to pay for it, which is-- I actually found that very surprising. But, you know, there is a lot of content on there. Maybe it's just not as high quality as it needs to be to get people to pay.

And the next one here, what streaming service would they use off after they get off of Netflix. And the top response there is Amazon--

JULIE HYMAN: Wow, that's surprising.

BRIAN SOZZI: --Prime. And I-- the only reason I could think here, guys, and I'd love to get your take on this one. Maybe you're just-- for $15 a month you're just getting a lot more. You have Prime delivery servers. In addition to video. Maybe they see a greater value in that. Just also, too, not a lot of value, I guess, seen in Apple TV+. And that has been, I think, a lot of analysts have been talking about that, Apple as needing more content on there. And then Hulu, probably the lower-priced service on there, as well, may pick up some of those Netflix users.

But this was something that Netflix new co-CEO Greg Peters talked about on the fourth-quarter earnings call a couple of weeks ago. He's saying, quote, "This will not be a universally popular move so there will be current members that are unhappy with this move. We'll see a bit of a cancel reaction to that. We think this is as similar to what we see when we raise prices." So Netflix is bracing for a potential a lot of users fleeing the platform. I don't think maybe Wall Street analysts have modeled for this correctly. That's just my take. But we will find out.

Ultimately, this-- my take is this, you can't fault Netflix for wanting to get paid. And yeah, I guess I'm siding with big corporate on this one. But here's a company that has seen or is looking-- actively looking for ways to juice up earnings growth, get that earnings growth re-accelerated. And one way to do it is weed out the freeloaders on the platform. I'm not saying it's good. It hurts consumers, I guess. But this is a public company trying to make money.

BRAD SMITH: Oh, yeah. They say-- and of course, in the entertainment business, content is king. But also when you're making that content, cash is king, too.

BRIAN SOZZI: You have to get paid. You have to get paid.

BRAD SMITH: And so with the increased amount of spending that they've had to do over the past seven years, I'll kind of round it out to, part of that when they were expanding more internationally. And then with the roll off of some of the Disney assets to try and backfill for exactly where those titles needed to be able to attract more users.

Yeah, it means a great deal when they're finding themselves on stages winning awards for some of that content. But is it enough to drive people to say, you know what? Yeah, I'll pay up even more for that, especially when they say to themselves, to your point a moment ago, what if this is gonna get me a discount on my groceries? And I'm not convinced, clearly. But as the Amazon--

JULIE HYMAN: Holdout.

BRAD SMITH: --holdout that I am, yes.

JULIE HYMAN: Yes.

BRAD SMITH: Thank you for putting it that way. But yeah, at the end of the day, I think pricing right now is gonna be looked across for all of these households when about three to four accounts is what people usually hold on to.

JULIE HYMAN: Here's the thing-- can we bring back that first graphic that showed what people are gonna do in response to this?

BRIAN SOZZI: Bring back whatever you want. Yeah, it's our take.

JULIE HYMAN: If we can bring that back because--

BRIAN SOZZI: Bring it back.

JULIE HYMAN: So here's the thing, stop using Netflix. They're not paying for it anyway. So if you look at the net loss--

[LAUGHTER]

BRAD SMITH: That's a good point.

JULIE HYMAN: If you look at the net loss to Netflix, there isn't a net loss unless the people who are sharing their password are going to cancel. There doesn't seem to be any indication of that. So if even a fraction, even if 16% of those people who are paying nothing right now, start paying something-- and it's, in fact, more than 16% because there are other people who are gonna get the ad-supported tiers-- then that's incremental revenue for Netflix.

BRIAN SOZZI: Well, we embrace here at Yahoo Finance all Netflix users that are leaving the platform, consume our content all day long. Please, please, it's out there. And if you're sharing--

JULIE HYMAN: You won't have to pay anything.

BRIAN SOZZI: You don't have to pay anything. [LAUGHS] Please, come over on our site and click on our videos.