Netflix’s password-sharing crackdown benefits nearly 6 million new subscribers

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Cracking down on password sharing helped Netflix add nearly 6 million subscribers, more than double what analysts forecast and validated the streamer’s strategy to grow its business.

After shocking investors by losing subscribers last year, Netflix has taken two big steps: offering a cheaper version of its service with ads, and trying to limit password sharing, which was largely ignored when growth was high.

Netflix in May prohibited sharing passwords for accounts in the US, UK and more than 100 other countries. In the US, Netflix told customers they would need to pay $7.99 per month to add someone outside their household if they wanted to share their password, or if they were willing to keep the account with ads. If so, you’ll need to pay $6.99.

That policy appears to be working. In the three months through the end of June, Netflix added 5.9 million subscribers, far exceeding Wall Street’s expectation of 2 million. “Reaction to the cancellations was subdued,” the company told investors on Wednesday.

However, Netflix shares, which had risen more than 8 percent in the five days before the earnings release, fell more than 5 percent after the company reported soft revenue.

Netflix’s quarterly revenue rose to $8.2 billion, up 3 percent from a year earlier but slightly below forecasts of $8.3 billion. The company predicted revenue would rise to $8.5 billion in the current quarter, missing analysts’ forecasts of $8.7 billion.

Netflix’s password crackdown reflects the harsh realities of the expensive streaming model it pioneered. When Wall Street was more keen on streaming, investors took note of the huge losses the companies would incur unless they were able to add subscribers rapidly.

But as the broader market has cooled, investors are focusing more on profits. Competition has intensified, with Disney and other companies competing with Netflix for subscribers.

Netflix is ​​profitable, while Disney+, Paramount Plus and other rival streaming services are still loss-making. Netflix reported quarterly net income of $1.5 billion on Wednesday, up 3 percent from the same period a year ago.

The company said it will spend less money this year because of a historic labor strike in Hollywood that has halted film and television production in the US. Netflix now expects free cash flow of $5 billion this year, up from its previous estimate of $3.5 billion.

PP Foresight analyst Paolo Pescatore said the results were “a strong endorsement” of Netflix’s password strategy, but cautioned that the action was a “short-term measure”. That said, Netflix “needs to consider its pricing strategy over the medium to long term”.

After falling last year, Netflix shares are set to rebound in 2023 with gains of more than 60 percent.

“While we’ve made steady progress this year, we have more work to do to accelerate our growth again,” Netflix said in a letter to shareholders.