Netflix Password Sharing Underscores Every SaaS Software Company’s Nightmare

The recent Netflix loss of 200,000 subscribers had company execs pointing at password sharing as a major contributor to the decline. This sent shock waves through the market that plunged company shares to 35% this week and reminded all SaaS vendors of a problem innate to their business model. The subscription streaming service subsequently announced its plan for a crackdown on password sharing—something that the company already started in 2021 on a small sample size and may officially roll out as early as 2023.

Borrowing login information was never an issue for Netflix. In fact, as the company acknowledged in its quarterly shareholder letter, password sharing pushed its growth as it encouraged more users to get hooked on the service. However, with an estimated loss of over $790 million in membership fees to non-paying viewers, the company’s attitude has changed.

“Our relatively high household penetration—when including the large number of households sharing accounts — combined with competition, is creating revenue growth headwinds,” stated in the Netflix letter.

Netflix is still the top streaming platform with 92% of streamers watching its content. It has 222 million subscribers globally and experienced sudden growth in 2020 thanks to binge-watching users during COVID lockdowns. But that has slowed down now that quarantine restrictions have been lifted in many countries. This is the first time Netflix reported a loss in members since October 2011.

How password sharing negatively impacts SaaS software vendors

Since the SaaS software business model relies on subscription plans to software products that can be accessed online, password sharing can ultimately stunt business growth. Instead of growing their paid subscriber base, vendors lose out on potential new users who simply continue using other people’s accounts.

In the case of Netflix, there are more than 30 million households in the U.S. and Canada that use shared passwords while globally, another 100 million households do the same. With this trend continuing, the company projects another 2 million global paid subscriber loss for the second quarter.

Moreover, password sharing increases SaaS security risks, especially when they are stored in plain text and passed around between multiple users. Hackers can easily access these passwords and steal personal information including credit card details. Identify theft was, in fact, a major cyber security threat at the height of the COVID-19. There was a 38% significant increase in identity theft cases globally in August 2020.

Therefore, not only are SaaS vendors faced with potential cyber attackers mooching on their platform and stealing customer data but also the possibility of a devastating security breach that can ruin their business reputation.

The Netflix Solution: Is This the End of Password Sharing?

With plunging shares and customer churn, Netflix has come up with a paid sharing feature to address the rampant use of login credentials among its subscribers. With paid sharing, users can share their account passwords with users outside of their household easily and securely and with additional charges. Adding advertisements on the platform is another source of income the company is contemplating.

“We’ve always made it easy for people who live together to share their Netflix account, with features like separate profiles and multiple streams in our Standard and Premium plans. While these have been hugely popular, they have also created some confusion about when and how Netflix can be shared. As a result, accounts are being shared between households – impacting our ability to invest in great new TV and films for our members,” explained Chengyi Long, Netflix Global’s Director for Product Innovation.

Exactly how the password crackdown and paid sharing moves will impact the service is not certain though Netflix already saw some pushback from clearly irate customers. Whether the company regains revenues or pushes more of its subscribers to completely ditch the platform is something all SaaS vendors should definitely stay tuned for in the coming months.