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The End of Netflix Password Sharing Is Nigh

Putting a stop to the practice without alienating customers will be a challenge

By SARAH KROUSE
Thu, Dec 22, 2022 8:41amGrey Clock 7 min

The end of password sharing is coming to Netflix soon—and it will be a challenge for both viewers and the streaming giant.

The company has put off this moment for years. Researchers inside Netflix Inc. identified password sharing as a major problem eating into subscriptions in 2019, people familiar with the situation say, but the company was worried about how to address it without alienating consumers. Then Covid lockdowns hit, bringing a wave of new subscribers, and the effort to scrutinise sharing petered out.

Netflix didn’t pursue a plan to crack down widely on the practice until this year, as subscriber losses mounted. At a company gathering outside Los Angeles early this year, Co-Chief Executive Reed Hastings told senior executives that the pandemic boom had masked the extent of the password-sharing issue, and that they had waited too long to deal with it, according to people who were at the meeting.

More than 100 million Netflix viewers now watch the service using passwords they borrow—often from family members or friends, the company says. Netflix has said that it will put an end to that arrangement starting in 2023, asking people who share accounts to pay to do so. The company expects to begin rolling out the change in the U.S. early in the year.

Netflix’s crackdown risks squandering years of goodwill the company has built up over the years and angering consumers, who have a crowd of other streaming services to choose from.

“Make no mistake, I don’t think consumers are going to love it right out of the gate,” Netflix Co-CEO Ted Sarandos told investors in early December, adding it was up to the company to make sure users see value in paying for the service.

Netflix declined to comment.

It’s a stark turnaround for a company that once tweeted, “Love is sharing a password.” The effort is part of Netflix’s answer to slowing growth, especially in the U.S. market.

Netflix has also switched gears on showing ads in content after years of resisting it. A $6.99-a-month ad-supported tier launched in November, aiming to capture new users looking for a discount to more expensive ad-free plans.

Netflix’s terms of service have long said that the person who pays for the account should keep control of the devices that use it and not share passwords, but the company never enforced the rule strictly. Drawing a hard line on who should be allowed to share passwords has proved tricky. Should kids going off to college be allowed to share their parents’ password? And what happens when users have a second home or travel a lot?

Netflix has updated its customer help pages this year to say accounts are only to be shared by people who live together. The company has said it would enforce its rules based on IP addresses, device IDs and account activity.

To mitigate consumer backlash, Netflix has discussed dialling up the pressure on password sharing gradually, according to people familiar with the situation. Some product executives warned against making the service too complex and not consumer friendly, a practice a few of them referred to internally as Comcastification, a dig at the cable giant, according to people familiar with the situation. Netflix has always billed itself as the alternative to cable providers that tethered viewers to cable boxes and contracts.

Netflix considered allowing users to rent pay-per-view content through their subscriptions, as Amazon Prime Video customers can, because it could make users wary of sharing their login information with others who might run up their bills, people familiar with internal discussions said. Ultimately, the company decided against that tactic, in part because product executives were concerned it would take away from the simplicity of the service, the people said.

As the leader in the streaming-video business, with 223 million global subscribers and a market cap of about $128 billion, Netflix is the first in the industry to confront password-sharing, but likely won’t be the last, investors and media executives say. Other streaming rivals face losses as well, and over time, the pressure to make money and keep growing could push services like Disney+, HBO Max and Paramount+ to take a hard look at password sharing as well.

Analysts at Cowen Inc. estimate that Netflix’s effort could generate an additional $721 million in revenue next year in the U.S. and Canada, where there are about 30 million sharers.

The estimate is based on a survey asking consumers who share the account of a person they don’t live with how they would respond if Netflix required them to pay $3 a month to keep sharing, and factors in people who would pay more to start their own new accounts.

“It’s a boost and it can definitely help, but it’s also a one-time boost,” said Neil Macker, senior equity analyst at Morningstar. He said he thinks the company is underestimating the degree to which the change will spur customers to cancel Netflix subscriptions.

Gina Mazzulla, 53 years old and a longtime Netflix subscriber who lives in southeastern Pennsylvania, shares an account with her parents. Since the $9.99-a-month plan only allows a single stream at a time, they text each other to coordinate. She said she might pay a few dollars more for sharing if Netflix forces the issue, but it would depend on the cost.

“If I were to stop watching Netflix is my life going to be dramatically impacted or different? No,” she said.

While Netflix hasn’t announced its plans for the U.S., it has been running tests in Latin American countries, one of the regions where password sharing is most prevalent. In those tests, Netflix lets subscribers pay to share accounts with up to two people outside of their homes.

Rather than blocking password borrowers from accessing someone else’s account, Netflix prompts them to enter a verification code for their device. The code is sent to the primary account owner, and must be entered within 15 minutes.

The password borrower can watch Netflix after entering the code, but might keep getting prompts until the account owner pays an additional monthly fee to add a sharer, according to people familiar with the tests. Netflix is weighing similar plans for the U.S., the people said.

Netflix has received complaints from consumers about the effort in Latin America, but many users are nevertheless opting to pay for sharing, according to some of the people.

One major challenge is that it is difficult for Netflix to determine when an account holder is traveling and accessing the service from another location like a second home or hotel, versus when another individual is borrowing their password, said people familiar with internal discussions.

Netflix also debated how to address families in which children split time between two parents’ homes, the people said. One approach the company has discussed is allowing subscribers to let Netflix know if they are shifting to a different geographic location for a period of time.

In markets such as India, people often watch Netflix on their mobile phones and stream it over cellular networks, people familiar with the matter said. That makes it harder for Netflix to determine who lives in a household, compared with when users stream over shared Wi-Fi or wired broadband connections.

Netflix saw the warning signals on password sharing in 2019. The company reported a rare loss in U.S. subscribers in the second quarter of that year, and while top executives felt it was a blip, they asked researchers to investigate why growth was slowing. That team found that password sharers were among the culprits.

Mr. Hastings was eager to restrict the practice, but it quickly became clear that doing so would be difficult, according to people familiar with the discussions.

The company for years has dealt with organised, fraudulent password sharing in countries such as Colombia, according to current and former employees. In those operations, people sell cards showing passwords that were stolen or are linked to accounts set up for the scheme.

Netflix executives realised that any crackdown, to be effective, would also have to address the large amount of more benign sharing between family members and friends.

The effort waned as a concern as the pandemic supercharged the company’s growth in 2020. When shutdowns of movie theaters, arenas and restaurants left users looking for at-home entertainment, Netflix added nearly 16 million new subscribers in the first quarter of that year alone. Company leaders’ attention turned to Covid-related workforce safety and production shutdowns.

In early 2021, Netflix began to test messaging with some members that said “if you don’t live with the owner of this account, you need your own account to keep watching.” The language spurred negative press coverage and consumer blowback. Netflix never rolled out the messaging across its whole user base.

Netflix hasn’t announced a date or pricing for its password-sharing plan in the U.S. in 2023. The company’s ad-supported tier could factor into the effort to stem password sharing, Mr. Sarandos said in December. The lower-priced ad tier was a “softer landing” for people who have to pay for Netflix for the first time or those who are financially strained, he said.

Executives have discussed charging account sharers in the U.S. a sum that is only slightly below the cost of its $6.99 ad-supported plan, according to people familiar with the situation. That could encourage password borrowers to sign up for their own subscription—and have full control over the account—rather than asking the account owner to pay a sharing fee.

Netflix’s initial goal is to help users cut back on sharing themselves, without the company forcing the issue.

For borrowers who want to sign up for their own subscription, the company is making it possible to transfer existing profiles, which include their viewing history and preferences, to a new account. Netflix said this would help during “life changes.”

The company has already given primary account owners a dashboard that tells them which devices are logged in at any given time. Some users aren’t aware of everyone who is sharing their account. The dashboard allows them to spot unusual logins and log out anyone who shouldn’t have access.

Sauro Artusi, who is 36 and owns a small IT business in Puerto Cabello, Venezuela, checked the new dashboard recently and was surprised to find 26 devices logged in, including his TV and computer, his sister’s computer, and many others he didn’t recognise.

Mr. Artusi, who has been a subscriber since 2016, didn’t want his account to be flagged for sharing too much once Netflix began enforcing limits. He sent messages to some friends he suspected were borrowing it to let them know he was going to change the password. Later that night, he got a call from his uncle.

“They were asking what had just happened to their Netflix account,” he said.

Bob Bornfriend, 77 years old, lives in the suburbs of Chicago and shares the cost and use of a Netflix account with his daughter, who lives in a different town. Mr. Bornfriend, who also has cable TV, said he watches Netflix primarily when he is traveling or if he gets hooked on a compelling show.

Netflix’s approach to limiting sharing will dictate his next steps, Mr. Bornfriend said. “I’m waiting to see how rigorously they do that and if it becomes an issue for me, I’ll just drop it,” he said.

—Inti Pacheco contributed to this article.

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Where Are Stocks, Bonds and Crypto Headed Next? Five Investors Look Into Crystal Ball

Equities are often seen as expensive after promising start to 2023

By CAITLIN MCCABE
Mon, Jan 30, 2023 7 min

A new trading year kicked off just weeks ago. Already it bears little resemblance to the carnage of 2022.

After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp., for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.

The rebound has been driven by renewed optimism about the global economic outlook. Investors have embraced signs that inflation has peaked in the U.S. and abroad. Many are hoping that next week the Federal Reserve will slow its pace of interest-rate increases yet again. China’s lifting of Covid-19 restrictions pleasantly surprised many traders who have welcomed the move as a sign that more growth is ahead.

Still, risks loom large. Many investors aren’t convinced that the rebound is sustainable. Some are worried about stretched stock valuations, or whether corporate earnings will face more pain down the road. Others are fretting that markets aren’t fully pricing in the possibility of a recession, or what might happen if the Fed continues to fight inflation longer than currently anticipated.

We asked five investors to share how they are positioning for that uncertainty and where they think markets could be headed next. Here is what they said:

‘Animal spirits’ could return

Cliff Asness, founder of AQR Capital Management, acknowledges that he wasn’t expecting the run in speculative stocks and digital currencies that has swept markets to kick off 2023.

Bitcoin prices have jumped around 40%. Some of the stocks that are the most heavily bet against on Wall Street are sitting on double-digit gains. Carvana Co. has soared nearly 64%, while MicroStrategy Inc. has surged more than 80%. Cathie Wood‘s ARK Innovation ETF has gained about 29%.

If the past few years have taught Mr. Asness anything, it is to be prepared for such run-ups to last much longer than expected. His lesson from the euphoria regarding risky trades in 2020 and 2021? Don’t count out the chance that the frenzy will return again, he said.

“It could be that there are still these crazy animal spirits out there,” Mr. Asness said.

Still, he said that hasn’t changed his conviction that cheaper stocks in the market, known as value stocks, are bound to keep soaring past their peers. There might be short spurts of outperformance for more-expensive slices of the market, as seen in January. But over the long term, he is sticking to his bet that value stocks will beat growth stocks. He is expecting a volatile, but profitable, stretch for the trade.

“I love the value trade,” Mr. Asness said. “We sing about it to our clients.”

—Gunjan Banerji

Keeping dollar’s moves in focus

For Richard Benson, co-chief investment officer of Millennium Global Investments Ltd., no single trade was more important last year than the blistering rise of the U.S. dollar.

Once a relatively placid area of markets following the 2008 financial crisis, currencies have found renewed focus from Wall Street and Main Street. Last year the dollar’s unrelenting rise dented multinational companies’ profits, exacerbated inflation for countries that import American goods and repeatedly surprised some traders who believed the greenback couldn’t keep rallying so fast.

The factors that spurred the dollar’s rise are now contributing to its fall. Ebbing inflation and expectations of slower interest-rate increases from the Fed have sent the dollar down 1.7% this year, as measured by the WSJ Dollar Index.

Mr. Benson is betting more pain for the dollar is ahead and sees the greenback weakening between 3% and 5% over the next three to six months.

“When the biggest central bank in the world is on the move, look at everything through their lens and don’t get distracted,” said Mr. Benson of the London-based currency fund manager, regarding the Fed.

This year Mr. Benson expects the dollar’s fall to ripple similarly far and wide across global economies and markets.

“I don’t see many people complaining about a weaker dollar” over the next few months, he said. “If the dollar is falling, that economic setup should also mean that tech stocks should do quite well.”

Mr. Benson said he expects the dollar’s fall to brighten the outlook for some emerging- market assets, and he is betting on China’s offshore yuan as the country’s economy reopens. He sees the euro strengthening versus the dollar if the eurozone’s economy continues to fare better than expected.

—Caitlin McCabe

Stocks still appear overvalued

Even after the S&P 500 fell 15% from its record high reached in January 2022, U.S. stocks still look expensive, said Rupal Bhansali, chief investment officer of Ariel Investments, who oversees $6.7 billion in assets.

Of course, the market doesn’t appear as frothy as it did for much of 2020 and 2021, but she said she expects a steeper correction in prices ahead.

The broad stock-market gauge recently traded at 17.9 times its projected earnings over the next 12 months, according to FactSet. That is below the high of around 24 hit in late 2020, but above the historical average over the past 20 years of 15.7, FactSet data show.

“The old habit was buy the dip,” Ms. Bhansali said. “The new habit should be sell the rip.”

One reason Ms. Bhansali said the selloff might not be over yet? The market is still underestimating the Fed.

Investors repeatedly mispriced how fast the Fed would move in 2022, wrongly expecting the central bank to ease up on its rate increases. They were caught off guard by Fed Chair Jerome Powell‘s aggressive messages on interest rates. It stoked steep selloffs in the stock market, leading to the most turbulent year since the 2008 financial crisis. Now investors are making the same mistake again, Ms. Bhansali said.

Current stock valuations don’t reflect the big shift coming in central-bank policy, which she thinks will have to be more aggressive than many expect. Though broader measures of inflation have been falling, some slices, such as services inflation, have proved stickier. Ms. Bhansali is positioning for such areas as healthcare, which she thinks would be more insulated from a recession than the rest of the market, to outperform.

“The Fed is determined to win the war since they lost the battle,” Ms. Bhansali said.

—Gunjan Banerji

A better year for bonds seen

Gone are the days when tumbling bond yields left investors with few alternatives to stocks. Finally, bonds are back, according to Niall O’Sullivan of Neuberger Berman, an investment manager overseeing about $427 billion in client assets at the end of 2022.

After a turbulent year for the fixed-income market in 2022, bonds have kicked off the new year on a more promising note. The Bloomberg U.S. Aggregate Bond Index—composed largely of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—climbed 3% so far this year on a total return basis through Thursday’s close. That is the index’s best start to a year since it began in 1989, according to Dow Jones Market Data.

Mr. O’Sullivan, the chief investment officer of multi asset strategies for Europe, the Middle East and Africa at Neuberger Berman, said the single biggest conversation he is currently having with clients is how to increase fixed-income exposure.

“Strategically, the facts have changed. When you look at fixed income as an asset class…they’re now all providing yield, and possibly even more importantly, actual cash coupons of a meaningful size,” he said. “That is a very different world to the one we’ve been in for quite a long time.”

Mr. O’Sullivan said it is important to reconsider how much of an advantage stocks now hold over bonds, given what he believes are looming risks for the stock market. He predicts that inflation will be harder to wrangle than investors currently anticipate and that the Fed will hold its peak interest rate steady for longer than is currently expected. Even more worrying, he said, it will be harder for companies to continue passing on price increases to consumers, which means earnings could see bigger hits in the future.

“That is why we are wary on the equity side,” he said.

Among the products that Mr. O’Sullivan said he favours in the fixed-income space are higher-quality and shorter-term bonds. Still, he added, it is important for investors to find portfolio diversity outside bonds this year. For that, he said he views commodities as attractive, specifically metals such as copper, which could continue to benefit from China’s reopening.

—Caitlin McCabe

 

Find the fear, and find the value

Ramona Persaud, a portfolio manager at Fidelity Investments, said she can still identify bargains in a pricey market by looking in less-sanguine places. Find the fear, and find the value, she said.

“When fear really rises, you can buy some very well-run businesses,” she said.

Take Taiwan’s semiconductor companies. Concern over global trade and tensions with China have weighed on the shares of chip makers based on the island. But those fears have led many investors to overlook the competitive advantages those companies hold over rivals, she said.

“That is a good setup,” said Ms. Persaud, who considers herself a conservative value investor and manages more than $20 billion across several U.S. and Canadian funds.

The S&P 500 is trading above fair value, she said, which means “there just isn’t widespread opportunity,” and investors might be underestimating some of the risks that lie in waiting.

“That tells me the market is optimistic,” said Ms. Persaud. “That would be OK if the risks were not exogenous.”

Those challenges, whether rising interest rates and Fed policy or Russia’s war in Ukraine and concern over energy-security concerns in Europe, are complicated, and in many cases, interrelated.

It isn’t all bad news, she said. China ended its zero-Covid restrictions. A milder winter in Europe has blunted the effects of the war in Ukraine on energy prices and helped the continent sidestep recession, and inflation is slowing.

“These are reasons the market is so happy,” she said.

—Justin Baer

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