📺🔒 Netflix's Password Crackdown a Success!
Happy Wednesday all,
Rickie here again. This week, we dive into the success of Netflix’s new password sharing crackdown and ultimately, why it decided to restrict a former staple of the platform.
In other news, I’m in the market for some new golf clubs. In a call that I had with Humphrey this week, I told him that I’ve been using the same clubs since my first high school tournament, and on top of that, I got them second hand so they have to be more than 10 years old by now. If anyone has recommendations, drop them below in the comments or reply to the email.
Enjoy this week’s Hump Days!
- Humphrey, Rickie & Tim
The Weekly Brief
U.S. Consumer Price Increases Slow; Underlying Inflation Sticky (Reuters)
U.S. consumer prices rose slightly in May, coming in at a 0.1% increase month-over-month and a 4% increase year-over-year. The smaller-than-expected rise in the CPI reflected decreases in energy, including gasoline and electricity. Rents, however, remained sticky and prices of used cars and trucks rose further. Inflation is decelerating overall but more work is still needed to get to the Fed’s target of 2%.
Why Does It Matter?
Fed officials began a two-day policy meeting as the report was published and the moderate slowing provides the Fed some room to pause its rate hikes this week.
Eurozone Saw Winter Recession, More Challenges Ahead (Reuters)
Data from statistics agency Eurostat showed that the eurozone economy fell into a technical recession (two consecutive quarters of negative GDP) in Q1 2023, falling 0.1%. A recession was expected toward the end of 2022 with the onset of higher energy and food prices. Conversely, employment grew in every country Greece, Lithuania, and Slovakia on a quarterly basis.
Why Does It Matter?
Given the state of the European Central Bank's monetary policy, this trend has the potential to carry on. Domestic demand is not in a good place with inflation still putting pressure on consumption.
GM Embraces Tesla’s EV Charging System, Wall Street Cheers (Reuters)
GM joins Ford in adopting Tesla’s charging plug which will also give GM EV buyers access to the Tesla Supercharger network. GM, Ford, and Tesla together account for 70% of U.S. EV sales and Wall Street reacted positively to the new alliance with shares in GM and Tesla rising 4%.
Why Does It Matter?
The unified charging port among the top three EV manufacturing companies in the U.S. is expected to have significant commercial and public policy implications, especially after Biden announced a rival charging system standard that included billions in federal subsidies for its adoption. Tesla, GM, and Ford are challenging the White House's direction.
Hump Days Scoop
Netflix began cracking down on password sharing in the U.S., and much to the surprise of myself and those that canceled their memberships, the new feature had the effect the streamer intended: an increase in its subscriber base. In the four days following the announcement on May 23rd, Netflix amassed more new subscriptions than in any other four-day period since Antenna began tracking the data in 2019.
The controversial decision to change what was once a staple of the brand’s identity (see Tweet) was not one that the company just stumbled upon but instead was a calculated and carefully tested move. This week, we dive into what contributed to Netflix’s decision to crack down and what Netflix is looking forward to from here on out.
Why did Netflix decide to crack down on password sharing?
Netflix first identified its password-sharing problem back in 2019 but delayed its initiative for years. It said that over 100M households shared accounts - about 43% of its user base and that this was affecting its ability to invest in new content. Last year, the company saw two consecutive quarters of subscriber losses for the first time in its history. While subscriber growth has turned positive again over the last few quarters, the growth was significantly slower than what it saw during the pandemic.
Netflix, seeing its growth begin to stagnate started to look at other avenues to boost revenue. In addition to password-sharing, the company also introduced an ad-supported tier that offered customers a lower price ($6.99) in exchange for viewing ads.
This shift in strategy also marks a shift in the company’s life cycle. Netflix is no longer (and has not been for a while) the new kid on the block desperately trying to make friends and gain subscribers. What was once a cornerstone of the brand identity: being able to share your password with everyone you knew, became a point of contention once Netflix started to reach the top of its total addressable market (TAM). Revenue growth was slowing and the company no longer needed to entice signups by offering the perk of a “group subscription”. Instead of trying to get more people to sign up (an increasingly expensive task as you get closer to 100% market share), it decided that the best option would be to break up the group subscriptions and have everyone sign up individually.
How did they test out the program, and how did it perform?
Netflix began testing the new password-sharing restrictions in countries such as Canada, Spain, Portugal, and New Zealand. While customers initially reacted negatively to the announcement, many begrudgingly opened up their wallets in order to watch the latest hit content.
In Canada, the restriction resulted in a net positive change in membership base, meaning that those that were forced to get new memberships outweighed those that were angered by the decision and canceled their memberships. The company even said in a shareholder letter in April that revenue is growing in Canada faster than in the U.S.
On a side note, Netflix’s ad-supported tier is actually generating more revenue per member than its basic and standard plans because it makes money from advertisers as well as the subscription fee.
What’s next for Netflix?
Netflix plans on using higher top line growth from the password sharing restrictions and the ad-supported tier to reinvest back into better content and make the platform better for its paying members.
Netflix, being content driven, spends a ton of money on content that will get eyes in front of screens. For now, it made the decision to increase revenue instead of cutting down on costs (aside from laying off a few hundred employees). Into the future, the company won’t have the same options it has now so it will be interesting to see how long its current revenue growth will last until they are at another crossroads. As of today though, the crackdown was a major success on Wall Street and shares are up almost 50% YTD.
Chart of the Week
On Wednesday, the Fed chose not to change its policy rate, keeping it at 5% to 5.25%, in order to evaluate the impact of previous monetary tightening measures. However, they are still trying to pinpoint the level of interest rates required to curb high and persistent inflation. The median projection in the Federal Reserve's Summary of Economic Projections suggests that policymakers believe the rates need to be even higher to adequately restrict the economy. The implication is that even if disinflation gains momentum later in the year, rates might still remain high.
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