Memo to Netflix: Password-sharing is a symptom, not the disease.

Like cable, you’ve got lots of listings, but relatively few that are worth paying for.
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Last week, Netflix announced that it, in its last quarter, lost 200,000 subscribers when analysts were expecting a gain of more than 2.5 million users.

Whoa, Nellie.

That’s a “statistically significant” miss for sure … not a smaller than expected gain, a loss!

And, the company gloomed that it will lose another 2 million in its current quarter.

Understandably, “the market” was “disappointed” and immediately shaved a cool 1/3 off the Netflix market cap.

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Hate to pile on, but that’s on top off a prior (and bigger) 1/3 drop earlier in the year.

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So, what’s the problem?

NFLX management chalks it up to to password-sharing … to many freeloaders who aren’t paying for the value that they’re getting from the NFLX “product”.

I beg to differ.

I think NFLX has an inflated view of how much continuing value it delivers … and, even if that’s not true, it’s value is eroding by the day.

Let me explain.

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Take a walk down memory lane…

At inception, NFLX offered a HUGE consumer benefit: Get your movie CDs in the mail rather than schlepping back & forth to Blockbuster (and risk getting hit with outsized late return fees).

Then, came digital streaming of the movies.

Forget the CD entirely.

Conceptually, a clear consumer benefit, but …

I remember being disappointed when I learned that NFLX’s online library was a lot thinner than its mail order CD library … due mostly to licensing restrictions and the threat of digital pirating

Bottom line: I didn’t sign up after my free trial.

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OK, fast forward to more recent times.

NFLX built its library with more movies, more TV series and original content … some of it compelling.

Enough compelling content?

Nope.

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How many classic movies are there?

For example, I have a friend who is a classic movie buff.

He quickly burned through NFLX’s film library and cancelled his subscription.

Hmm .. a warning flag?

Maybe the film library wasn’t that deep after all … especially since many of the classics can be DVD’ed from cable channels and watched with remote-controlled ad skipping.

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Then came the pandemic

During the Covid lockdown, like everybody else in the country, my wife & I got bored and “borrowed” a family member’s NFLX credentials.

Initially, it was a a godsend … so much to watch, too few hours in the day.

That sugar high lasted about two weeks.

Then we were scrapping for something “not too bad” to watch.

The TV series that we were binge-watching got swept up by other streaming services (e.g. NCIS’s most recent seasons going to Paramount+).

The movies that were being added were either box office flops or original NFLX content that was either too weird or too woke (or both) for our old-school tastes.

The hot series weren’t “must see TV” since there weren’t water cooler chats with everybody working (?) from home.

So, NFLX transitioned out of our “consideration set” … and our subscribing family member had license to cancel their subscription … which had been dormant at their house for a while.

Bottom line: By looking the other way on password-sharing, NFLX got a couple of extra months out of the family-sourced subscription.

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My Take:

NFLX has a grossly inflated self-view of the value of its content library … and, the company’s market has it more accurately valued.

A part of NFLX’s delivered value is embedded in password sharing.

Said differently, its prices may already be too high to justify subscribing without F&F sharing.

I wonder how many of the cancelled subscriptions were customers who were password-sharing?

My bet: the vast majority.

If so, curbing password sharing will just accelerate subscription losses.

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As James Carville might say” “Its the content, stupid.”

Keeping a content library compelling is tough to do … especially when some of the most watched legacy content is being picked off by other content-developers now doing their own for-pay streaming … think: Disney, Paramount and Discovery.

It’s easy and frequent for subscribers (or their F&Fs) to binge through a content catalog … and the Covid lockdowns made most of us (or, at a minimum, many of us) burn through NFLX’s library.

Keeping a content library fresh is a monumental challenge … especially if content development isn’t really the streamers core business.

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Bottom line: NFLX had a good run, but may be going the way of, sorry to say, Blockbuster.

Economists call it “creative destruction”…

As political opinionator James Carville might say” “It’s the content, stupid.”

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