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After Price Increases, This Could Be Netflix's Next Growth Lever

In recent weeks, we've seen dominant video streamer Netflix (NASDAQ: NFLX) pull on two different growth levers: cutting out commissions it pays for new and returning customers on mobile platforms, and the biggest price increases the service has ever implemented. Investors were thrilled with the news of price hikes, sending shares up 7% yesterday. The extra cash those moves will generate will help Netflix service its growing debt load, as the company has made it clear that debt is its preferred source of capital.

Here's what could be Netflix's next growth lever.

Image source: Netflix.

Cracking down on account sharing

In an interview with Bloomberg Radio, Steelhouse CEO Mark Douglas says that Netflix should crack down on account sharing, which he argues could be construed as an effective price increase per user that would generate more revenue.

Douglas notes that rivals like Hulu lock down accounts to prohibit sharing, although Hulu's approach is to limit the number of simultaneous streams. Hulu's main plans only allow a single active stream per account, while its Live TV service offers two simultaneous streams. Netflix's most popular plan allows two streams, while its Premium tier includes four.

Netflix, which reports fourth-quarter earnings tomorrow, has historically been extremely lax regarding account sharing, despite the widespread prevalence of the practice.

Netflix has never worried much about sharing

Speaking at CES 2016, CEO Reed Hastings even outright condoned the practice. Account sharing is "a positive thing, not a negative thing," according to Hastings. The chief executive believes that account sharing is comparable to free advertising or free trials, giving prospective members a taste of the content and hoping they sign up on their own. "It really hasn't been a problem," Hastings added.

Hastings reiterated those sentiments later that year. "In terms of [account sharing], no plans on making any changes there," Hastings said during the October 2016 earnings call. "Password sharing is something you have to learn to live with, because there's so much legitimate password sharing, like you sharing with your spouse, with your kids ... so there's no bright line, and we're doing fine as is."

Everybody's doing it

It's less clear how Hastings might feel about the practice more recently; the topic hasn't come up in recent calls. There is a risk that Netflix's permissive stance on account sharing could encourage questionable cases of sharing, such as with people outside of a member's household.

Making matters worse, third-party estimates are all over the board. A GlobalWebIndex study from 2015 estimated that a whopping two-thirds of Netflix members share their accounts. A Reuters/Ipsos poll in 2017 found that just 12% of adults were accessing streaming services (like Netflix, Hulu, or Amazon Prime) using the credentials of someone outside the household. More recently, researcher Magid told CNBC in August that 35% of millennials share passwords for streaming services, suggesting that younger demographics do appear to have a higher propensity to share.

But over time, as Netflix's revenue growth decelerates, investors may demand more from a company trading at 125 times earnings, and it may have to start cracking down.

Netflix can't stay complacent forever

Last month, video software maker Synamedia announced a new software service called Credentials Sharing Insight that would help companies like Netflix (and other service providers) crack down on account sharing. Leveraging artificial intelligence, machine learning, and behavioral analytics, Synamedia hopes to identify questionable instances of sharing. The service will look at a plethora of data points, such as location, type of content viewed, and time of day, among others.

There is some level of sharing that Netflix will accept, but allowing rampant account sharing translates into lost revenue. Ideally, technological innovations will be able to help providers better differentiate between legitimate and illegitimate sharing. One of these days, Netflix is going to have to start taking a stricter stance.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of AMZN and Netflix. The Motley Fool owns shares of and recommends AMZN and Netflix. The Motley Fool has a disclosure policy.

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