Netflix Is Going to Start Cracking Down on Password Sharing. It May Be Too Late.

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Netflix

free-loaders, beware. The streaming giant is preparing to crack down on password sharing in a bid to boost revenue as subscribers are expected to drop throughout the first half of the year.

A lot has changed since Netflix (ticker:

NFLX

) CEO Reed Hastings said in 2016 that password sharing was “something you have to learn to live with.” At the time, Hastings said there were no plans to change password-sharing practices, with the company acknowledging it was a way to attract new users.

But Netflix backtracked on that stance Tuesday, when the company announced it would seek new ways to monetize the roughly 100 million households it calculates are using shared accounts, including more than 30 million in the U.S. and Canada.

“This is a big opportunity as these households are already watching Netflix and enjoying our service,” the company said in a letter to shareholders. In March, the company tested two paid-sharing features in Chile, Costa Rica, and Peru, where current members had the choice to pay for additional households. It plans to continue rolling out initiatives to charge users for sharing the account.

Password sharing has become commonplace among streaming platforms, with many seeing it as a way to drive growth, said Neil Macker, senior equity analyst at Morningstar. Netflix’s announcement has led some to wonder what prompted the company’s change of heart — and whether competitors will follow suit.

Slowing subscriber additions and increasing competition could be a main factor, analysts said.

“They’re already fully saturated and this is an act of desperation,” said Wedbush analyst Michael Pachter.

Netflix lost 200,000 subscribers during the first quarter, and projects it will lose 2 million net subscribers during the next quarter.

Over the last few years, Netflix stock has skyrocketed on investors’ optimism about its subscriber adds, which had been steadily rising, Macker said. But now that the streaming service is losing subscribers, the stock is taking a hit, prompting management to look for new ways to invigorate investors, he added.

To be sure, within a few years, Netflix could see significant upside from password-sharing monetization, perhaps as early as 2023, wrote Guggenheim Partners analyst Michael Morris in a research note.

But getting there is the tricky part. In the interim, Netflix may be faced with increased consumer churn if people are unwilling to pay a price for sharing passwords, especially after it already raised monthly membership costs this year, Pachter said.

Moreover, there is no assurance that the users mooching off of existing customers would be prompted to become paying customers.

“People stealing the signal aren’t going to pay,” Pachter said.

Netflix’s competitors will be watching the experiment closely, Macker said. If the experiment works and Netflix doesn’t see significant churn or impact, they may be prompted to do it themselves. But that could still take a while, especially if consumers don’t take too well to the change, he added.

“I just think password sharing is something that’s been normalized by consumers,” Macker said.

Shares of Netflix were down 37% on Wednesday, and have lost 63% this year alone. Competitors

Roku

(ROKU) and

Walt Disney

(DIS) fell 5.6% and 4.6%, respectively.

Write to Sabrina Escobar at [email protected]