The Decibel - Netflix’s big gamble on its future

Episode Date: March 10, 2023

Netflix is facing a backlash after announcing it’s cracking down on password sharing in Canada, among other countries. The company says 100 million of its customers worldwide share passwords, which Netflix claims is cutting into its revenue.Kean Birch, director of the Institute for Technoscience and Society at York University, says that Netflix’s business model was bound to run into problems like this, as competition from other streaming services pulls content off the platform and draws users away. But will it work?Questions? Comments? Ideas? Email us at [e-mail]

Hi, do you have a quick sec to chat with us? We're from the Globe and Mail. We're doing a podcast episode about Netflix. What are you going to do with your Netflix account? Have you been affected by this new policy where you can't share passwords? Yes, like we have so many friends, like we used to share it and then we had to cancel it. Yeah, I had it before they changed to the one location i shared it with my family who live in bc with the location restrictions it's not worth it anymore so i use

disney plus amazon prime do you currently share your password with family or friends i do i have three households sharing the password so yeah quite a bit of us i think once it does happen i will think twice i might just switch to another platform and use that for a while, then switch back to Netflix. So we'll see. So you didn't get the notice saying you need to change to one location? I did. I'm on my parents' account, though. So I'm assuming it will affect me soon. A lot of people have been talking about this recently, since Netflix began cracking down on password sharing in Canada. And many people are not happy. Do you feel upset? Yeah, of course I feel upset.

I feel like, OK, I'm going to cancel the plan. It sucks. Yeah, I don't know why Netflix did this with us. We have a cottage. That's the problem. If we go to the cottage, can I share it there or not? If not, I'll be upset with Netflix. Maybe we'll cancel it. I do get the business case behind it.

I also get the outrage behind it too, so it's tough to reconcile those two. I am upset. I will be upset. Because instead of increasing the service, the benefits for the customers, it's milking us more and more and more. So it's not fair because they don't need to milk us. They are making millions already, trillions, whatever. So this greed, yeah.

Last year, Netflix reported a loss in subscribers for the first time in a decade. Netflix says that 100 million of its users are sharing passwords, and that the company is missing out on revenue, when so many people are all watching on one account. Today, I'm joined by Kian Birch. He's a professor of science and technology studies at York University, and he's the director of the Institute for Technoscience and Society. He's here to tell us why the company's once-successful business model isn't working anymore

and what this means for the content on its platform. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Kian, thank you so much for joining me today. Thank you for having me. Let's just start with what Netflix is doing here, because I think a lot of people are still trying to figure this out. How does their new password sharing policy actually work? So they're changing to a multiple kind of different kinds of subscriptions. So you can have a kind of cheap version with ads.

And then they're stopping people sharing passwords. So you can add members as you go up the subscription kind of fee level. So if you get a premium subscription, which costs, I think, $21 a month, you could add two extra members at $8 a month each. And so at the end of it, you come out at $37 a month plus tax. Talk about inflation. I remember when it was $8.99, I think, a month. Yeah, yeah.

$9, $10, yeah. Yeah, no, it started a lot lower. But also what's interesting is that streaming services generally, across the board, audio, visual streaming services have gone up much faster than inflation. So it's not just Netflix. It's a broader kind of issue there. And so it used to be that you could share passwords with people in your family. You could each have an account on there, but you're just paying for one.

So you can't do that anymore then, is that right? Unless you're paying additional costs then? Yeah. So they have some, as far as I understand the technical side of things, what they're doing is they are requiring that you kind of register your devices with a home network. And then you have to log in with a device that you use in that home network every month. And if you don't do that, then you don't count as being part of that home network. Okay. So Netflix is doing this in Canada, as well as Spain, Portugal, and New Zealand. And they started the same thing before in Chile, Costa Rica, and Peru. This was last year. So why are we seeing the change in these countries?

Testing grounds, I'd expect. You don't want to test out your most lucrative market, which is the US, and find that there's a significant negative response. So you test it out in other markets first. And then if it works and people are okay with it and you don't lose too many subscribers and maybe you actually gain some subscribers, then you'd be happy to roll it out in your bigger market. Well, I think so far, at least kind of anecdotally, there has been some backlash to this policy from Netflix users. Why do you think people are so upset by it? Apart from the obvious having to pay more, I think that there's probably a few issues

here. One, Netflix previously seemed fairly okay with password sharing. I think they have now an infamous tweet where they said sharing is love or something similar to that. Yeah. Love is sharing a password back in 2017. So they were promoting it. Yeah. So they were promoting it and pretty happy for people to share passwords. I think probably the complexity of it makes it also irritating, like we've already mentioned, to subscribers and working out what kind of subscription type that you want.

I also think that there's cost of living issues, inflation issues, all these kinds of things that are currently happening that mean that paying extra on top of the other pressures that you're paying extra for is also going to raise hackles. So there's all these sorts of things that combine to annoy subscribers. And I mean, I think a lot of people are finding too, like this is a sudden change, right? Where the price has been increasing actually for years here, but it's hard to notice that almost. This is very in your face.

Yeah. So if they'd been a little bit more superstitious about it and raised it gradually, another dollar a year for a few years, then I don't think we would have noticed. So I think this kind of, as you say, sudden change, I think is more noticeable. I think that 2022 was a bit of a bumpy year. That's a self-described bumpy year for Netflix as a consequence of kind of stagnating, flatlining user growth. It's not that Netflix was not making money or wasn't being profitable. It's just that their business model was largely driven by user growth. As user growth slows down, they face financial pressures to find these other revenues. And the way of finding other revenues for Netflix is they have to rely on subscription fees.

I wonder, is a constantly growing user base a sustainable business plan? Because eventually you've got to run out of people, right? Yeah, I think I've described this as kind of internally contradictory in many ways. Because you can't just keep on growing and growing and growing. So there's a, I'm not sure it's a paradox there, but it's a problem if you've based your whole model on users' user growth. So at some point you have to start what they call monetizing those users. And that means you have to start finding ways to extract more and more revenues from them. And that means things like charging higher subscriptions and shifting your subscription model. I think there's a lot of

businesses that have been based on the same kind of model, business model, that are finding themselves in a similar situation to Netflix. And you can think of Twitter, which has infamously introduced the kind of blue tick mark where you have to pay for it. Meta has, I think, just announced that they're going to test out people paying subscription fees for Facebook and Instagram if you want a verification. So Netflix had just over $31.5 billion US in revenue last year, which sounds like a lot. Does the company really need to cut down on password sharing here? Over the last few years, I think their revenue has been flat. So I think that goes back to the issue of user growth and that kind of business model being based on user growth. So for the investors, that's shareholders, that can be a cause for concern. We'll be back in a moment.

From a business perspective here, is Netflix in trouble? My take on it is, you know, I think they are, but I can't, you know, I don't like making a prediction about which, you know, what's going to happen because it's obviously, you know, there's room to change and and shift their approach so like i said i think that they have a sort of contradictory business model that has caught them in a kind of track uh what they did was you know they started shifting their kind of production model towards certain kinds of shows oh they have a particular approach to the renewal or cancellation of shows that's based upon user numbers and in the time that all you know all these changes have happened as they produce more and more content a lot of that content is based upon certain kind of viewing habits binging you know you binge a show for a month that's that's their kind of way of assessing whether a show to renew a show or not is to to see

whether people have binged it and this means that they have to increasingly you know spend an increasing amount of money on the production of new shows especially especially shows that will attract lots of new users but at the same time they're cancelling shows that maybe their current users do like and and that means that they they're caught between this kind of attracting new users and retaining their existing users. But as their kind of production model shifts, you know, they can't appease or satisfy both. Yeah, you like I mean, people talk about this a lot, right? There's there's a lot of options for streaming services now. And if you don't like the content on one, and especially like you're kind of hearing anecdotally, at least that Netflix

people are not necessarily drawn to the content that's there anymore. Do you find that there's stuff on Netflix that you that you want to watch these days? Um not as much like sometimes there are kind of things that pop up that I'm like oh that'll be cool to watch but nothing that I'm like oh I really need to kind of like have Netflix in order to watch this. And the quality of the content I feel has gone down in recent times as well so it's not worth it for me at this moment. To be honest like in the beginning there was a lot of series and everything I like but right now I don't feel any interest. To tell you the truth we have Crave, Disney and Apple TV so many other places to watch movies and series Netflix, we don't like it much anymore.

So there's kind of a struggle that's happening there or decisions that people are making about this. Yeah, and one of the big problems for Netflix is that when they produce content themselves, they have to pay for the full content production cost. So they've got to pay up the cost of the full production and they can't outsource some of those costs. And so they need shows to bring in new users.

They're not reliant on advertising. So renewing shows for them is actually quite expensive. And is that just because it's successful so you have to pay everybody a little bit more, essentially? Yeah. And you might need to up the budget. So you're paying everyone more and you're upping the budget because you have producers or directors or whoever who wants, you know, creators who want more resources and so on. So you end up with this increasing cost. And I think this is something that people really do notice about Netflix, right? Especially as other streaming companies come into the market, they're pulling their shows off Netflix.

So Netflix has to actually start producing more of their own content to have that there. And this can be pretty expensive. Like, for example, Stranger Things, which is a hit that a lot of people probably know and have watched, that apparently cost around $30 million US to make per episode in the last season. So this is kind of maybe what you're talking about here. If a show hits four or five seasons, that cost increases. But I guess, why is Netflix willing to make that decision to pour so much money into their own content? Well, partly they have to, as you mentioned, that other content producers are pulling their materials from Netflix. So they have to produce this material. They also, because of the business model, they have to, you know, they have to attract new users. And part of that seems to now be a strategy of doing these big shows like Stranger Things that will attract new users.

So they expand the offerings. And some of this seems to be something, you know, some of it's like, again, anecdotally, they're expanding their offerings in kind of shows that shows that have a broader appeal, that are trying to aim for a larger audience range, as it were, like terrestrial TV. I want to ask you another question, though, about the content that they produce or that they think is going to draw people in. Because we've seen a lot of the reality TV shows on Netflix as well. I'm thinking about Love is Blind or Perfect Match, these kind of are very quick hits that people seem to be watching. I guess, what is the content that we're seeing tell us about Netflix's strategy? Well, I find that that's interesting and I have to shamefully admit to watching some of the reality shows as well. Me as well unfortunately yes but it's but the but the the number of reality

shows that are coming out on netflix is noticeable you know it's it's um stuff that you know we can watch and we can binge and it's fairly easy watching and things so you know it it's becoming increasingly like a terrestrial tv station in the sense that a lot of the terrestrial tv moved towards reality shows because they were cheaper and they still attracted audiences and these sorts of things. So it's becoming less and less attractive as an alternative. Yeah. So for a while, Netflix was the only streaming service, but now the space is quite crowded, right? We've got Disney Plus and Crave and Amazon Prime and all of these other options for people. So how is Netflix's business model different from other streaming platforms that are out there?

Well, the business model per se might not be that different, but the business is, I think. Netflix is a standalone company, while a lot of those other streaming services are part of a broader conglomerate. You know, Disney can cross-subsidize its channel if it wants, its streaming channel, because it's got all the other revenue streams. And so it's not as tied into the success of that channel as, say, Netflix is. So even if Disney Plus is not making a whole lot of money, Disney's making money in other ways. And so they can actually kind of share that around a little bit. And the Disney Channel or Disneyney plus it might have a different role within the conglomerate because it you know it might take on a kind of marketing role or a you know

part of its branding and so on that is um for them has value the same could apply to any other kind of conglomerate that produces content for something like amazon prime amazon prime is an interesting one because amazon it might be another additional kind of plus point for becoming a Prime member, right? So Amazon wants you to become a Prime member because you'll basically start most of your shopping on Amazon. Whatever they spend, as long as they attract enough members to Prime, then that works out as a cost-effective strategy. And so these other companies, we have not seen them crack down on password sharing. You can still do that with these other streaming services. But do you think it's something that maybe down the line, these other streaming services might

also start doing following in Netflix's footsteps here? Oh, for sure. If it's successful for Netflix and we've yet to see what the what the what the real you know kind of impact is I guess we'll see that over the next few months but I think Netflix is betting on the you know they might lose subscribers but at the same time they're betting on gaining subscribers and so if they gain enough to offset the losses then for them it's a win and if that happens you know we could see other streaming companies follow suit. For some of them, maybe like Disney+, maybe it actually doesn't matter to them too much

because it plays this other role of branding and marketing and so on. Then to them, it doesn't have a significant kind of impact on their revenues. So this is a bit of a gamble for Netflix, frankly, Ben, to clamp down on password sharing like this and frustrate a lot of users with it. Do you think it's a gamble that's going to pay off? We have to wait to see what happens in the US for them, I think, really. Because if it seems to work in Canada and the other three countries, if it works and they don't lose too many subscribers, or they gain some new subscribers to offset the losses,

and they roll it out in the US, and then there's a big backlash in the US, then that's going to be pretty damaging. Just lastly here, Keane, what are you going to do with your own Netflix account? Do you know? Yes, we'll wait till the summer, and then we will cancel it, before we go away traveling. We're going to spend more than a month, I think, away. And that means that on the basis of my understanding of the technical requirements of having to log into your home network every month, I think we will lose access at a certain point. And so we might as well cancel beforehand. We will see whether we miss it. And then we will, you know, when we come back, we will make a decision about whether to sign up again. We're also, you know, we're come back, we will make a decision about whether to sign up again. We're also, you know, we're also thinking about all the other streaming services and what we can actually, you know, what can we physically watch in a month?

And does it make sense then to have all these different services? Keanu, it was great to talk to you. Thank you so much for being here. Thank you very much for having me on. That's it for today. I'm Mainika Raman-Wellms. Thank you very much for having me on.