New analysis from Macquarie Research pegs Netflix’s imminent password sharing crackdown in the U.S. as a catalyst for growth on its ad-supported tier, with the potential for billions in annual incremental revenue in 2024.
In an April 14 research note to investors, Macquarie analyst Tim Nollen explored three scenarios based on how 30 million existing but unmonetized users might opt to retain their account when Netflix implements password sharing charges in the U.S., at an assumed price of $7.99 per month per user. The firm estimates the strategy could net annual incremental revenues between $1.17 billion in the most conservative model and up $3.5 billion in the most aggressive. Those figures include revenue from both the add-on charge for extra accounts as well as revenue estimates from the ad tier as the firm anticipates the monetization of password sharing to boost adoption of the AVOD plan. Estimates are for the full-year 2024 since Macquarie anticipates the paid sharing strategy will likely lead to higher churn at the start.
When Netflix reported subscriber losses for the first time in Q1 2022 it estimated 100 million people globally were using the service for free, with 30 million of those located in the U.S. and Canada. Netflix earlier this year already rolled out paid sharing in Canada, New Zealand, Spain and Portugal, following paid sharing tests in certain Latin America markets. The U.S. market is teed up next but an official date hasn’t been disclosed. Last October the SVOD already introduced a feature where existing users can save their profiles and transfer to new accounts.
As Nollen noted, when paid sharing is implemented, those existing but non-paying viewers will have three options – loose access to Netflix, opt to pay to stay on the same primary household account, or transfer profiles and pay for a new ad-tier subscription. With an assumed paid sharing charge of $7.99 per month per user (based on the prices Netflix has used in Canada), the option for someone to purchase their own ad-supported tier account is cheaper at $6.99 per month. The firm believes that most users who are sharing passwords are the most price sensitive, and as a result are likely to adopt the less expensive ad tier.
The higher price for adding an extra user “may make paid sharing less attractive and could push price-sensitive users in the direction of the ad-supported plan – or, of course, parents may tell their college-bound kids they have to pay for their own Netflix now,” wrote Nollen.
Netflix launched its ad-supported tier last November, with early reports of slow initial uptake. More recently in March Bloomberg reported monthly active users on the plan with ads reached 1 million, based on company data viewed by the news outlet.
In its most aggressive (and unlikely) scenario, Macquarie assumes half, or 15 million, of the 30 million unmonetized US/Canada users choose to pay for an add-on account, while the remaining 15 million opt to purchase Netflix with Ads. For those moving to the ad tier Macquarie’s model estimates Netflix would get $6.99 per month in subscription revenue and an additional $9 per user for displaying ads, generating ad plan ARPU of $15.99 and total gross revenue of $2.8 billion. The firm also accounts for an assumed 20% revenue cut to content suppliers on its ad tier, as well as Microsoft charging an SSP take rate of 5% and any DSPs charging an additional 15%.
“After netting out these charges, this paid sharing strategy would add ~$3.5bn in incremental net revenue (23% upside) in the first year of implementation,” wrote Nollen.
A second scenario assumes 10 million users don’t subscribe to any Netflix plan, while the remaining 20 million are split evenly between paid sharing accounts and the ad tier – generating estimated incremental net revenue of $2.3 billion, with an upside of 15% on a full-year run rate.
However, it’s the third, more conservative scenario that Macquarie believes is probably realistic, with the assumption that two-thirds of the 30 million don’t take any Netflix plan, and the remaining opt for paid sharing and the ad plan at 5 million each. That scenario shows an upside of 8%, with estimated annual incremental net revenue of $1.17 billion.
As for annual revenue from just the paid sharing add-on, Macquarie estimates $1.4 billion in the most aggressive scenario, $959 million in scenario two, and $479 million in the most conservative model.
“All scenarios point to a higher incremental revenue to the existing ad-free revenue forecast with a significant upside potential. Since the ad tier roll out has been quieter than expected, we think the implementation of the paid sharing strategy would lure more users to the ad tier and attract a wide swath of advertisers as the user base expands,” wrote Nollen. “We see this crackdown on password sharing as a catalyst to the growth of its ad tier roll-out.”