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Summary

In July 2016, a US appeals court gave broad powers to the Department of Justice to crack down on a common practice: sharing passwords to pay bills, access emails, or enjoy the latest TV series on a subscription service. What will this crackdown mean for the entertainment industry, where the practice is widespread and even encouraged?

Will Netflix and HBO be eager to crack down on password sharing now that it’s a crime?

Password sharing is built into Netflix’s subscription model. Netflix allows its members to create up to five profiles on each account, but it limits the number of devices that can access the service at the same time on the same plan. For instance, the $11.99 plan allows four devices to stream at the same time; the $8.99 plan allows two.

At the Consumer Electronics Show in Las Vegas in January, Netflix CEO Reed Hastings stated that people who view content on someone else’s Netflix account often go on to become paying subscribers themselves, according to reporting by CNET. HBO’s president, Richard Plepler, stated in 2014 that this sort of activity acts as a “terrific marketing vehicle” to attract the next generation of viewers – a means of “building addicts” of HBO content by exposing its shows to more people.

The reality is that password sharing is rife in the US, and many “cord never” millennials, who have never subscribed to pay TV, are secretly taking their parents’ Xfinity passwords with them when they move out of the family home.

Will Netflix and HBO be so amenable to password sharing when their subscriber growth slows? The practice has undoubtedly driven subscriber satisfaction and positive brand equity, but it could also be affecting growth. Netflix can’t afford to take the latter lightly, given that its failure to meet projections for growth caused its stock to decline by 15% after the company’s last earnings call.

In July, the US Ninth Circuit Court of Appeals in San Francisco issued an opinion that found that former employees of a recruitment firm had violated the Computer Fraud and Abuse Act in 2005 when they used a current employee’s password to access company computers and obtain information to help start a rival firm. According to a Ninth Circuit judge, the court’s decision renders “consensual password sharing”even in seemingly innocuous circumstances (e.g. a wife and husband sharing an email password) a prosecutable offence.

Of course, the matter that decided this law involves misconduct a little more severe than illicitly watching the latest season of Orange Is the New Black. But will Netflix and HBO change their minds about password sharing now that they have a blunt tool to stop it? It seems more likely that they will tinker with their price plans and streaming limits if the practice continues to create too many freeloading “addicts,” but not enough new paying subscribers.

Appendix

Author

Robin Lake, Principal Analyst, Media & Entertainment

robin.lake@ovum.com

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