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MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next.


WHAT’S HAPPENED?

Netflix released its Q2 2023 earnings on Wednesday (July 19), and while revenue came in roughly as expected, its subscription numbers surprised far to the upside: The streaming service gained 5.9 million new subs in the quarter, blowing away analysts’ expectations of a 2.1 million worldwide increase.

That’s a significant turnaround from a year earlier, when the company’s worldwide subscriber base was down by around 1 million subscribers year-over-year.

The new subs had a positive impact on the company’s bottom line, with operating income coming in at USD $1.8 billion, well above the company’s $1.6 billion guidance for the quarter.

This success can largely be attributed to one thing: Netflix’s crackdown on password sharing. Beginning with Latin American markets last year, Netflix eliminated the ability of multiple households to share Netflix accounts by detecting and requesting verification on accounts that were being used by different IP addresses.

The crackdown then expanded to Canada, New Zealand, Portugal and Spain in February of this year, followed by the US in May.

Netflix gave password-sharers a bit of an incentive to sign up for additional accounts, by offering subscribers the option to “add a home” to their account at a discount price of $7.99 per month.

(Netflix also launched a less expensive ad-supported service tier late last year, but the company says that’s had little impact on its revenue so far.)

In the wake of the earnings report, analysts have largely agreed that Netflix’s crackdown has been a success, dispelling concerns that the move could lead to a decline in subscribers.

Netlfix is now forecasting a gain of around 6 million subscribers in Q3, and says it plans to expand the password crackdown to virtually all of its markets.


WHAT’S THE CONTEXT?

Netflix’s move comes amid continuing concerns in the entertainment industry that password-sharing among streaming service subscribers is eating into creators’ and rightsholders’ incomes.

A 2021 survey from Comparitech found that password-sharing is common among most streaming services, including the world’s biggest music streamer, Spotify. The report found that 22.2% of Spotify subscribers were giving or receiving access to the service through a shared password.

To be sure, that’s considerably less than is the case with Netflix, with 44.6% of subscribers gaining access through shared passwords, according to the survey.

Nonetheless, given Spotify’s 210 million paid subscribers, this implies that some 47 million Spotify users aren’t paying for a subscription – a very large potential audience that the service could monetize if it were to follow Netflix’s lead.

The big question is: How many of these password-sharers could be converted into paying Spotify subscribers?

In an interview with Yahoo! News Thursday (July 20), Evercore ISI’s Head of Internet Research, Mark Mahaney, said he expects that about a third of the approximately 100 million password-sharers on Netflix worldwide will eventually sign up for an account.

If we were to assume the same proportion for Spotify users, that would imply that Spotify could gain around 14 million subscribers through a password-sharing crackdown.


WHAT HAPPENS NEXT?

Investors and analysts will be keeping a close eye on Netflix’s coming quarterly reports to see whether the boost to subscribers from the crackdown will continue.

There should certainly be plenty more upside. After all, the password crackdown reached the US market in May, mid-way through the second quarter, meaning only about six weeks’ worth of new sign-ups from password-sharers were recorded in Netflix’s latest earnings report.

And the positive subscriber numbers out of Netflix this week will almost certainly lead to calls for Spotify to do something similar, especially given the growing pressure from the music industry to raise its prices.

A growing number of streaming services have been hiking subscription rates recently in the face of several years of elevated inflation and growing pressure from music industry insiders who argue music is undervalued and underpriced in the market. Among them are Apple Music, Amazon Music, Tidal and – most recently – YouTube Premium and YouTube Music, which just this week raised their prices for US subscribers.


A FINAL THOUGHT…

The key motivation behind Netflix’s move to crack down on password sharing came from the fact that its subscriber numbers had flatlined in 2022.

After growing steadily for more than a decade, Netflix’s subscriber numbers peaked at 221.84 million worldwide in Q4 2021, before declining slightly in the two subsequent quarters, to 220.67 million.

Simply put, Netflix needed some way to get back to growth, and the password crackdown, along with the launch of its ad-supported tier, was how it addressed that need.

But a password crackdown is a one-time event. Though analysts expect to see elevated subscriber numbers from the crackdown for several more quarters, eventually the returns from this tactic will suffer from diminishing returns.

The same would almost certainly be true for Spotify – yet Spotify is in a different place when it comes to subscriber growth. While Netflix is showing signs it may be close to plateauing in terms of its market reach, Spotify subscriptions continue to grow strongly with each quarter. Its Q1 2023 earnings report showed a 15% increase in premium subscribers, a jump the likes of which Netflix hasn’t seen in years.

Not risking that strong growth may be what’s motivating Spotify’s Ek to hold off on price increases. By the same token, Spotify may also delay any password-sharing crackdown until the day comes when its subscriber numbers are in need of a boost.

Spotify’s reluctance to raise prices is clearly causing frustration within the music industry, but from the streaming company’s perspective, its strategy may be a good one: Before increasing costs to subscribers, make sure you have as many of them as possible.Music Business Worldwide

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