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Analyst: Netflix password sharing 'fairly meaningful,' but a crackdown could work

Netflix (NFLX) is cracking down on password sharing — or at least is testing the idea.

The streaming giant raised eyebrows this week as news that some accounts with more than one user were sent a message encouraging them to sign up for their own accounts. The message reads: “If you don’t live with the owner of this account, you need your own account to keep watching.”

Netflix confirmed the new trial in a statement to Yahoo Finance, stating that “this test is designed to help ensure that people using Netflix accounts are authorized to do so."

About 33% of all Netflix users share their password with at least one other person, according to research company Magid. Still, one analyst says the long-term benefits of a password crackdown may outweigh the initial impact.

"It's pretty difficult to estimate the impact that it would have, but my sense is that it would be a net positive in the long term because I think the number of password sharers right now is a fairly meaningful number," CFRA Analyst Tuna Amobi told Yahoo Finance.

"There would be some immediate negative impact in terms of churn, but it's very easy to see how some of that impact would cancel out in terms of potential uptake from certain customers who were affected," he said.

Amobi added that a password crackdown would help prove customer loyalty, and could potentially convince people to subscribe on their own as opposed to sharing accounts. It comes as the streaming giant is poised to spend a staggering $19 billion on content this year, according to one estimate, and plans to release a new movie each week in 2021.

Needless to say, it needs as many paying customers as possible.

"It does come with some risks but I believe it wouldn’t be radically different from what some of the other service providers are already doing right now," Amobi added.

'This isn't rocket science'

Chiang Mai, Thailand - March 22, 2016: screen shot of Netflix application showing on Asus Zenfone 2 mobile phone. Netflix is a global provider of streaming movies and TV series.
Chiang Mai, Thailand - March 22, 2016: screen shot of Netflix application showing on Asus Zenfone 2 mobile phone. Netflix is a global provider of streaming movies and TV series.

Still, the analyst insisted a new password strategy has to be carefully implemented. Netflix "doesn't want to upset its core customers — mainly, family users," he said.

"Hopefully they can figure out something to track the real abusers, but this isn't rocket science. There’s always been a solution to this, but I was surprised it took them this long to get around to it...I thought it was overdue," he added.

Netflix Co-Founder Marc Randolph previously weighed in on the password debate, explaining a similar sentiment to Yahoo Finance.

"You don’t want to put in place barriers that impede people that are trying to do the right thing," Randolph said at the time.

"I don’t think we’re talking about people coming into your apartment and putting you up against the wall and saying show us your credentials. I mean we’re looking at broad cases of fraud, broad cases of flagrant abuse," he continued.

But will a Netflix crackdown convince disgruntled users to flock to other streamers? Maybe...but probably not, Amobi said.

Only "a small percentage of people would be affected by this password sharing, so it's not going to provide a very large pool for other competitors to tap into," he explained.

"Right now, Netflix is on cruise control and has a pretty good base, so it might make sense as to why now is the right time to try something like this," he added.

Netflix's international presence has been impressive, with over 203 million global subscribers, and the company's expectations to be free cash flow positive as early as this year.

Alexandra is a Producer & Entertainment Correspondent at Yahoo Finance. Follow her on Twitter @alliecanal8193

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