How Will Netflix Stop You From Sharing Your Password?

Netflix plans to start cracking down on subscribers in the U.S. who share their password for the streaming service by the end of March. But how exactly would that work?

Initial reports and trials in other countries suggest the effort to deter password-sharing will be relatively gentle in its first iteration, relying on a combination of technology and user conscientiousness to prod serial over-sharers into paying more for the privilege.

Netflix will likely use a person's geographic location, as determined by the IP address of any internet-connected device, to figure out which people count as "household" members who live together, Insider reporter Sarah Saril told CBS News.

"If you're watching on a TV, it'll provide exactly where you are," Saril said. "They only want people in your household, at your address, watching."

Netflix says on its website that the company uses "IP addresses, device IDs, and account activity from devices signed into the Netflix account" to determine which devices are in the same household. 

"People who do not live in your household will need to use their own account to watch Netflix," the site says.

Stricter rules 

Netflix told investors in January that it would roll out more stringent sharing rules by the end of March. More than 100 million households currently share Netflix passwords, the service said. That "undermines our long-term ability to invest in and improve Netflix," the company said in a statement accompanying its latest quarterly results.

It's a major turnaround for a company that six years ago tweeted, "Love is sharing a password." And Netflix executives know there's likely to be backlash.

"This will not be a universally popular move, so there will be current members that are unhappy with this move. We'll see a bit of a cancel reaction to that," Greg Peters, Neflix's recently promoted co-CEO, told investors on a call last week.

Will users leave?

The company tried password limits last year, when it asked members in Chile, Costa Rica and Peru to pay an additional fee to share with non-household members. The effort had mixed results. Tech publication Rest of World called the test "a mess," reporting that the new policy was rolled out inconsistently. Many users were able to avoid the extra charges, while others were prompted to pay more and responded by canceling their accounts, the outlet said. 

Netflix predicted a similar response in the U.S. "From our experience in Latin America, we expect some cancel reaction in each market when we roll out paid sharing," the company told investors, noting that could hurt its viewership in the short term.

The rollout poses a risk to the premier streaming service, said Paul Verna, principal analyst at Insider Intelligence.

"You have to tread very carefully with these things, because you can't upset your customers," Verna told CBS MoneyWatch. "You can't charge a price point where people are going to be horrified and complain that this thing that's been free for so long is suddenly costing a lot of money.

Device verification

One way Netflix could limit the reach of an account is through multi-factor authentication. According to its website, the company might ask devices that log on from an unfamiliar IP address be "verified" before they're allowed to stream. 

"[I]f your account is accessed persistently from a location outside of your household, we may ask you to verify that device before it can be used to watch Netflix," the website says.

To do this, Netflix says it will send a four-digit code to the account's primary email or phone number. The person logging on from a new device will have to enter the code within 15 minutes of logging in. This could be a relatively frequent occurence, Netflix says, noting that "Device verification may be required periodically."

Speaking to investors last month, co-CEO Peters described the company's goal as to "give [users] a little bit of a nudge and to create features that make transitioning to their own account easy and simple."

What's a household?

Netflix could turn off customers if it comes across as too heavy-handed, noted Verna.

"You also have to be sensitive about what you consider a household," he said.

He cited the example of a family whose children go to a sleepaway camp or go away to college, putting them geographically outside their "household." That should be treated differently than a household sharing with a person who's never lived there, he said.

Netflix has said it recognizes that the new policy is a major change for customers, and it has sought to cushion the blow by touting new features aimed at making the transition less painful. That includes letting members see all the devices using an account and making it easy for people to transfer individual profiles into separate accounts. Last fall, the service also introduced a dashboard that lets account users log out of individual devices.

"Tough conversations"

Netflix hasn't revealed the cost of any potential membership fees. However, in trials in Chile, Costa Rica and Peru, sub-memberships increased the monthly cost of an account by one-quarter or one-third, according to Variety. U.S. analysts who track the company expect an added member charge of around $3 to $4 a month, according to Netflix's most recent earnings call with investors.

"This is where these tough conversations come in — who is worth paying an extra fourth of your subscription cost every month?" Saril quipped.

The company's hope is to dramatically increase its paid viewership. Even though Netflix is the leader among streaming services in terms of subscribers, it commands only 8% of TV time in the U.S., executives said on the investor call. 

However, it's walking a fine line between prodding users to pay more and not turning off too many casual viewers. Netflix also says users will not be automatically charged if the system detects too many location streams, nor will accounts be canceled. That's led some observers to question how effective the password crackdown will truly be.

"All signs indicate that the most aggressive Netflix intends to get in the first iteration of the paid-sharing rollout is to keep prodding violators with email reminders and notifications," Todd Spangler wrote in Variety in November.