Why Netflix doesn’t care if you “illegally” share your account with friends

In Michael Heller and James Salzman’s book, Mine!: How the Hidden Rules of Ownership Control Our Lives, they say that streaming video companies like HBO Max do not care that people get one account and share it with friends. This technically violates their terms of service, but in practice, they don’t care because they are hoping for benefits:

  1. Freeloaders will develop an habit/addiction for the product and some freeloaders will grow up and get subscriptions of their own.
  2. The company brand is developing good will that will generate future sales.
  3. Shows are developing more ‘buzz’ which generates more paying customers now.
  4. Less revenues (and eyeballs) for rival companies like Netflix right now.

Another way to look at their acceptance of freeloaders is through the lens of price discrimination. This is deliberately charging a different markup to different customers. Customers with lower elasticity of demand get charged a higher markup than more flexible customers who aren’t going to pay for higher markups anyhow. That allows a company to both soak customers with a higher willingness and/or ability to pay as well as get a little bit of benefit from customers that wouldn’t pay a high price.

Price discriminating companies always charge at least their marginal cost, but for products that have zero marginal cost, it is rational to offer a version for free if that version is complementary with other sales. There is a danger that a free version could cannibalize sales of the profitable version, but free samples are also a potent marketing expenditure that can generate future sales and it is complementary with the primary strategy for the industry. The streaming video industry is growing rapidly and there is a danger that only a few of the biggest companies will survive. So they are in a grow-market-share phase right now. They are all competing for market share and so anything that generates a bigger market share than their rivals is good. If some customers are freeloading on HBO, then that could mean less customers for Netflix and Netfix is probably a bigger a threat for HBO than freeloaders.

Someday the industry will transition to a maximize-current-profits strategy and their price discrimination scheme will change and they will focus more on getting rid of “illegal” account sharing, but right now, it is a win-win to just let it slide.

Posted in Managerial Micro

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