Password sharing: Are Netflix, HBO missing $500 million by not cracking down?

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(VARIETY) — Netflix, HBO and other Internet video-subscription providers are theoretically leaving megabucks on the table from customers nefariously sharing login info with nonpaying users. So why aren't they aggressively trying to block the millions of freeloaders gorging on "Game of Thrones" or "Orange Is the New Black"?

Illicit password-sharing would appear to be a serious issue for subscription VOD players: The practice will cost the sector upwards of $500 million worldwide in 2015, according to a recent report from research firm Parks Associates.

It's certainly a striking claim. About 6% of U.S. broadband households use an over-the-top video service paid by someone living outside of the household, the firm estimated. Unauthorized password-sharing is most rampant among consumers 18-24, with 20% of OTT users in that age bracket binge-watching on someone else's dime, Parks says. The data is based on a consumer survey of 10,000 U.S. broadband households conducted in Q3 2014.

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But the reason subscription-video services are not moving to actively stamp out password sharing, at least for the time being, is that they don't want to screw up the customer experience — especially as they're in growth mode, adding new subscribers every month.

First, think of it along the lines of the tech-biz maxim "it's not a bug, it's a feature." Netflix and HBO Now are specifically designed for multiple (authorized) members of a household to watch on several different screens at once. Is a college kid piggybacking off mom and dad's Netflix account out of bounds? It's a gray area. But anytime-anyplace multistream capabilities are a core part of why people love SVOD services. And the goal is to encourage as much usage per account as possible, because that drives up the perceived value of the subscription, so such "virtual households" are tolerated.

The real problem is, SVOD providers really can't block unauthorized users if they have a legit password without instituting an additional form of authentication. Netflix and HBO want to make it as easy as possible to watch their streaming services; if they started asking for your mother's maiden name or some other proof you're entitled to the goods, customers would get irritated.

Look, HBO is not going to require a fingerprint scan or Social Security number before you can watch the latest "True Detective" episode. SVOD services could do heavy two-factor authentication for a preset number of devices per account, but again, that would stunt users' ability to stream on any Internet-connected thing with a screen (e.g., from your in-laws' smart TV on Thanksgiving).

That said, Netflix has effectively taken password-sharing into account in its pricing strategy. Since 2013, it has offered a "family plan" with up to four concurrent streams for $11.99 monthly (versus two streams for the standard $8.99 service). Sure, that's designed for families — or, say, four cheapskate buddies who can get Netflix for $3 each. HBO, for both the standalone HBO Now and HBO Go cable add-on services, provides up to three simultaneous streams per account.

Technically, sharing passwords with anyone outside your household violates SVOD providers' terms of service, which specify that access to the services are only for personal use and "nontransferable." (Note that for Hulu, password sharing isn't as much of concern because it provides just a single concurrent stream per account to subs.)

Execs at Netflix and HBO have regularly insisted that password-lending scofflaws are not a big concern. And then there's this: Many password "borrowers" passwords may eventually become paying customers. A 2013 study found that 41% of HBO freeloaders and 33% of Netflix non-subscribers said they'd be willing to pay for their own accounts in the next six months.

To be sure, the industry is closely watching to see if password sharing becomes worse. HBO reserves the right to "change the maximum number of simultaneous streams and/or registered devices per account that you may use at any time, in its sole discretion," according to the cabler's terms of service for HBO Now. Netflix has similar verbiage on its subscriber agreement.

Right now, though, in the scramble for market share, putting up with password-sharing cheaters is a cost of doing business that Netflix and HBO don't have an easy way to solve.

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