Millennials are going to extreme lengths to share streaming passwords, and companies are missing out on millions

Key Points
  • An estimated 35 percent of millennials share passwords for streaming services. That's compared with 19 percent of Generation X subscribers and 13 percent of Baby Boomers.
  • It creates a unique problem for the services that want to get content in front of the addressable market, but are losing massive amounts of money. 
  • The biggest threat is still aging into the space.
Gabby Jones | Bloomberg | Getty Images

Streaming services such as Netflix, Hulu and Amazon are increasingly fighting for eyes — upping content spends and rounding out studios. But industry leaders are fighting a different battle for dollars with their youngest viewers.

Streaming subscribers are sharing passwords and skirting systems in increasing numbers, creating an increasingly expensive problem for streaming services. Getting content in front of the addressable market can help to convert potential customers and inflate marketable metrics. But as younger users grow up used to accessing streaming services for free, the companies have to consider when and where to draw the line on password sharing.

"The cat is out of the bag," said Jill Rosengard Hill, executive president at media research firm Magid, in an interview with CNBC. "I wish I had a solution, because it's really hurting the business model and monetization of these premium high value services."

Hill and Magid said 35 percent of millennials share passwords for streaming services. That's compared with 19 percent of Generation X subscribers and 13 percent of Baby Boomers. Take those password-sharing rates, the tens of millions of paying subscribers for various services and the monthly subscription cost of a service like Netflix, and that can add up to hundreds of millions of dollars in potential revenue that streaming companies aren't booking.

Media experts struggle to pinpoint an exact cost, and Netflix and HBO executives have gone on record to dispel concerns. Netflix CEO Reed Hastings said in 2016 password sharing "hasn't been a problem" and could convince new users to buy in. HBO CEO Richard Pleper said something similar in 2014, saying, "It's not that we're ignoring it, and we're looking at different ways to affect password sharing. I'm simply telling you: It's not a fundamental problem."

But experts agree the problem is worsening.

One 20-something Twitter user told CNBC recently she consistently signs in with the HBO GO login of a one-night stand she met in 2013, because he left his credentials saved on her browser.

A CNBC coworker said she continued to use the Netflix password of a guy she had been dating even after he added a user profile to his account for the new woman in his life.

Another person, who asked for anonymity, told CNBC she stopped using credentials her boyfriend gave her, after finding out they belonged to someone the boyfriend knew in high school who had died.

"Millennials in particular want ease of access and ease of use on their dime at their convenience," Hill said. "They're embracing it — the ability to customize and curate their video portfolio or their video access."

The kids don't want to pay

But the biggest threat is still aging into the space. A demographic Magid calls post-millennials, users roughly 21 and younger, report sharing passwords at a rate of 42 percent.

Those youngest users are more likely to have first gained access through family accounts and to remain on a parent's plan for free into adulthood.

It's not that different from staying on the family mobile phone plan into early adulthood, Hill said, or claiming a parent's health insurance until 26. But even mobile phone plans charge extra per family member, and health insurers can verify a child's age and cut off access.

The barriers to logging in and streaming premium content from multiple devices is much lower.

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"We do believe that access to content creates perceived value of that content and will lead to a higher willingness to pay," Hill said. But, "if the content is something they value, they're going to find a way to access it."

Users 21 and younger are also more likely to share passwords among friends than older generations, Hill said. They consider paying for one service as having paid into the ecosystem.

And if I've bought in, why not spread the wealth?

"Sharing can be extremely desirable, especially if there are no explicit costs," said Sudeep Bhatia, a professor of psychology and marketing at the University of Pennsylvania.

"Giving my friend my password is unlikely to influence my own viewing experience, but it's likely to create a stronger bond between the two of us," Bhatia said. "By sharing my password I am giving something to my friend. This triggers reciprocity motivations and strengthens our relationship."

As for why freeloaders cling onto an ex's login: They've already established they can get access for free.

"Paying for his or her own subscription feels like a loss of $10 with no corresponding gain," Bhatia said.

Crafty users don't lose the $10, but companies do.

The terms and conditions of all the major streaming services note access to content is for personal use and not to be shared with others. But, the contracts note, if users do share access then they're responsible for the actions of that third party. And if you are sharing, then the terms insist you keep it within the set limit of simultaneous streams. And if that limit of simultaneous streams is too restricting, well, you can pay a few extra dollars to raise it.

It's those kinds of caveats that demonstrate the companies' unwillingness to police inappropriate sharing, said Daniel McCarthy, a marketing professor at Emory University.

"As we move away from an advertising-only revenue model towards people paying for subcriptions more, it has to carry with it the rise of sharing," McCarthy told CNBC in an interview. "Companies like Hulu, they are under pressure right now because they are losing a lot of money" from general operations.

Hulu loses in the neighborhood of $1.5 billion a year, according to recent financial reports by its major stakeholders.

There's a positive spin to be put on password-sharing as a customer retention strategy, McCarthy said. It's harder for users to cancel the subscription if it would pull the plug for friends or roommates too.

Companies also face a certain level of risk in cracking down on sharing: acting on false positives, or losing out to services that are more amenable to groups.

"There's errors of omission and errors of commission. The errors of omission is what's happening now — they're not really policing who's sharing with who," McCarthy said. "The problem with the error of commission (in policing inappropriate sharing) is it comes at much higher cost."

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