Netflix knows ‘what an advertising subscriber is worth’ in password-sharing crackdown: Analyst

Jason Helfstein, Oppenheimer Managing Director and Head of Internet Research, shares his thoughts on the impact of Netflix's password-sharing crackdown.

Video transcript

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- Netflix users are up in arms, threatening to cancel subscriptions over the streaming giant's account sharing crackdown. Now, a new survey conducted by Jefferies is there showing that 62% of password borrowers would stop using its service. But despite the recent password-sharing headwinds, our next guest remains bullish on the stock. This is Jason Helfstein, managing director and head of internet research at Oppenheimer, who is joining us now.

Jason, thank you. Just your big-picture thoughts-- does this help Netflix? Do they get away with this in the end? Are they able to make this a success?

JASON HELFSTEIN: Absolutely. So they've been A/B testing this in South America. They would not be doing this if they thought they would end up in, you know, a worse revenue situation. The bottom line is there's a massive amount of password sharing, particularly amongst affluent people, let alone a broad part of their range.

So we do think a good chunk of their subscribers will probably pay more to keep certain members of their household or, let's say, their children who no longer live with them, on their plan, or their mother, for example. But, you know, we think this is a net positive. They know what an advertising subscriber is worth. They know what password sharing is worth.

And effectively, if you don't want to pay, you can go to the ad plan. And so I think that's what's gonna happen. You're gonna add more delineation between the tiers that they offer.

- Jason, I think this is gonna be a really bumpy ride with subscribers. Do you think it'd be well received? Do you think there's some numbers here that they're not seeing, people that don't share passwords that might, in fact, drop the service? I'm talking about myself.

JASON HELFSTEIN: They're not raising the price on you, so why would you drop the service?

- Well, when you read these rules, and you hear that when you go out of town, you're gonna need a code, and when your kid goes somewhere, they're gonna need a code, and that type of annoyance, if they don't have extraordinarily sticky content, is going to make you re-evaluate your streamers.

JASON HELFSTEIN: So first of all, I think they do have sticky content--

- Yeah.

JASON HELFSTEIN: --where we're at right now. They're spending more than everybody else in streaming, and they have a profitable business. And given the economic pressure that the media industry is facing-- and you can make an argument the media CEOs are trying to keep their jobs-- getting positive unit economics out of streaming is a priority. So I think we're past the point of competitors flooding the market with unprofitable content, which is what we saw for a good chunk of last year.

So we do think, over the next 12 months, you'll see, I think, Netflix definitely with a competitive content advantage. And I think you saw it even in the last quarter. There was a comment that, actually, what has been talked about is not 100% what they're gonna do.

So I don't think we know the final-- you know, the final, you know, for example, like, will you not be able to keep your college kid on the service, right? You know, it wouldn't surprise me if they come up with a way to make that happen, right, where, like, OK, every 90 days or something, your college kids has to authenticate in, like, some way, shape, or form.

So this is a company that historically has prided itself on very, you know, customer service above all. I mean, they've arguably been the easiest of all streaming services. They've never required any authentication, never limited the number of devices, let you keep the most simple, easily-guessed passwords. And, look, the reality is people have taken advantage of it.

I mean, sharing your Netflix account with 20 other people is probably not what the company had in mind. I think, if people are reasonable and share this with five or six people in their family, I think it's gonna work out.

- If people are reasonable. All right, I want to get to gaming here because we haven't talked much about that. In fact, I haven't talked about that in weeks. Anything new on that front? And how is it looking in terms of their aspirations into the space?

JASON HELFSTEIN: Yeah, I mean, we didn't really get much of an update. It's not something we're focused on. I mean, they do share a little bit of metrics I don't think most people are focused on it.

It's a very longer-term initiative, whether it's using, taking IP of games, creating content, taking content, making games. Given the launch of the ad tier, right now, that is the big initiative for the next two years. And I think gaming, you know, very, very far on the back burner.

- All right. The story of the year, at least to some, ChatGPT-- Google has announced they are just about finished with Bard. Their answer to ChatGPT should be rolling out in a few weeks. How far are they behind? What type of threat is ChatGPT to Google's search business?

JASON HELFSTEIN: Yeah, too bad they couldn't call it Brad. I don't know. We're gonna mispronounce this as companies trying to come up with these different names.

- Right?

JASON HELFSTEIN: But we think it's well-known that Alphabet, you know, effectively has been the leader in AI with papers published. I think in 2017 is when they published the kind of leading paper on big models called-- basically [INAUDIBLE] someone called transformers-- no connection to the animated-- the "Transformers" franchise, but these models that allow you to actively, you know, use very big data to come up with these outputs.

And so they have this data. They're spending a lot of money on it. What they didn't ultimately do is build that front end that allowed you to have that conversational interaction. You know, to use it, you had to effectively be a coder.

So, look, I think ChatGPT caught Alphabet off guard. I think they're recognizing it. And I think this is gonna be the first version of what you see.

I actually think this is an acceleration of their plan. I think the prior idea was that when they hosted their I/O day in May, they would announce a product. So I think they are absolutely fast-forwarding everything they can around AI to ultimately prove to the market that they don't believe they're behind OpenAI or ChatGPT.

- I think the big win here is for consumers. We're gonna be surrounded by tech that is just too incomprehensibly great to comprehend. And, well, let's hope it gets used for the right way. Got to leave it right there. Jason Helfstein, thank you very much.