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Netflix Seen Cracking Down on Sharing to Bolster Profit

Netflix Inc. (NFLX) has won over consumers and Hollywood with its mix of TV reruns, old movies and original shows, all for $7.99-a-month with liberal policies that let family and friends share one account.

Chief Executive Officer Reed Hastings may now be able to squeeze more profit from his 33.3 million customers by tightening up those policies or boosting prices. As many as 10 million people are watching the online video service without paying, according to Michael Pachter, a Wedbush Securities analyst in Los Angeles.

Netflix’s options include limiting the number of people or computers that could share one account or charging extra, for example, to let a college student in another town use his parents’ account. The company today doesn’t actively restrict the number of PCs, tablets or phones that can use one account or the number of people who can sign in, though it limits each account to playing two video streams simultaneously.

“It’s time to change,” Pachter said in an interview. “They can say they’re cracking down on piracy. They can appeal to fairness. It’s great if the parent has a subscription and the kid watches it in the college dorm.”

Investors will be looking for clues to new revenue opportunities when Los Gatos, California-based Netflix reports first-quarter results after markets close today. The shares have risen 88 percent this year, second-most in the S&P 500 behind Best Buy Co., as profit and subscriber gains beat Wall Street estimates. They rose 6.7 percent to $174.37 at the close in New York, before the results.

Photographer: Jin Lee/Bloomberg

Netflix Inc.'s streaming service and Netflix envelopes. Close

Netflix Inc.'s streaming service and Netflix envelopes.

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Photographer: Jin Lee/Bloomberg

Netflix Inc.'s streaming service and Netflix envelopes.

Sales Help

Tightening up sharing would help sales. A pricing or policy change could boost revenue per subscriber by 5 percent in 2014, accelerate new signups and fatten profit margins, according to Goldman Sachs & Co. analyst Heath Terry.

Hastings, 52, has a number of options, said Pachter, who has an underperform rating on the stock. He could charge extra for access to kids’ programming. The company could also levy $3 each time a user wanted to register more than a limited number of devices per account.

The topic of raising prices is touchy. Netflix lost 800,000 domestic customers in the third quarter of 2011 when it raised the cost of combined streaming and DVD-by-mail service by 60 percent to $15.98 a month from $9.99 previously.

Hastings has said Netflix has no plans to change prices. In January, he said the company still had “a year and a half of probation” left after the 2011 subscriber revolt.

Photographer: Scott Eells/Bloomberg

Netflix today has no restrictions on the number of PCs, tablets or phones that can use one account or the number of people who can sign in, though it limits each account to playing two video streams simultaneously. Close

Netflix today has no restrictions on the number of PCs, tablets or phones that can use... Read More

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Photographer: Scott Eells/Bloomberg

Netflix today has no restrictions on the number of PCs, tablets or phones that can use one account or the number of people who can sign in, though it limits each account to playing two video streams simultaneously.

“It wouldn’t take much to have that issue flare up again or for us to lose trust,” Hastings said.

Family Plans

Under current policy, Netflix lets people stream to two different devices at the same time using one subscription, said Joris Evers, a spokesman. That allows family members or friends to share a single account and watch different programs. He declined to comment on future plans.

The company’s terms of use limits customers to six authorized, Netflix-ready devices. The policy isn’t enforced.

Netflix is considering family accounts that would let people keep individual queues and see personal recommendations, company executives said last May at a JPMorgan Chase & Co. conference. While Netflix hasn’t discussed prices, Hastings suggested families now paying for two accounts might save money.

In general, consumers don’t see sharing accounts as theft, according to John Rose, managing director of the media, technology and telecom practice for Boston Consulting Group in New York. Raising prices on every customer creates a risk in competitive markets where consumers have many choices, he said.

“In the digital world, you don’t want to become the pariah, for people to rise up against you and look elsewhere for their content,” said Rose, a former EMI Group executive who struck digital music deals with Apple Inc. (AAPL)

Subscriber Outlook

Hastings might offer a range of plans, including individual accounts, surcharges for additional users or some combination, Terry, the Goldman analyst, wrote on April 11. He has a neutral rating on the stock.

If Hastings does that, Netflix might reach 53 million domestic subscribers in 2017, Terry estimates. The company could also just raise prices. Goldman estimates average revenue per user will rise 5 percent next year.

“The improving quality of content, better personalization of the service and higher price points from competitors would justify moderately higher prices,” Terry wrote.

Netflix is expected to report its U.S. online subscribers increased by 1.8 million to 29 million from year-end, the average of seven analysts’ estimates compiled by Bloomberg. Analysts project profit rose to 20 cents a share, compared with an 8-cent loss a year earlier, on sales that grew 17 percent to $1.02 billion.

Studio Contracts

The company has been trying to increase consumer loyalty by building a film and television library that stands out from competitors such as Amazon.com Inc. (AMZN), the largest Web retailer, Hulu LLC and Redbox Instant by Verizon.

Hastings has agreed to spend $5.63 billion over the next several years on exclusive content and original programs. He says subscriber gains -- his goal is to reach 90 million U.S. customers in the next two decades -- will pay for such deals.

The exclusive Netflix horror series “Hemlock Grove” became available for viewing on April 19, and the resuscitated show “Arrested Development” premieres on May 26. The original series “House of Cards” was its most-watched program ever.

Hollywood studios that were reluctant to sign exclusive deals with Netflix now welcome its big paychecks amid dwindling DVD sales and the growing popularity of online viewing. Some 59 percent of teens in a recent Piper Jaffray Cos. survey said they expect to get most of their online viewing from Netflix in five years, up from 48 percent a year earlier.

Consumer Clout

“Despite all the bad PR, the mindshare of Netflix seems to be increasing,” said Michael Olson, a Piper Jaffray analyst in Minneapolis who rates the stock neutral. Of 38 analysts who follow the company, 11 say buy, 19 hold and 8 recommend selling.

The company’s original and exclusive content, such as its film deals with Walt Disney Co. (DIS) and DreamWorks Animation SKG Inc. (DWA), give Netflix more clout with consumers than it had in 2011, according to Tony Wible, a Janney Montgomery Scott LLC analyst in Philadelphia. He recommended the stock in January for the first time in six years.

Hastings, in a Facebook post this month, said subscribers since January had streamed 4 billion hours of video. That implies 87 minutes of daily streaming per subscriber, putting Netflix on par with the Disney Channel, the most-watched cable network, said Rich Greenfield, an analyst with BTIG Research.

Netflix shares could be pressured if Hastings resumes a costly international expansion. Investors have been cheered by Hastings’s suggestion that geographic growth will occur at a slower pace to maintain profit, Olson said.

“Depending on what they invest in for content and for international, they can do between $2 in earnings per share, up to $8,” said Olson, who has a buy rating on the stock.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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