Business and Management

Internal assessment
Higher Level

Research question: To what extent did the policy change of password-sharing influence Netflix’s
profitability?

Key Concept: Change

Word count: 1800 words

Session: May 2024
Personal code: lbw454

Declaration of authenticity:
I confirm that this work is all my own and that this is the final version of this written commentary. I have
acknowledged the use of any information collected from secondary sources. All supporting documents are
attached in the appendices. These are contemporary in nature and were written within a maximum of 3 years
prior to submission. All parts in the supporting documents that relate directly to this commentary have been
highlighted. Additional sources have been acknowledged in the Works Cited.

Signed: D.D.
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Table of Contents

Introduction 3

Analysis 4

Porter’s Generic Strategies 4

Liquidity Ratios 6

Sales Forecasting 8

Conclusion 10

Works Cited 12

2
Introduction

Netflix is acknowledged as one of the leading global streaming services (Nickinson, 2023). Boasting an
extensive content library of 3781 movies and 1940 TV shows, the platform offers a wide range of
entertainment options to its subscribers (The Feed, 2023). However, what distinguishes Netflix is its
outward-facing strategy, permitting users to share their passwords- a unique feature not commonly
observed among its competitors, such as in 2017 when the company shared a tweet with the message,
“Love is sharing a password,” encouraging users to freely distribute their account credentials to others.1
This unconventional approach fostered a sense of community and inclusivity among Netflix users,
contributing to an enhanced streaming experience for all parties involved.

However, in 2022, Netflix opted to terminate the practice of password-sharing with the implementation
of a new policy.2 The company cited the involvement of over 100 million individuals globally in
password sharing3 as a factor contributing to insufficient revenue. Consequently, this led to the
cancellation of several TV shows, including notable titles like “Sense 8” and “Haters Back Of” (Peters,
2023). The change in policy elicited dissatisfaction among numerous subscribers, resulting in a
substantial amount of subscription cancellations. Additionally, critics contend that this new policy
change contradicted the company’s previous values as Netflix had previously advocated for password-
sharing, creating a dilemma for customers as it seemed to diverge from the transparency and fairness
that the company had previously emphasized.

Therefore, the focus of this essay on the concept of change, meaning to replace or make something
different, is to assess the impact of the recent password-sharing policy change on Netflix’s profitability,
particularly in terms of customer loyalty and revenue. The evaluation of Netflix’s competitive advantage
will employ a qualitative business tool, Porter’s Generic Strategy, while the examination of the policy’s
effects on company sales will utilize two quantitative methods, Liquidity Ratios and Sales Forecasting.
The research will predominantly draw on secondary sources, including articles, blogs, and Netflix’s
financial statements. The selected supporting documents aim to provide extensive information for the
investigation. However, it is crucial to acknowledge that there is a potential risk of bias when relying on
these sources, which could negatively influence the reliability and credibility of this research.

1 Supporting Document 3
2 Supporting Document 3
3 Supporting Document 2
3
Analysis
Porter’s Generic Strategies
The qualitative tool, Porter’s Generic Strategies, is used to examine the impact of Netflix’s change in
terms of competitive advantage and how that would influence the brand image and sales. First, Netflix
would be placed on the tool and classified as either cost leadership, cost focus, differentiation, or
differentiation focus(Gordon, 2023). By identifying Netflix into a category, we can analyze the
effectiveness of the policy change, and if it has negatively/positively influenced Netflix’s competitive
advantage. However, the limitation of this tool is its emphasis on the impossibility of being “stuck in the
middle” when in reality, firms may implement diversification strategies, making them fit in between
sectors, hence this could result in an inaccurate recommendation and analysis of business objectives
(Team, 2023).

Netflix inc.
*Average price*

*Not Niche
Market*

Fig.1 Porter’s generic strategies (Riley)

Netflix is an MNC that provides an affordable and high-quality streaming service to the mass market
hence lies between Cost Leadership and Differentiation. However, with the initial price of $7, Netflix’s
affordable price is considered average as it lies between the $6-$10 fee charged by other services4,
hence Netflix relies on its differentiation for success, classifying into the Differentiation sector. Aside
from high quality and easy usage, Netflix’s biggest USP is encouraging password-sharing as it tweeted
“Love is sharing a password” 5 which had 100 million people worldwide engaged6. Being classified in

4 Supporting document 5
5 Supporting document 3
6 Supporting document 2
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the Differentiation sector, Netflix’s brand image and success are built upon its USP, however, this policy
change meant Netflix no longer has a definitive USP and a competitive advantage, causing its
customers to consider other streaming services. Furthermore, this change also changed customer
perception from reasonable to outrageous7.

Additionally, the price increase to $8 led many to unsubscribe from Netflix, claiming “they’re insane”
and “greedy” for making us pay more for less8. However, for most, their cancellation was due to Netflix
“breaking an unspoken agreement”9 showing how a negative perception of the brand image could
prompt customers to favor other options. Moreover, the new price and policy had customers resorting to
piracy and illegal streaming10 to stream Netflix's original content, consequently diminishing both
profitability and exclusivity/brand image which is especially hard to rebuild.

Nevertheless, Netflix stated that the new policy would be a “big opportunity” for revenue growth
despite the anticipated bumpy start11. Still classified in the Differentiation sector, this change caused
Netflix to shift its USP from password-sharing to personalization, a simple/easy-to-use interface, and a
wide variety of licensed movies and genres12. Despite the negative customer response, the new policy
and USP test run in Spain, Canada, and New Zealand were reported to be profitable13 showing that
although Netflix eliminated its distinctive USP, its replacement still maintained Netflix’s competitive
advantage and profitability.

To summarize, Netflix’s new policy change has drastically changed customer satisfaction and opinions
on Netflix as a corporation, constituting the many cancellations and attempts at piracy which decreased
Netflix’s sales revenue in the short term. However, as Netflix began to rebuild a new USP, it slowly
regained its competitive advantage and hence began seeing small improvements in revenue. Ultimately,
the change did greatly influence Netflix’s short-term profitability due to customer hysterics,
nevertheless, Netflix could always recover and achieve long-term profitability.

7 Supporting document 1
8 Supporting document 2
9 Supporting document 2
10 Supporting document 2
11 Supporting document 3
12 Supporting document 5
13 Supporting document 1
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Liquidity Ratios

Liquidity ratios are instrumental tools for evaluating Netflix’s policy change on its financial health and
liquidity. One commonly used ratio is the current ratio, which compares Netflix’s current assets to its current
liabilities (Fernando, 2023). A higher current ratio is generally indicative of better short-term financial
strength. Another liquidity ratio is the acid-test ratio, which provides a more stringent measure by excluding
inventory from current assets (Hayes, 2023). These ratios attested to Netflix’s ability to manage its short-
term finances. However, the reliance on liquidity ratios comes with possible drawbacks. The interpretation of
these ratios can be subjective, as the financial health of a company varies across industries, and what is
considered acceptable can differ. Additionally, over-reliance on liquidity ratios alone might not provide a
comprehensive view of a company’s overall financial performance, necessitating careful consideration of
other financial indicators for a more holistic analysis.

Table 1: Calculations for the Liquidity Ratios

2021 2022

Current ratio $8,070,000,000 $9,266,000,000

C u r r e n t A sse t s = 0,9506 = 1,1683
= $8,489,000,000 $7,931,000,000
C u r r e n t L i a bi l i t i es
s t o ck + d eb t ors + c a sh
cr ed i t ors + o ver d r a f t s + sh or t er m l o a n s

Acid-test Ratio $4,045,000,000 $4,628,000,000

C u r r e n t A sse t s − S t o ck = 0,476 = 0,583
$8,489,000,000 $7,931,000,000
C u r r e n t L i a bi l i t i es
Current Ratio 0,9506 1,1683

Acid-test Ratio 0,476 0,583

*Numerical findings (Stock, debtors, cash, overdraft, short-term loans, creditors)14

In both the Current and Acid-test Ratio, the ideal figure should be above 1 as a result below that
indicates liquidity problems with covering liabilities and an increased risk of bankruptcy. The Current
and Acid-test Ratio results provide valuable insights into the impact of Netflix’s policy change on
password sharing on the company’s financial health. In 2021, prior to the policy implementation, the
current ratio was 0.9506, indicating that Netflix faced some challenges in meeting short-term
obligations comfortably. The acid-test ratio was 0.476, suggesting potential difficulties in covering
immediate liabilities without relying on inventory assets.

14 Supporting document 4
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Fast-forwarding to 2022, the year the policy was implemented, we observe positive shifts in both ratios.
The current ratio increased to 1.1683, reflecting an improvement in Netflix’s short-term liquidity and
ability to cover immediate obligations. Similarly, the acid-test ratio rose to 0.583, indicating an
enhanced capacity to meet short-term liabilities without relying on inventory and a decreased possibility
of insolvency.

While these positive changes in liquidity ratios might not be directly attributed to the password-sharing
policy, they do suggest an overall improvement in Netflix’s financial position in 2022. The increase in
liquidity may provide the company with additional financial resources to invest in content, improve user
experience, and enhance its overall profitability as mentioned in the Force Field Analysis above. It’s
important to note that financial metrics are influenced by many internal and external factors, and the
observed improvements may stem from a combination of strategic decisions and market conditions.
Therefore, a comprehensive analysis, considering various financial and operational aspects, would be
necessary to have a more definitive conclusion about the specific impact of the new password-sharing
policy on Netflix’s profitability.

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Sales Forecasting

Sales Forecasting constitutes a quantitative business approach employed to project future sales
outcomes, drawing insights from past performance data (Karp, 2023). Analyzing sales figures for both
preceding and succeeding policy implementations facilitates an assessment of the policy’s influence on
Netflix’s revenue. Nevertheless, a notable drawback of this analytical tool lies in its heavy dependence
on historical data and market assumptions. It falls short in considering other variables, such as consumer
behavior and competitive dynamics, which could significantly impact future sales trajectories.

More precisely, I will utilize a simpler linear regression for scrutinizing the trend line and forecasting its
implications on forthcoming trends. A positive trend line would signify and anticipate an increase in the
data moving forward.

The actual sales revenue data15 is represented by the blue line, and the line of best fit, calculated by the
LinReg option on the TI-84, is shown by the black line. The line of best fit is used to extrapolate the
revenue for Netflix’s 2023 sales revenue. Due to Netflix’s financial accounts for 2023 being currently
unavailable, historical data from 2021 and 2022 will be used to extrapolate the recent 2023 data.

Graph 1. Netflix’s Sales Forecasting

The line of best fit has the equation of y=1,378,000,000x + 7,082,000,000 with a r 2 value of 0.955
meaning that it has a strong positive correlation, suggesting a positive trajectory for Netflix’s sales.

15 Supporting Document 4
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Using this line of best fit, the revenue for 2023 has been extrapolated as seen in Graph 1. and it is
extrapolated that Netflix’s 2023 revenue would increase above 8,3 billion dollars by the fourth quarter.
Further, we can also see the correlation between the loss of subscribers and the revenue as in 2022 Q1,
Netflix had lost 200,000 subscribers worldwide16 and the revenue rate of increase slowed, showing that
this abrupt policy change required customers to adapt to the new policy and how in the short-run, that
would negatively affect the sales. Nevertheless, the overall trend, illustrated by the linear regression and
the actual sales revenue both display a distinct upward trajectory which anticipates an increase in future
sales after the policy implementation, signifying a positive outlook for sales in the coming periods.

To summarize, relying on the extrapolated revenue obtained through the linear regression line, the
policy change influences Netflix’s sales and profitability positively. Both the observed and extrapolated
trend lines suggest a sales increase post-policy implementation and hence testify to the effectiveness of
the anti-password sharing policy in driving sales growth and overall profitability. The consistent trend-
line inclinations, point towards a positive trajectory for future sales, indicating the policy change has
had a beneficial impact on sales and profitability overall. However, this positive outcome is not 100%
certain due to the backward-looking approach of extrapolation as there are external factors such as
inflation that although not considered when extrapolating, would influence the sales forecast.

16 Supporting document 1
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Conclusion

To conclude, the examination conducted in this essay sought to address the research question: To what
extent did the policy change of password sharing impact Netflix’s profitability? The findings indicate a
nuanced impact, entailing both positive and negative aspects.

Concerning the competitive advantage and brand image, the policy change holds the potential to
generate increased revenue, as it is able to maintain a competitive advantage through its personalization,
abundant catalog, and simple interface. These elements collectively restored Netflix’s advantage point,
despite still negatively impacting the short-term profitability, the new USP would create a more
pleasurable user experience and, therefore, would restore and change the brand image and customer
preference in the long-term. Nevertheless, realizing the potential user dissatisfaction, negative effects on
brand image, potential piracy attempts, and betrayal of trust is crucial. Hence, it is imperative for Netflix
to actively address these concerns to avoid future discrepancies.

In terms of sales, the analysis of the sales forecasting and liquidity ratio suggests an optimistic trend. In
the Sales forecast, both the observed and extrapolated trendiness exhibit a positive trajectory, indicating
a probable increase in sales due to the policy change. However, it is crucial to acknowledge the
limitations of sales forecasting, which relies on historical data and market assumptions and may not
encompass all factors influencing future sales. As for the liquidity ratio, it’s noteworthy that the
improvement observed in the current and acid-test ratios from 2021 to 2022 suggests enhanced short-
term liquidity. This improvement could be a contributing factor to the positive sales trend observed in
the analysis, potentially providing Netflix with increased financial resources to invest in content, user
experience, and overall profitability- highlighting the large effect this change has had on Netflix’s
profitability.

Looking through the lens of change, the new policy introduces a dilemma for Netflix’s customers. The
contrast between Netflix’s earlier encouragement of password sharing and the present policy results in
discrepancies among customers causing them to reject Netflix, negatively impacting sales/profitability.
Hence, in light of this change, Netflix needs to implement further customer service changes to combat
their customer’s current rejection of the new policy, constituting a big change to Netflix’s entire
branding.

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In summary, discontinuing password sharing on Netflix has yielded both positive and negative results.
While the policy change could potentially elevate brand image through customized offerings, and an
abundant catalog, associated risks, particularly user dissatisfaction, should be addressed. Netflix’s
commitment to addressing these concerns to restore user trust is crucial to support the positive impact of
the policy change on sales, competitive advantage, brand image, and hence profitability. As an
extension, further exploration through in-depth interviews with Netflix users could provide a more
thorough comprehension of their subjective opinions and experiences regarding the change of policy, to
explore how this change has also changed the average consumer.

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Works Cited
Jeffrey, Joyanne. “Netflix Has Officially Begun Its Password-Sharing Crackdown. What You Need to
Know.” TODAY.com, 24 May 2023, www.today.com/popculture/netflix-officially-begun-
password-sharing-crackdown-need-know-rcna85959. Accessed 4 Mar. 2024.

Kelly, Heather. “Netflix Restricts Password Sharing, Leaving Some Angry and Confused.” Washington
Post, 27 May 2023, www.washingtonpost.com/technology/2023/05/27/netflix-password-
sharing-why-users-mad/. Accessed 4 Mar. 2024.

Mccluskey, Megan. “Netflix’s Password Crackdown Is Coming. Here’s What to Know.” Time, 2 Feb.
2023, time.com/6251148/netflix-password-sharing-crackdown-rules/. Accessed 4 Mar. 2024.

Netflix. “Netflix - Financials - Financial Statements.” Ir.netflix.net, 23 Jan. 2024, ir.netflix.net/

financials/financial-statements/default.aspx. Accessed 4 Mar. 2024.

Jackson, Kourtnee, et al. “Best Streaming Services of 2024.” CNET, 14 Feb. 2024, www.cnet.com/tech/
services-and-software/best-streaming-service/#google_vignette. Accessed 4 Mar. 2024.

Fernando, Jason. “Current Ratio Explained with Formula and Examples.” Investopedia, 25 Mar. 2023,
www.investopedia.com/terms/c/currentratio.asp. Accessed 17 Jan. 2024.

Gordon, Jason. “Porter’s Generic Strategies - Explained.” The Business Professor, LLC, 17 Oct. 2023,
thebusinessprofessor.com/en_US/business-management-amp-operations-strategy-
entrepreneurship-amp-innovation/porters-generic-strategies. Accessed 4 Mar. 2024.

Hailu, Selome. “Every Show Canceled by Netflix in 2023.” Variety, 29 Dec. 2023, variety.com/lists/
netflix-shows-canceled-2023/. Accessed 4 Mar. 2024.

Hayes, Adam. “Ciphering the Acid-Test Ratio.” Investopedia, 26 Mar. 2023, www.investopedia.com/
terms/a/acidtest.asp. Accessed 17 Jan. 2024.

Karp, Ivan. “Sales Forecasting Guide: Definition, Methods, and Examples |

FindMyCRM.” Www.findmycrm.com, 12 Mar. 2023, www.findmycrm.com/blog/sales-
forecasting-guide-definition-methods-and-examples. Accessed 17 Jan. 2024.

Nickinson, Phil. “The 10 Most Popular Streaming Services, Ranked by Subscriber Count.” Digital
Trends, 13 Dec. 2023, www.digitaltrends.com/home-theater/most-popular-streaming-services-
by-subscribers/#:~:text=Netflix%20is%20the%20biggest%20streaming. Accessed 10 Jan.
2024.

Riley, Jiim. “BMT: Porter’s Generic Strategies [Hl Only].” Mr. Dachpian’s MYP Humanities, DP
Economics & DP Business Management Page, dachpian.weebly.com/bmt-porters-generic-
strategies-hl-only.html. Accessed 23 Feb. 2024.

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Team, Digital. “Understanding Porter’s Generic Strategies (Definition and Uses).” Nesta Hong Kong, 6
Feb. 2023, www.nesta.com.hk/understanding-porters-generic-strategies-definition-types-and-
uses/. Accessed 23 Feb. 2024.

The Feed. “55 Percent of Netflix US Comprises Netflix Originals; Currently Streaming over 6,600
Titles.” The Economic Times, 13 July 2023, economictimes.indiatimes.com/news/
international/us/55-percent-of-netflix-us-comprises-netflix-originals-currently-streaming-
over-6600-titles/articleshow/101734313.cms?from=mdr. Accessed 4 Mar. 2024.

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