Rethinking the subscription business model
Changing consumer behaviour is seeing the subscription TV streaming model challenged. Rob Mills, head of digital at Affinity asks, is it time to rethink things?
New Year is the perfect time to make new resolutions. Lose weight, quit vaping, save more. To be fair, we do our best to stick to these, but they’re easier said than done. Well, except maybe the ‘save more’ one.
I’m not saying this because saving is easy. I’m saying it because of the way business models have shifted over recent years. Many businesses have shifted from one-off costs to subscription-based models. And amid a cost-of-living crisis, is there anything easier to take off your monthly outgoings than a subscription?
For many of us, most of our outgoings now come in the form of automated payments. Back in the day (the noughties), these payments were mostly reserved for essentials, like bills and rates. But today, if you were to total up all your automated costs, you’re likely to be in for a shock. For example, subscribe to Netflix Premium ($22.99/m), Disney+ ($139.99/y), Apple TV ($9.99/m) and you’ll pay $535.75/year.
UBS predicts that the subscription economy will grow an average annual rate of 18% and reach US$1.5 trillion by 2025. That’s phenomenal growth and explains why subscription companies have far outperformed global equities from an investment standpoint. But is this a bubble?
These growth estimates rely on a prediction that the addressable market is expected to double by 2025. Where does this addressable market increase come from? If you’re in a developed market, it’s probably not from your corner of the planet. You can’t magically double a population.
Search data shows for ‘Lifetime deals’ (access to a product/service for its entire lifespan) have grown 133% over the past two years and 384% in the past five years. Subscriber fatigue has started to settle in.
Is it because we’ve lost sight of what subscriptions are for? The benefit to consumers used to be about providing cash flow and budget flexibility – paying a reasonable amount for endless content, as this Netflix ad from 1999 showed. But when you add multiple subscriptions together, that benefit withers away.
And what have these businesses been left with. Hooked on the desire for more consistent revenue and cash flow, the focus has shifted to become highly reliant on subscriptions. It’s become a key measure of performance. Success for streaming services like Netflix and Disney+ are now so stringently tied to their subscriber numbers that their share price rises and falls based on that number. So much so that it has a heavy influence on their investment into programming – a central component of their future offering.
But investment made based on current subscribers alone may come at the expense of innovation, which is what more mature markets require to stay competitive. Looking inward at retention, profit maximisation and keeping existing subscribers happy, results in lost opportunities for developing new features or products that are attractive to new and different types of users (or those that no longer value the subscription model). We see this time and again in marketing too, where businesses grow when they increase their customer bases, rather than focus on creating more loyal buyers.
Subscription-based technology products are in the more precarious positions. With streaming services, you might stomach a price increase because you believe Umbrella Academy season three might be as good as season one and two. Technology products (or suites) like Adobe Creative Cloud or Microsoft Office365 (which switched to be subscription-only) may find themselves under more scrutiny as people realise they’re not using the new and existing functionality they’re paying increasing amounts for.
This might just be providing a pathway back for ‘Lifetime deal’ businesses. A software company called Affinity (no relation to us) has built their business banking on it. For a one off, reasonable fee, you can own a product that’s essentially like Adobe’s offering without the fancy frills. If you’re a budding designer, hobby photographer or vector artist, you don’t really need features like ‘One-Click Delete and Fill’ or ‘Share for Review’, so why pay $359.88 a year for it when you could pay $109.99 once, forever?
Back to streaming services. $10/month for Netflix used to be considered a fair price for nearly all the world’s content – especially when compared to the old Foxtel subscription fees. It’s now $22.99 a month for the stuff that’s not on Disney+, Paramount+, Amazon Prime, Binge or Stan. Mix in a cost-of-living crisis and you’ll find consumers becoming choosy, switching between services rather than subscribing to all of them at once. Have you seen the Canal+ version of War of the Worlds? It’s fantastic, it’s on SBS On Demand, it’s around 30 hours of entertainment and it’s free. When push comes to shove, do I still need a $22.99/month subscription? Do I even have time for it?
All this competition has created a new behaviour amongst customers. There’s a growing cohort who binge and churn after a month to keep bills down, or (even worse for streaming platforms) take advantage of free trials. It’s not the ‘subscribe and forget’ behaviour the business model is designed to take advantage of. To counter this, Netflix has started a new hybrid ad supported price point. This one is only $6.99 a month. Low enough, Netflix hopes to keep subscriber counts growing and share price high. But the Netflix ad supporting offering in Australia has already bombed, missing its launch projections by 50-70%.
We’re also beginning to see some new retention tactics around bundling. Optus have created SubHub, a service that gives you one place to easily manage your subscriptions – and save up to 10% when you bundle three together. The flipside of this saving is that you’re presumably losing the discount when you cancel too many services. Locking you into keeping at least three at a time.
Foxtel has shifted their messaging too. Last year they were running ads with Sam Neil touting their tech credentials. The classic ‘don’t call us old’ strategy. Their new campaign, launched just last week, is ‘All in one place’. Even though you still require separate subscriptions for Netflix, Disney+ and Amazon Prime, they’re trying to create the perception of a single bundle. Would you cancel one if it meant cancelling all?
OnePass is a bundling service with similar messaging to Foxtel. But there’s an interesting twist, and probably one that matches the financial reality of many Australians today. It covers budget brands such as Kmart, Target, Catch of the Day and Disney+, offering discounts and free shipping on the services that provide it.
Bundling like this does a couple of things. From a behavioural economics standpoint, it reduces the pain of paying. One $50 bill is easier to pay for than four $12.50 ones. It also reduces the number of times we rethink our subscriptions. For example, if we have three subscriptions, we reassess all of them three times a month. If we have one bundle, there’s only the one bill to sit down and have a think about.
But are the bundles good value at all? I consider myself reasonably savvy. I choose to avoid auto-renew for annualised fees (so I can snag renewal deals – including months of free access), I downgrade my phone plan when I’m not using my data and I unsubscribe to the streaming services I don’t use.
So we’re back to where we started. People want budget flexibility – and ironically the model business had put together to solve that problem has become the problem. Is bundling the answer, or will that be doomed to face the cutting block at every household’s budget review? Will the sector continue growing 18% YOY, I’m not so sure.
Being the first quarter of the calendar year, it might be the right time for business to re-evaluate its dependency on subscriptions. I know I am.
Rob Mills is the head of digital at Affinity.
