Sites Seeing Varied Success With Subscription Model

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Article ImageWeb users are showing a willingness to pay for content through subscriptions, but publishers and apps are seeing mixed results with premium tiers, according to a March report from BI Intelligence that explores categories increasingly relying on recurring payments to monetize content. The report finds that while some companies use a purely subscription-based model, such as Netflix, many others employ a "freemium" plan. Under this structure, all users gain basic access to content-which is often supported by ads-but can pay to upgrade the experience, perhaps unlocking certain features or accessing an ad-free version. 

The percentage of subscribers within a userbase varies greatly across and within categories. For instance, the researchers estimate that 25% of those who listen to the music streaming service Spotify are subscribers, compared with just 5% of the listeners of music site Pandora. Likewise, while 21% of users of the ad-free messaging app WhatsApp Messanger subscribe, the researchers estimate only 2% of LinkedIn networkers do the same.

The category currently having the most luck with subscriptions is streaming video. The BI researchers estimate that by the end of last year, subscriptions drove 70% of revenue for digital video companies, with ads responsible for the rest.

Contributing to the shift are viewers who want to access television shows and movies via alternatives cheaper than cable TV, the report says. Mark Hoelzel, a research analyst who co-authored the report, expects consumers will see more subscription-based streaming video services. Some will be stand-alone, while others will be part of a bundled cable TV package that might offer a deal (such as 30 channels for $30 a month).

Streaming music services have a different narrative. The BI report estimates the number of paid subscribers to streaming music services will grow 31% from 2014 to 2015. That's growth from a small subscriber base, one the researchers estimate to total 8.7 million in the U.S., based on historical data from the Recording Industry Association of America (RIAA).

Subsequently released data from RIAA put the figure of paid subs even lower, at 7.7 million in 2014. Considering Edison Research estimates that 120 million people in the U.S. listen to online radio weekly, it's clear that people paying for streaming services make up a tiny slice of listeners.

"We think penetration of paid subscription tiers have failed to achieve massive scale because the free ad-supported versions of the leading services-including Pandora internet radio, iTunes Radio, iHeartRadio, and Spotify-already offer deep music libraries," the report says.

Still, Hoelzel says streaming music companies, music industry executives, and musicians all have an incentive to get more people paying for music they hear over the web. "If you look at the overall economics of music, there's been a lot of downward pressure on pricing, and by moving people from ad-based accounts to paid streaming accounts, you can prop those prices up more," he says.

Even a relatively small subscriber audience can reap big rewards for content companies. "Unlike [with] advertising, which is more cyclical, you've got this nice, steady stream of reliable income," says subscription marketing consultant Bill Baird. "So even if it's not an enormous stream, it's consistent." Likewise, subscriptions open the door to ecommerce relationships and the chance to cross-sell other products, he says.

The model has been gaining traction over several years, propelled by three main reasons, says Tarun Agarwal, co-founder and CEO of ThinkApps, an on-demand service for designing and building apps. People have become more comfortable with the idea of online subscriptions, premium services are offering innovative concepts, and consumers are being presented with what they view as better quality content and services, he says.

Subscriptions are generating enough interest that the revenue engine is now the fastest-growing model in the app economy, according to a February report by VisionMobile called "Developer Economics Q1 2015: State of the Developer Nation." To put this in perspective, though, subscriptions will grow from a relatively low base to reach $9 billion in revenues this year. They will be dwarfed by ecommerce sales, which the researchers predict will bring in $300 billion.

Today, 18% of app developers are using subscriptions, the report says, with music and video streaming services reaping the bulk of mobile subscription revenue. SaaS businesses are earning a small but rapidly growing fraction of subscriptions, it adds.

Adopting a subscription model has its particular challenges. "Ad-dependent companies will be extremely hesitant to hide away too many features or content behind a paywall because of the risk of losing audience and ad revenue as they chase subscribers," the BI report states. Another problem is that companies overvalue their own content, Baird says. Not just any content will attract recurring payments. "It needs to be ‘wow' content," he says, the kind of offering that really excites people.

In addition, merely presenting ad-free subscription tiers is often not enough to get people to take the paywall leap. "If Netflix's sole offer was, ‘You can come here, and you can watch content you can watch everywhere else, but we just won't provide you ads,' I really don't think they would have built the business they've built," Hoelzel says. Original content is one of the drivers getting people to open their wallets for Netflix.

Other sites have different enticements for web users such as Alan Henry (the deputy editor at Lifehacker), who subscribes to Hulu, Pandora, and Netflix. Paying for Hulu Plus gives him perks such as immediate access to programs as they air, the chance to see older content he can't see elsewhere, and the ability to watch shows on devices such as his gaming console or smartphone, Henry says.

As for Pandora, the self-described audiophile likes the quality of streaming music available to subscribers and appreciates being able to skip more songs. "Having a Pandora One subscription also means no ads," he says, "which means nothing but sweet music every time I fire it up."  

(Image courtesy of Shutterstock.)