The world of subscriptions, which has seen tremendous growth in recent years, is undergoing a big shake-up.
Subscription models have become ubiquitous, with access to everything from supper clubs to socks available — for a monthly fee. New offerings continue to emerge, too. Just look at luxury automaker BMW, which recently announced a subscription service for heated seats. (The cars still come with the hardware, but there’s a cost to access the feature, which has drawn some criticism.)
However, media companies that have been relying exclusively on subscriptions are now facing headwinds as the subscription business slows down. Notably, Netflix — the world’s most popular subscription streaming service — lost 200,000 subscribers during 2022’s first quarter alone. That was its first net loss in a decade and one that triggered a round of layoffs — and then another. The news has also sent shockwaves through the media industry at large.
What are the main challenges for subscription-only models today?
No one factor is responsible for the so-called Great Unsubscribe, of which Netflix’s losses are arguably a part. The causes are particularly acute pain points for companies that haven’t diversified revenue streams beyond subscriptions. Here are three of the bigger trends taking a toll on subscriptions:
- Subscriber fatigue: With people at home more during the pandemic, subscriptions boomed, even for certain print products that had been struggling. By now, though, most subscribers are overwhelmed by the sheer number of options available.
Consumers are spending upwards of 40% more than they want to on subscriptions right now, and half say they’ve got too many, according to research from global consultancy Kearney. As a result, increasingly cost-conscious subscribers are getting pickier about the services that they choose to subscribe to. That doesn’t bode well for subscription-only models, which often charge a premium to users in exchange for remaining free of ads.
- Password sharing: For businesses that solely rely on subscriptions, users sharing passwords across their social networks is an especially serious problem, since there’s no ad revenue to fall back on. Streaming services lose $9 billion annually to password sharing.
Making matters worse: there’s no quick-and-easy solution. Netflix has been vocal about the issue, announcing in March that it was going to slap extra fees on subscribers who share passwords with anyone outside their household. The backlash against the announcement was swift, and harsher crackdowns might further alienate subscribers, many of whom may see nothing morally wrong with the practice to begin with.
- Tougher competition: New players are entering the subscription sphere all the time, and existing competitors are making bold moves to expand by investing in original content, among other things. Amazon’s acquisition of Hollywood studio Metro-Goldwyn-Mayer for $8.45 billion for the e-commerce giant’s Prime streaming service is just one example of competition ramping up.
These trends could create a perfect storm for companies that double down on subscription-centric plans — so how are media companies responding?
The rise of the hybrid subscription model
Necessity is the mother of invention. With signs emerging that subscriptions alone may not be enough to support a business, more media companies are shifting to a hybrid model by opening the door to ads.
That’s just what Netflix revealed in April and cemented in July when it announced a partnership with Microsoft that will help the streaming service launch its first ever ad-supported subscription option. Netflix’s latest announcement follows in the footsteps of competitor Disney+, which in March outlined similar ambitions to introduce an ad-supported tier to its subscription-only model. These companies join others that have long taken this approach, including Hulu, Apple TV, and more.
Perhaps most significant about Netflix’s new plan is it comes from a company that has been so unwaveringly ad-free since its inception in 1997. First as a pay-per-rental DVD service, then as a monthly by-mail subscription, and, finally, as a video-on-demand offering, Netflix has shown staunch opposition to displaying ads. “We’ve got a much simpler business model, which is just focused on streaming and customer pleasure,” Netflix CEO Reed Hastings said in 2020.
Adopting a hybrid subscription model lets services like Netflix, Disney+, and others tap into a whole new revenue stream, and that’s not all. Here are two more key benefits:
- More competitive pricing: Netflix has been criticized for charging more than its competitors. “??Like a frog boiling in water, Netflix has been constantly increasing its prices over the years,” writes Forbes contributor Paul Tassi. By introducing ads, media companies can provide cheaper subscription options and begin to expand their subscriber bases once more.
- Increased audience reach: Low-cost (or free) ad-supported services appeal to older demographics, presenting an opportunity for media companies to tap into new audiences. “Boomers grew up on traditional broadcast and pay TV, and they’re comfortable trading their time and attention for entertainment,” according to Deloitte.
What does the future of subscriptions hold?
It’s much too early to say whether Netflix’s gambit will pay off — though the hybrid model certainly looks like it could solve some of the challenges that the streaming service, and others like it, are facing.
For media companies looking to shake up their subscription and ad models, having the right technology is going to be an important determinant of success. Tools like Adpoint, Lineup’s advertising sales software platform, and Amplio, our subscriptions management platform, are examples of the kinds of tech that subscription-first enterprises will need as they roll out ads. The pairing of these two types of tech would allow publishers to analyze that single customer view to better understand when to present subscription offerings and when better revenue could come from ads, thus providing a combined revenue model for success.
By harnessing data, a new generation of tools can help media companies better understand their audiences. The tech can not only help them serve up the most relevant ads — it can also inform which kind of revenue models might work best. Some media companies may even learn that the hybrid model isn’t right for them, as it isn’t for everyone.
Of course, challenges are certain no matter which approach media organizations take to revenue bases. However, if there’s a silver lining it’s that, fundamentally, there’s good reason to believe subscription models like Netflix’s still strongly appeal to audiences in general.
“In our view, it would be a grave mistake to take the Netflix experience as a sign that streaming TV services are on the verge of decline, as some analysts have suggested,” says Peter Fondulas, principal at Hub Entertainment Research, reports TechCrunch. “The lure of buzzworthy exclusive content, and the sheer convenience of on-demand viewing, are two powerful forces that should keep these services growing at least for the near term.”