Apple’s entry into the subscription market later this year will fire a broadside across the freemium model. But there are not many companies that can do what Apple can. Every product and service needs to acquire customers and usually that entails advertising and marketing. If what you are selling is a relatively nuanced proposition, and music subscriptions are exactly that, then you are going to need to spend a lot of time and money building the awareness and understanding of the product. That typically either means a big ad budget or having a captive audience to talk to directly without the marketing middleman. For freemium services that is the free tier. For Apple that is the installed base of device owners. It is all well and good for Apple to crusade against free in its entirety because that also happens to make it increasingly difficult for anyone else to make the subscription model work. As I argued in my previous post there is a need for a rethink of free, to ensure that it acts as an acquisition funnel for subscriptions not as a replacement for them. But there is another part of the puzzle that needs solving too: the subscription model itself. If freemium is on borrowed time, a solution is needed that the entire market can work with, not just Apple. Pay As You Go (PAYG) is part of the answer.
Music Subscriptions Cap ARPU
Currently the music industry is trying to migrate all of its paying customers to subscriptions. The theory is that this should increase the Average Spend Per User (ARPU) to 9.99 but as MIDiA’s research revealed, thus far it appears to be doing a better job of reducing the ARPU of the most valuable. Thus we have a worst of both worlds scenario in which the ARPU of the most valuable customers is capped (something no other media industry does) and the lower value customers aren’t offered enough options to get on the spending ladder.
When I wrote back in October that it was time for a pricing reset I pointed to three things that need to happen:
- More price tier differentiation
- Reduce the main $9.99 price point to $7.99
- Introduce PAYG / Top Ups
The good news is that we’re beginning to see some movement on all three counts, including Apple poised to tick off the second item later this year when it launches its subscription offering.
The Return Of The Day Pass
Last week Pandora announced that it was introducing a $0.99 day pass to its ad free subscription offering. The idea isn’t new, Spotify had a day pass in its earlier days, but the timing is now right for a reassessment of the tactic. Most people are not in the habit of paying for music on a monthly basis and most do not spend anything close to 9.99 a month. Little surprise then that only 10% of consumers are interested in a 9.99 subscription. But PAYG pricing interest, while still relatively modest, is the clearly the pricing that has strongest appeal (see figure). PAYG pricing allows consumers to ‘suck it and see’ to try out. It is what the mobile phone business needed to kick start cellular subscriptions and it is what the music industry needs too. And done right PAYG can even uncap ARPU by allowing customers to spend more than they would on a monthly plan, something that happens frequently among pre-pay mobile phone customers.
Currently there is only a handful of companies pioneering this approach, including the MusicQubed powered MTV Trax’s ‘Play As You Go’ model and Psonar’s ‘Pay Per Play’ offering. It should only be a matter of time before the big streaming services start experimenting with a la carte pricing but they will have to tread carefully to ensure they do not cannibalize the spending of their 9.99 customers. At an industry level though the case is clear and it is one that other media industries are already heeding. In the TV industry services like Netflix are empowering cable and satellite TV subscribers to cancel or reduce their subscriptions. Consequently TV companies are busy experimenting with unbundling their subscription offerings to meet the needs of their newly empowered customers. The most interesting example for the music industry is Sky’s Now TV in the UK which offers its core programming with no monthly contract and enables users to simply add on extra content such as and ‘entertainment pass’ or a ‘sports pass’ as one off payments.
The future of music consumption is clearly going to be on demand but 9.99 subscriptions are just one part of the mix. PAYG pricing will be crucial to ensuring that streaming can break out of its early adopter beachhead.
Hmm.. I don’t have as much faith in the PAYG model as you do, Mark. One of the benefits of the subscription model is asking the customer to make a decision once and then letting that decision ride…with a PAYG model, you must repeatedly convince a customer to buy your product over and over again.
The main problem with the subscription model is it’s pricing. Consumers are anchored at $8 for streaming content with Hulu and Netflix. Consumers also place a higher value on movies and television shows than they do music. So consumers are anchored at $8 for premium, higher value content, and the music industry is coming along and saying the consumer should pay 20% more for music content that has less value to them – content, BTW, that can be streamed on demand via YouTube or as channels via the other services.
The pricing really needs to be around $4-$5 a month which is in line with the perceived value and the established price anchoring. Now, will the music biz make money at a 50% reduction in subscriptions? Who knows? But I think that’s where the market is at.
Perhaps the training we are alll getting in In-App purchases . . . with premium value tiers . . . is more of a model that might work, with VIP access to additional material.
iamschonne – agree on the importance of lowering pricing, which was item number one on my industry pricing ‘to do’ list back in October. And yes, PAYG removes the predictability but there has to be a realistic understanding of the likely spending of lower value consumers. Taking the Netflix example: Netflix stopped reporting churn because so many people were opting in and out of their service. Now few would question the achievements of Netflix but that success is based upon a customer base that does not get locked into a recurring payment for long periods of time. e.g. when they’ve watched all of House of Cards they cancel until there’s something new they want to watch. These are the realities of the empowered digital consumer. You have to meet them on their turf, on their terms.
Gigi – agree totally about PAYG top up for premium subs – this is something I outlined in this report
I support the PAYG option. There is a potential market sector of people (myself included) who would like to stream, say, up to 20 albums per month, but wouldn’t want to commit to pay a full £10 (or $10, etc) every month for the opportunity to do so. With a PAYG model they might well be prepared to pay more per stream.
The mechanics of a PAYG system need to be worked on. I suggest one option would be to require a modest initial minimum deposit, to be drawn down as and when the service is used. For example, the minimum deposit might be $10, which would last longer than a month for a light user. The user might be given the choice of opting into automatic ‘topping up’ to save the nuisance of actively renewing the deposit when it runs out. It would be important to show the user clearly how much they are paying at every stage.
Price comparisons with film streaming services are dubious. No film service has anything close to the comprehensive content of the music services. If they did, they would have to charge substantially more than they do now.
I am more doubtful about lowering the price of ‘all-you-can-eat’ subscriptions. This would only increase revenue if the increase in subscribers more than offsets the reduction in income per subscriber, i.e. if demand for paid music streaming services is price-elastic. I don’t see any reason to think that it is.
Regardless of the mechanics of the pricing system, it will be ineffective unless the freemium services give users more incentives to switch from ‘free’. Simply saying ‘you can avoid the ads by paying’ is not sufficient, because there are not that many ads anyway.
PAYG can work. Create something like a ‘Weekend Music Pass’ or a ‘Saturday Evening Pass’ – maybe discount it on a monthly or annual basis. Possibly build in temporary entry through a concert ticket. This is also exactly the way to market around a Global Release
Date – a Friday Pass. If there is a perceived difference between the value of music and film ( and clearly there is and perception, after all, is reality!) then the trick will be to tap into how music consumers act differently to movie-goers. Follow that behaviour and monetise it. Make people feel they are getting value and what they want WHEN they want it.
Hi Jonathan – great points, and yes, I agree that the weekend pass looks like a clear value proposition. What the market needs is a number of services testing different models. There are three key ways to productise PAYG music:
1 – Time based (e.g. weekend pass)
2 – Play based (e.g. penny a stream)
3 – Content based (e.g. rock pass)
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David — you mention the mechanics of the PAYG model. That’s exactly what we’re doing at RepX (a streaming marketplace – that’s right, free market, no fixed prices). But we had to get creative in designing the payments so that they’re clear but non-disruptive. The low prices help as well; we don’t really think about purchases as low as a few pennies, we just purchase if we want it. We predict that most streams will be priced around 1-4 cents.
And we’re also doubtful about lowering the prices of unlimited streaming subscriptions, like on Spotify. The business model they use is bad and adjusting the price isn’t the solution, switching models is. For instance, the paid subs are used to subsidize all plays, from all (free and paid) users. So if I pay $9.99 in order to listen to one small, niche indie artist on Spotify, that artist may get only a few quarters from me and the rest of my payment goes to the mainstream artists.
Direct subscriptions are a better solution, I think. Rather than Spotifys all-or-nothing model, we like direct to artist subscriptions – so rather than a lump payment to the service, you subscribe directly to the artists you actually listen to the most. Again, prices and subscription packages are chosen by the artists.
And, of course, you’re right about that “something extra” necessary to draw people over from free to paid. As sites like Bandcamp and Patreon have demonstrated nicely, that extra is all about the artists, experiences, and interactions.
We’re just starting to give private demos; we’ll be opening RepX to the public soon though. Feel free to contact us if you want to see your ideas in action; we’d be delighted to talk and get your feedback.
IMHO, a big reason for the excitement in the music industry is the model – i.e. subscription / SaaS. the business/investment community largely believes that recurring revenues/ongoing subscription is the panache for all business problems. To move away from that kind of a widely accepted (rather, respected) model into a PAYG model is going to take a lot of convincing across the board. Please note – I am not saying good or bad; I am just saying it will take an effort. An interesting space to watch out for…surely
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