Why People Pay for Subscription Entertainment Services

Karen Allen
Sep 12, 2016 · 6 min read

I’ve been giving a lot of thought to subscription entertainment services and why people will or won’t pay for them. This is a question we in the digital music space have been grappling with for the better part of the last ten years. Setting aside piracy for the moment and looking purely at sales, we lost physical sales to download sales first. Overall sales were down, but at least people were still paying for whole albums and singles via iTunes. More recently, we’ve been losing downloads to streaming, which is also a revenue-generating model for rightsholders but with strikingly lower overall revenue than downloads. Within streaming, the rate of paying users pales in comparison to the ones using the ad-supported services. It’s imperative that we turn that around.

At the same time, video content services have been trying their hand at paid subscription services. Netflix was the first in, followed by Hulu, Amazon Instant Video, YouTube Red, Qello, and others. Some video services didn’t even bother with charging and are simply ad-supported, such as Baeble, Crackle, Go90, etc. Despite having name brand content, the only ones who seem to have a significant number of paying users are Hulu and Netflix. One could argue also Amazon Instant Video, but that is a benefit for Amazon Prime subscribers, so you can’t assume that people would have subscribed to it solely (indeed, you can now but it’s cheaper to get Prime).

This all seemed understandable. In an internet full of entertainment options, many of them already free, it’s tough to get people to open their wallets.

Then came along livestreaming. Periscope broke the platform open to the masses, but Twitch was in first and making a ton of money for themselves and their users. So much so, they were bought by Amazon in 2015 for $800M. I’ll say that again. A livestream service where people stream whatever they’re doing (in this case playing video games) and people watch and comment and pay for the service in various ways, was sold for $800 million.

This challenges what we know about what compels people to pay for online content and, by extension, what they consider to be content worth paying for. On one end they’re paying for premium TV shows and movies with little complaint (Netflix, Hulu). On the other end, they’re paying for amateur content from amateur broadcasters voluntarily and willingly (Twitch), when even YouTube stars with huge followings are having a hard time getting their fans to pay for content (YouTube Red). Everything in the middle seems to be a slog, even when the content is “premium.”

I started really looking at each of the services, what they offer, their revenue models, and how users are responding to them. I’ve come to some theories about what users are really paying for and what low-earning services are missing.

When People Will Pay for Premium Content

Clearly, Netflix and Hulu have this nailed. They have first mover advantage, but it’s more than that. They both replace an existing behavior and they do it at a far lower rate than the incumbent services. For $8-$12 per month, you can watch almost all the shows you’d normally watch on major networks and cable, on the device of your choice (even your beloved TV). I’ll even throw HBO Now and Showtime into this category since those are both digital subscriptions now.

People pay for premium content when it replaces an existing behavior at a lower price and with equal or greater convenience.

When People Will Pay for Non-Premium Content

I’m talking about livestreaming — the monetized ones like Twitch and YouNow, not the non-monetized ones like Periscope and Facebook Live (that’s a whole other post, but you can see what the differences mean here). Yes, Twitch is hyper-focused on gaming, but willingness to pay is about more than that. First-time web personalities are doing well enough on YouNow (which has no topic focus) to quit their jobs and are not relying on brand endorsements as most web personalities do. It may seem obvious that people would pay $12/month to replace their $100+ cable bill, but it’s a head-turner that they would pay at least that and more to subscribe (and tip and buy emoji) to broadcasts that are only on live a few times a week by people that aren’t known outside of the service.

What they are paying for is personal interaction and community around a niche topic. It’s not just personal interaction (chat rooms) or just community (social media), because no one pays for those. It’s the combination of both and a charismatic broadcaster talking about a relevant topic.

People will pay for non-premium content when they feel they have a highly personal stake in it and are a direct part of it. It’s this direct relationship that makes it worth paying for in their minds. This is when users make the connection between enjoying content and the need to support the creator.

When People Will Not Pay for Premium

There is where most of the subscription industry sits. They have premium, or at least name-recognizable, content and they are either killing themselves trying to get people to pay for it or they are not even bothering and just going with an ad-supported model.

Music does a bit of both. Spotify and Pandora have ad-supported and paid plans and by far have the most users. Tidal and Apple Music are paid only and have less. They all have comprehensive catalogs from all the major and independent labels. They all are fairly intuitive to use and offer playlists and customized recommendations. So why are so few paying? They are replacing an existing behavior, just like Hulu and Netflix. If you’re a music buyer, it’s at a lower price, just like Hulu and Netflix. This should work.

The reason why it doesn’t is that the services are not that different from each other, so they are fairly interchangeable. That spreads the subscriber base around. Add to this that the features of the ad-supported services are similar to the paid ones, so unless you are a rabid music fan, you don’t have much incentive to pay.

With music, people do not pay for premium because they simply don’t have to. If all the music services are just a fat pipe of content with the same songs and roughly the same playlists and personalization features, then choosing the cheapest option (free) makes the most sense. A few ads here and there is not a deal breaker for the average user who is fine with having music programmed for them (most people fall into this category). Even exclusive releases, once thought to be a differentiator, have proven to just irritate fans and labels alike. Music services are next trying exclusive original video shows, and my guess is they won’t be enough to pull paying fans in. (Exclusives work for Hulu and Netflix because they put millions into award-worthy shows with major talent. Music services won’t do this.) The fundamental thing music services are missing is the personal connection made with the user, something livestreaming has proven has value regardless of content quality.

With video, there are innumerable streaming video-on-demand (SVOD) services on Roku, Apple TV, in the app stores, and on websites. They are all about $5/month and niche in topic. Some content is premium (as with TV network apps) but most are simply quality, special interest shows and movies. As these services have found, it’s not enough to have a pipe of content, regardless of how targeted. None of these replace an existing behavior at a far cheaper cost and none of them have a personal connection with their users.

When People Will Not Pay for Non-Premium

This seems like an obvious category. The content isn’t even premium, why would anyone pay? However, the wild success of YouTubers suggests that even non-premium content is worth watching. The creators have large, engaged fan bases and have spun off their own networks. YouTube personalities are such big business that MCNs like Maker and AwesomenessTV have been sold for hundreds of millions of dollars and now are proper media companies and brand marketing behemoths. With that kind of support, shouldn’t fans be willing to support their favorite YouTube stars?

Nope. The fact is that paid services like YouTube Red don’t replace existing behavior at a lower price (like Hulu); in fact it’s trying to turn free content into paid content. That’s hard. It’s even harder when the creators on the paid service are still pumping out content for free elsewhere. There’s no scarcity.

These services also are missing the personal element that this particular demo of viewer craves. YouTube Red is just a pipeline of content, and we’ve established that the content on its own is not enough to get people to pay.

If you have subscription service success stories or your own experiences that contradict my conclusions, please post about them in the comments. I am in a constant state of discovering what makes the internet tick.

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