Are subscription payments enough for streaming services?

Are subscription payments enough for streaming services?

In the beginning of this year, the online music streaming industry hit an important milestone of 100 million paying subscribers. Video streaming reached this mark a little while ago and could be somewhere around 130 to 140 million subscribers (Netflix today has 93 million users, Hulu 12 million and the rest from smaller competitors). In today’s blog post, let’s take a look at what is the current state of the industry and whether payments can accelerate this growth.

One hundred million users is by no means a small accomplishment, but on a global scale the numbers are relatively small. With an estimated 2.1 billion smartphone users, this means only 5% of people are paying for a music or video streaming service. How does it compare to other digital entertainment categories?

According to Slice Intelligence, some 10% of mobile users generate 90% of revenue for mobile games. For a global hit game like Candy Crush Saga that would mean between 50 to 100 million paying users, in just one game. If we add up all the games available to consumers, a significantly bigger amount of people are paying for games than music or video.

How come? While gaming has become more mainstream thanks to mobile games, it is still a niche hobby compared to listening to music and video. I am sure you know at least a few people who don’t play any games. But how many people do you know who don’t listen to music or watch movies at all? It would be logical that if games, music and video are available to all smartphone users, more people would be paying for music and video than games.

One big reason why that hasn’t happened so far is because of a different monetization strategy. Games rely on a freemium model where users can purchase content in small quantities. The full streaming experience (no ads, advanced features) requires an upfront investment in the range of $10. When everything else you get online is for free, many users do not want to pay for a service.

My argument is that streaming services can increase their user base by adopting a parallel pricing strategy to their existing subscription-based payments. Subscription-based access should of course be kept, as it has helped the industry grow to 100 million users. But on top of that, additional one-time payments could help grow the audience even further.

Why? Let’s think of it from the consumer’s perspective. If they are not already paying for a subscription, what would motivate them to make that step? Here are three potential triggers:

  • Music streaming - release of an album by the consumer’s favourite artist
  • Video streaming - release of a new movie by their favourite director
  • Sports streaming - final championship game of their favourite football team

With the existing monetization logic, the user would have to pay ~$10 in order to access this single piece of content; if they are interested in just this specific piece of content, the rest of the library is unwanted or unneeded to them. For reference, the average mobile phone user spends the same amount on all telecommunications services in a month! While these examples create a situation where the user is emotionally more prone to buying the subscription, the ticket price is still too high. The alternative solution? To sell access to that specific piece of content through a one-time payment at a lower cost.

This approach would allow streaming companies to improve their user acquisition and take advantage of album or movie launches and unique sports events. In addition to targeting the market of people who are willing to pay $10 per month, now people who are willing to pay $0.99, $1.99 or $2.99 for a single piece of content can be targeted as well. Different value propositions work differently among consumer segments and more specific user segments can be targeted with the custom pricing.

Another important benefit of having one-time payments available means that streaming companies increase their revenue per stream. In case of a monthly subscriptions, users can play thousands of songs or watch dozens of TV episodes, resulting in a very low revenue per each individual stream. In case of one-time payments made for a specific piece of content, revenue per stream is significantly higher.

Thirdly, the smaller the price a user has to pay for content, the more likely they are to convert. Streaming companies can get a bigger amount of people “on file” with their card or carrier billing information who have chosen to make a small one-time payment. This opens up the possibility of upselling them with the subscription package in the future, in a situation where the checkout flow will be much shorter and conversion rates thus higher compared to new users without their payment data “on file”.

Another key point to bring out is the fact that carrier billing and users in emerging markets are playing an increasingly important role for streaming companies. With lower income and a vast majority of people using prepaid SIM cards, the subscription-only strategy will not work everywhere.

The online streaming industry is still at a nascent stage in its evolution. 95% of smartphone owners are still not paying for a music or video streaming subscription. In order to grow their audience, streaming companies can take a page out of the gaming industry’s playbook and integrate a one-time payment approach in parallel with their existing subscription business.