Subscription Surge
The evolution of the subscription economy
—By Alex Wang
“Ready to watch? Enter your email to create or restart your membership,” reads Netflix’s front page. “Want a break from the ads? If you tap now to watch a short video, you’ll receive 30 minutes of ad-free music,” says Spotify. I sit staring at my phone, in disbelief of the multitude of subscriptions I have been almost forced to accumulate. Even when watching YouTube, I long for the era where I could watch any video I wanted, uninterrupted. Today, I cannot watch for more than five minutes without being interrupted by an unskippable thirty-second ad. Almost every product marketed to the general public either requires a recurring payment or a subscription to get rid of the pesky ads that bombard our screens, just like the old days of broadcast TV.
According to a blog on Stax Bill, a cloud-based software platform designed to help businesses manage their subscriptions and billing, 53% of all software revenue was generated from a subscription model in 2022 and 80% of historical vendors are now offering subscription-based business models. Even the gaming industry (primarily Rockstar Games, the makers of the highly anticipated GTA VI) has toyed with charging gamers by the hour as opposed to allowing them to outright own the product. This drastic turn highlights the broader trend of consumer rights taking a backseat as corporations seek bigger profits.
What changed?
The subscription-based model is not a new phenomenon, dating back decades ago with newspapers. However, subscription-based models are now touching every corner of the globe. An article by Forbes states that the biggest factors that have led to the subscription economy are price and convenience. Subscriptions offer a perceived price advantage; instead of a large upfront cost, payments are spread out, which could potentially make them more affordable. Additionally, they offer convenience, with automatic recurring payments and deliveries eliminating the need for recurring purchases. Companies meanwhile have realized that charging 12 payments over 12 months was a stronger business model than a single-time purchase.
The biggest catalyst for an uptick in demand for low prices and convenience was the Covid-19 pandemic. A blog article by the International Monetary Fund (IMF) argues that the lockdown brought about the worst economic downturn since the Great Financial Crisis. Low-income households saw an average decrease of 3.0% in income, and for middle-income households, 2.1% during the lockdown, ravaging their financial stability. With everyone faced with a lockdown, companies sold us price and convenience. And their means of delivering? Subscriptions. Companies dangled a perceived lower-cost lifestyle in our faces.
Subscriptions also offered convenience. Now you can access a wide range of products and services from the comfort of your own home, including meal kit delivery services like HelloFresh, e-commerce services like Amazon Prime, and subscription-based gaming services like Xbox Game Pass. “Now everything is a subscription model. Corporations are selling us choice, you need to choose this over that to get people to believe they have the choice, but the reality is we’re locked into a cycle of payments that limits our freedom,” says University of Michigan alumn Cam Turner, a research coordinator at Maxwell Leadership Foundation who analyzes student behavior with an emphasis on generational studies. Turner references a recent example with Netflix in his explanation.
Recently, Netflix changed their subscription policy so that users on one account can only use their Netflix if they are on their home wifi. This means that those who don’t use Netflix at their house, primarily college students and those who travel for work, are unable to use their Netflix accounts. According to Turner, this maneuver is a double-edged sword where they “attempt to get more people to pay that base subscription” while they also “cut down on the password sharing.” I asked my father if this would lead him to pirating. “I would never intentionally break the law” he stated proudly. And this is the case with many members of the older generations. They will just bear the cost and go on with their lives, particularly if they are not technologically adept. Companies like Netflix are aware of this tendency and understand that their older customer base will be reluctant to cancel subscriptions. However, this sentiment is not widely conveyed across the population as a whole.
Piracy
According to the news website Semafor, “Online piracy is on the rise as viewers suffer “subscription fatigue” from signing up for multiple platforms to watch shows, and as streaming services hike prices and crack down on password sharing.” Visits to piracy sites are up about 12% since 2019 and TV and film piracy cost the US economy about $29 billion a year. One University of Michigan junior admitted to me, “Of course I pirate. I can’t afford all these subscriptions just to watch stuff like the NFL, BIG 10 basketball, or the Yankees. So I just pirate everything. Also because it’s free and there’s really nothing stopping me.” Upon asking several other University of Michigan students, I found they all came to the same conclusion; it’s nearly impossible to juggle student loans, living expenses, and entertainment costs. What used to be paid for by our parents is now our burden, an expense we can hardly afford.
Universities have even recognized this and now allow for free subscriptions to academic-related services. Microsoft Office requires a hefty subscription, but as many classes require this software, you can get the service for free by providing a school email. Unfortunately, that is not the case for all services. Quizlet recently changed its policy to a subscription-based model. What used to be a free service now costs $8 a month for the “luxury” of essentially having online flashcards. In addition, to explore hobbies or potential interests, you also need to finance subscriptions to services like Lightroom, a photo editing software, or Splice, a sample library. What should be products that are a one-time buy, now obligate users to monthly payments.
Pitfalls of subscriptions
While subscribing may initially feel like a bargain by paying less per month, you’re essentially paying that amount repeatedly over an extended period. If you never end your subscription, it could be indefinite. Economists frequently use present value (PV) calculations to determine the price of future payments in today’s money. Using a standard Netflix subscription as an example, the present value of a Netflix subscription is $3,098, a tough pill to swallow. In an interview with Dr. Ed Cho, an Economics professor at the University of Michigan, he noted, “Financing a $3,098 subscription may be incredibly difficult for lower-income households, as credit card companies may charge disproportionately high interest rates based on income level and credit score, causing the $3,098 figure to be understated. The subscription-based model allows for more manageable payments.” If this was how potential customers viewed subscriptions, many would be wise to stray away.
Convenience, while marketed as an advantage of subscriptions, has its limitations. According to findings from C+R Research, 42% of consumers forget about subscriptions and continue to pay for them even when they are no longer using them. Cancellation rates only jump when these consumers are prompted to make a renewal decision. Forgetfulness has boosted revenues from 14% to more than 200% for some companies per research at Stanford and Texas A&M. Additionally, many companies intentionally make it very difficult to cancel subscriptions. Signing up for subscriptions is remarkably easy, but canceling them does not mirror this simplicity.
The future
According to Media Makers Meet, the subscription economy has grown 4x over the last nine years, and this exponential growth is expected to continue. Corporations have realized that subscriptions provide a steady and predictable stream of revenue, and we are noticing a shift toward this model. Outright ownership now seems like a thing of the past. University of Michigan junior Deven Parikh laments, “I’ve got like three subscriptions right now that I barely use. I’ve tried canceling some of them but it’s just too much work.”
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