Subscription Fatigue and Consumer Optimization in Digital Markets

We all like our entertainment, but it can be a significant toll on our pocketbook!  Today, with most entertainment being streaming and subscription-based, there is a bill every month.  If you have Spotify for music, Netflix and HBO Max for movies and television, and XBox Game Pass for video games, you could be spending almost a hundred dollars per month.  While many have praised the streaming resolution as less costly than cable TV from the early 2000s, costs for streaming entertainment are steadily rising.  Stream-flation has many consumers feeling frustrated and lamenting the loss of the “golden age” of streaming when content was cheap.

Subscription Fatigue in Digital Markets

During the “golden age” of early streaming, the handful of platforms had lots of premium content.  As new firms, such as movie studios, entered the market and created their own streaming platforms, original giants like Netflix lost the rights to much of this premium content.  Nowadays, most major studios have their own streaming platforms and have exclusive rights to their own content.  That favorite TV show you could stream on Netflix a decade ago is now only available on a separate platform owned by the show’s creator.   If you want to watch your fave again, you have to subscribe.

Having to subscribe to additional apps and websites to access entertainment that was once conveniently housed on a single site has led to subscription fatigue.  Consumers are not only tired of paying higher fees every year, but also having to remember which platform houses which movie, TV show, music, or video game they want to enjoy.  This subscription fatigue can also include the mental stress of trying to strategically purchase and cancel subscriptions to access desired content while spending less money.

Economics of Subscription Fatigue

Increasing Loss of Longtime Subscribers

Excessive costs of digital subscriptions can lead to consumers cancelling many of these subscriptions.  Many longtime subscribers in Western nations have been cancelling in recent years, with streaming consumer growth largely driven by expansion into new markets.  Although streaming is still experiencing growth, the increased loss of longtime subscribers heralds economic losses in the future if changes do not occur.  Eventually, newer markets will face the same challenges as original markets, such as subscription hikes and increased silo-fication of content.  

Unfortunately for firms and investors, the rapid expansion of high-speed Internet across the globe means that streaming platforms will soon hit full saturation in all markets.  When this occurs, streaming entertainment companies will no longer be able to expand into new markets to continue showing strong customer growth.  At this point, tough decisions regarding productivity and pricing will have to be made to avoid losses from subscription fatigue.  Just as customers in the United States and Britain have been logging off due to rising fees, customers in India and Indonesia will start doing the same.

Creation of Ad-Supporter Tiers

Original streaming was typically ad-free, with a low subscription cost covering unlimited streaming.  To combat subscription fatigue and loss of longtime subscribers, streamers have begun adding lower-cost, ad-supported tiers.  These tiers have kept many customers, at least for now, but may re-introduce cable TV and radio as true substitutes.  Original, ad-free streaming was seen as a revolution away from pesky ads and commercials, so their return in streaming may cause customers to question why they shouldn’t just return to their pre-streaming entertainment.

Bundling Wars

There are lots of streaming platforms today, which may reduce new customer growth due to confusion.  In behavioral economics, the paradox of choice means people are actually less happy and less efficient when given more choices.  Some consumers, even when they have the income to purchase streaming subscriptions, may fail to do so because they cannot decide which ones are most beneficial to them.  To combat this choice fatigue, some streaming firms may create bundles where a single subscription gives access to multiple platforms.

Bundling and Demand Enhancement

The demand determinant of complements in consumption leads to increased demand for any good or service for which more complements are available.  For example, consumers will have increased demand for automobiles the more gas stations and drive-throughs are available in their area.  If you can better use a good thanks to available complements, you will have increased demand for that good.  With streaming entertainment, consumers have increased demand for a bundle that allows them to watch videos and TV, listen to music, or play video games for a single fee.  The bundle is even more attractive if the user can access all bundled services from a single app, allowing them to switch services quickly on a whim.

Bundling and Economies of Scale

A good bundle may draw in proportionally more customers than individual services, enhancing revenue.  Another benefit of bundling can be the cost efficiencies of economies of scale.  As a firm expands, its ability to purchase resources in bulk, including labor, reduces its per-unit costs of production.  If streaming platforms merge, they can operate many features on the infrastructure of only one of the original firms, reducing costs.  Streaming firms can merge to offer large bundles or share capacity on each other’s capital goods - such as computer servers - to create economies of scale.  These economies of scale can be used to cut subscription costs and draw in more customers.

New Tool:  AI and Individual Marketing

A new tool to combat subscription fatigue and customers canceling their subscriptions is individual marketing.  Streaming platforms track the data of all customers on their sites, noting what they stream, when, for how long, and how often.  This data can be compiled, especially using AI, into individual marketing campaigns tailored to each user.  Instead of receiving generic ads, customers are fed ads and commercials designed to be most likely to lead to increased viewing and purchasing.  These AI-enhanced ads can be sold to firms for more money, increasing ad revenue and perhaps allowing streaming firms to reduce subscription fees.  

AI can also feed customers more desirable ads for the streaming service itself to convince them to upgrade to higher tiers of service.  After years of streaming, the firm knows exactly what each customer likes and can tempt them with upgrades that allow access to that type of content - but premium.  Lured by AI, customers who were considering cancelling their subscriptions may linger on, or even upgrade.  Customers will feel increased satisfaction with the platform thanks to its AI and increase their usage.  This can boost revenue, but raises questions about ethics and the potential for AI optimization to lead to addiction.