Subscription Fatigue and Two-Part Tariffs in the Digital Economy

Sometimes, the flat monthly fee just allows you to get your foot in the proverbial door.  You discover that, to do much of anything, you have to pay per-use fees.  Increasingly, online subscription services are moving to this hybrid model of a low monthly fixed fee plus individual charges for content.  Why the evolution away from the all-content-covered subscription model of yesteryear?

Rising Costs of Delivering Quality Content

Consumers’ content demands have substantially increased over the past two decades, with customers wanting everything to be high-definition, updated, and with no buffering or lags.  This has increased fixed tech costs for online subscription companies, which must host many more servers and build elaborate infrastructure.  For better or worse, the Internet has long surpassed the days where lone users could craft intriguing sites and media - everything is now a massive undertaking.

Case Study: Video Games

A generation ago, many computer games were side-scroll, shareware software that could be created by scrappy teams of amateur programmers.  Today, popular video games take years to develop by teams of hundreds of professional programmers.  The cost of making these video game titles, such as the popular Grand Theft Auto entries, require individual fees to recoup.  A customer may purchase a subscription to be able to download games to his or her console, but new titles like Grand Theft Auto VI will certainly require an individual payment.

Case Study: Streaming Entertainment

You can purchase a monthly subscription to a TV-and-video streaming entertainment service, but new releases, especially popular ones, cost an individual fee.  For example, premium access video-on-demand (PVOD) is used by many streaming services to generate additional revenue for new releases.  Thus, the monthly subscription only guarantees subscribers access to the library of “old” content, not recent releases.  As with video games, the rising costs of creating movies is likely responsible for firms’ need for individual-purchase revenue.  Movies and TV episodes created by streaming platforms like Netflix and Hulu now cost just as much, if not more, as similar content created by traditional Hollywood studios.

Effects of Two-Part Subscription Costs on Customers

Obviously, customers are displeased at having to pay additional download or streaming fees to access premium content.  However, many will likely avoid switching providers due to switching costs and knowledge that similar substitutes are also charging individual fees for premium content.  Digital entertainment streamers are an oligopoly market and thus have similar industry standards, meaning that practices and features among firms in the market tend to be similar.  If one major firm is charging for individual premium content, then others will likely follow suit.

Extraction of Consumer Surplus

Charging individual fees for premium content works similar to dynamic pricing to capture more consumer surplus and increase profits.  Instead of charging different prices to individuals based on timing or characteristics that indicate a greater demand, streamers track customer purchases of premium content to determine how much they can charge for which tiers of content.  For example, do enough customers download new video games for $39.99?  Do enough customers stream newly-released movies for $9.99?  Over time, these digital entertainment firms can settle on optimal prices for each tier of content, absorbing most consumer surplus without driving away subscribers.

Long-Run Welfare Implications

Potential for Market Failure

The risk of subscription fatigue increases as customers are subjected to increasing requirements to pay for individual content.  Firms may use subscription bundling to encourage customers to purchase bundles and access more content, such as Disney+ and Hulu bundled together.  For a while, this may give subscribers enough content to remain satisfied, but eventually they will want new, premium content again.  Customers may start to view advertised bundles as misleading due to continued fees for individual premium content.  

Eventually, some may give up on the bundles altogether and start purchasing individual content directly.  This could lead to market failure in the streaming market due to asymmetric information - consumers feel that they are being routinely misled.  They decide that they would rather pay for higher a-la-carte (individual) pricing and download only what they really want rather than pay rising monthly subscription fees for access to libraries of older content.

Creation of New Subscription Tiers

Faced with customers unsubscribing due to subscription fatigue over individual fees for premium content, large streaming firms may spin off additional subscription packages tailored to what customers want.  Some customers may be satisfied with libraries of old content so they can watch rerun “comfort shows” as nostalgia or background noise.  Others may want primarily new premium content.  Thus, individual fee demands may decrease as customers are successfully sorted into new tiers of subscriptions, easing the outrage.  

However, mid-tier customers, who desire a mix of both library content and new releases, will likely still be frustrated by the two-part fees.  To appease these customers, streaming services may include a limited number of premium content views/downloads in the monthly subscription, perhaps after slightly raising the cost of the subscription.  This may successfully appeal to generic subscribers who only occasionally wish to watch a specific new release and be willing to pay an additional $5 per month to get a “free” $9.99 premium content download.  The firm gets additional monthly revenue, and not all subscribers will utilize their “free” premium content each month.

Digital Entertainment Firms Look at Trimming Costs

Unfortunately for firms, creating new subscription tiers for library viewers and new-content viewers may not solve the overall dilemma of subscription fatigue.  To limit the need to raise subscription rates, and charge so much for premium content views/downloads, firms will need to look at methods to cut their production costs.  One method for doing so is to vertically integrate with production companies and contractors to eliminate the profit-seeking of contracted firms.  If Netflix, Hulu, or Amazon own their entire production process, they are not paying profit to subcontractors.  

Improvements in AI technology may reduce special effects costs, potentially reducing the price of video game, TV episode, and movie production significantly.  These cost savings may eliminate the need to raise subscription rates and halt “streamflation.”  Optimistically for consumers, streaming firms may even look to eventually reduce subscription fees in the name of competition, hoping to lure away customers from rival firms.