The Downside to the Subscription Explosion

I wrote previously about Apple’s embrace of “monthlification” and both the pros and cons of such an approach for Apple and its customers. But the reality is the trend of subscription-based everything goes far beyond Apple and is a dominant one in today’s consumer tech industry. It runs the gamut from subscription content services like Netflix and Spotify to device payment plans from carriers and phone makers to software-as-a-service models to monthly boxes of clothing or other items to membership-based models like Amazon’s Prime service. As consumers, we can benefit greatly from this trend, but there’s also a significant downside to it, which disproportionately affects the less affluent.

Amazon Prime Subscribership by Income

Amazon has a steadily growing number of subscribers in the US. A number of financial analysts and others like Consumer Intelligence Research Partners regularly run surveys to gauge the exact number, which is estimated to be between 30 and 45 million at this point. I ran a survey recently about Amazon Prime and although the main focus was something else, it highlighted an interesting trend about who subscribes to Prime, especially when sorted by income. The chart below shows selected data from the survey, relating to subscriber levels among the US population by annual income:

Amazon Prime subscribers by income

As you can see, there’s a very clear correlation here between income and likelihood to subscribe. Of those who took the survey, almost all of those earning $150,000 or more per year were Prime subscribers, but among those earning $25-50,000 per year, just under a third did. The Prime example highlights a couple of key points about such subscriptions:

  • The less affluent are less likely to be able to make such an annual commitment to a subscription service because the cost is a greater portion of their annual income
  • They are also less likely to be able to commit because such a subscription relies on both a lump sum annual payment and the likelihood that e-commerce orders during the course of the year will be sizable enough to offset the additional cost

Both the size and the lump sum nature of such subscriptions are therefore harder for the less affluent to contemplate than for those with higher incomes.

Lessons from the Wireless Industry

The US wireless industry has its own parallel with this story. The US is somewhat unique globally in that the balance between the two main wireless service structures is very different here from the rest of the world. In most of the world, prepaid services dominate, while postpaid services are the minority. But in the US, the reverse is true, as postpaid services are dominant and prepaid services the distinct minority. The reason is that the major carriers decided early on they preferred the economics of postpaid – higher revenue per user, lower churn, and so on – to prepaid, and resisted efforts to introduce the prepaid model in the US. As such, prepaid was largely left to mobile virtual network operators and second-tier operators for many years.

Once most of those with prime credit had wireless service, though, the industry began to recognize that, if it wanted to expand the market, it needed to embrace prepaid too. But because of the history, prepaid remained largely the province of those with lower incomes and poor credit who couldn’t qualify for postpaid contracts. These customers also preferred the flexibility of being able to shift their spending up and down on a monthly basis according to their needs and their financial situation. But, for a long time, this meant they were squeezed out of the better features and access to more attractive devices that were available to those on higher incomes. This has begun to change in the last few years, as prepaid services have become more attractive, but the divide remains in some respects.

Short-Duration Contracts Help

One thing that helps in all this is shorter contracts, because these remove the obstacle associated with annual or even two-year contracts for those who have lower or unpredictable incomes. As such, Amazon’s recent introduction of monthly pricing for Prime should help alleviate the problem a little and may indeed be aimed at those who can’t afford an annual subscription. In this sense, the move may be seen as analogous to the US wireless industry’s belated embrace of prepaid services, which opened the market to those who had previously been kept out. To the extent subscriptions are available on this month-by-month basis and easily canceled and resumed at will, the problem is alleviated a little.

Companies Should be Sensitive to the Implications of Subscriptions

Even though short-duration contracts can help, they don’t entirely mitigate the effects of income levels on openness to subscriptions. This is especially true for those subscriptions whose value comes from a calculus about the cost of an ongoing subscription versus the costs of buying items individually. As such, companies introducing these models (or even based entirely on them) need to remain aware of the possible negative side effects in terms of exclusion of those on lower or less predictable incomes and ensure they are not alienating customers who might otherwise be interested in their products and services.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

6 thoughts on “The Downside to the Subscription Explosion”

  1. This is not just a tech phenomenon. Everyone wants me to pay a yearly fee—my plumber, HVAC—whoever I may need to call on regularly or in an emergency. It’s getting kind of ridiculous. I make a point to go over my finances every few months and see who I am paying that really does not need to make a yearly fee from me. It’s hard to keep track of sometimes. I have to remember to check back several months on my bank statements since it isn’t always a monthly fee.

    Joe

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