The Subscription Model: Down but Not Out
Just as manufacturing organizations are once again adopting a subscription model as a means of pricing product-service packages marketed as solutions, it appears that Internet-based businesses are abandoning it, instead giving away everything from information to music in order to sell advertising. As questions are being raised about the ability of telephone service providers, newspapers, and others to sell subscriptions in the future, I recently asked readers what the future of this wonderful Twentieth Century revenue generator might be.
Richard Feder maintains that the subscription model will gain momentum on the Internet as the memory of free service fades and the utility of new service increases.
The response gives hope for those hoping to utilize the subscription model in the future.
"Down but not out" was the verdict of Jonathan Robertson, who went on to say, "The model isn't working for phone and cable companies, not because the model is bad, and not because they aren't providing value ... but ... the implementation at the phone companies is geared around giving more value to new customers than to existing customers. Any company pursuing the subscription model by taking its customers for granted should be pursuing another model."
Another view is that Internet companies will return to the subscription model given their signal lack of success in supporting themselves solely with advertising. Claiming that the advertising model "went bust," one respondent concludes that the "'free' connotation to the Internet is eroding away slowly."
Richard Feder maintains that the subscription model will gain momentum on the Internet as the memory of free service fades and the utility of new service increases. As he puts it, "Value to the subscriber base will increase as the frame of reference in which the subscriber determines value switches away from prior cost." He also suggests that positioning a new service in the prospect's mind as a "free trial subscription" can facilitate the transition.
Is this a case in which the Internet economy is out of step with more traditional business practice? Or are we seeing an irreversible trend in some industries away from the subscription model, in part because of Internet-facilitated competition? What do you think?
The subscription model has served as a wonderful revenue generator through the years for many companies in the media and communications industries. Organizations have built hard-to-beat revenue streams around it, enabling them to make long-range plans and even enjoy substantial "float" from advance payment for subscriptions.
Companies abandon the subscription model at their risk. Take the case of Xerox, for example. Many would argue that the company began its slippery slide toward obscurity when it ended the practice of leasing all or most of its equipment, an arrangement under which it charged a royalty for equipment usage, as I mentioned in an earlier column "Can You Hard-Wire Performance?" in this series. The model is so attractive that a number of "industrial" firms are adopting it, as shown by IBM's increasing emphasis on service contracts and GE's exit from the jet engine business and entry into the "thrust service" business, guaranteeing the on-demand delivery of various levels of power to jet aircraft. The subscription model, by tying a company's success to its ability to preserve its relationships with customers and the value of their lifetime revenue streams, can provide a strong incentive for continued product and service excellence.
At the same time that former manufacturing enterprises are adopting the subscription model, it appears that media and communications industries are questioning their use of it. We are told, for example, that standard telephone service is migrating toward becoming a free service, becoming a foundation instead for the sale of other information services. At least one New York daily newspaper has begun giving away its afternoon edition, relying instead on the advertising revenues it produces. Questions have been raised about whether Napster users will be willing to pay a reasonable subscription fee for the use of the service after having been treated to its free use for many months. And an outcry has arisen over the $9.95 annual charge proposed for access to "out of market" radio broadcasts over the Internet. In fact, some have raised the question about whether, having enjoyed free digitized media and communications services, we have spoiled the revenue models for certain of these services.
Has the subscription model's time come and gone? Does it require so much time, effort, and cost to build a business around a subscription model that it's become impractical for this purpose? Or was it just that the "get big fast" strategy didn't allow time for the use of the model and that we will get back to it now that sanity has returned to the marketplace in the post dot.com era? Or will the subscription model become attractive only to those organizations that have already built a large customer following and thus might be converted more easily and economically to a subscription basis? What do you think?