Subscription service finance 101
Several folks have doubted my claim that it's very difficult/impossible for standalone music download subscriptions to make money. I thought I'd get more concrete.
The answer is that it's theoretically possible. It costs around $12/mo/subscriber to run a subscription service. Thus, if you charge $14.99, you're profiting - $3/month yay!
The reality hits in when you consider the twin horses of the subscription apocalypse - TAC and Churn. TAC is total acquisition cost, the amount it costs you to get each new subscriber. This consists of marketing costs, free trial subscription costs, distribution partner bounties, etc... divided by your new additional subscribers. Churn is the % of subscribers you lose each time period (quarter).
For a subscription service to be successful, TAC and/or churn must be very low. An existing music service (I won't name names, but you've heard of them and the numbers are typical) shows the problem. They pay around $150+ per new subscriber in TAC. Thus, at a $3/month profit, they must keep a customer for 4.17 years to break even (and that's without including the time value of the initial $150...).
Fair enough - they're still ok if they keep the users that long. The problem is, this service churns out user at over 40% per quarter! That means on average they keep each user for only 9 months! Thus, they pay $150 to acquire each user and make back $28 in profits. Not a good story.
Now, a non-standalone offering that includes a device is a different story. Your TAC is lower since you acquire customers through (profitable) devices, and your churn is lower since the end to end with a same-vendor device will make the entire thing "stickier".
So, for example, if you don't market the service independently and thus TAC is (say) $30 and churn is a stickier 10% per quarter, you would be keeping customers for 3.75 years/$135 in profit per customer for an overall net profit of $105 (on top of the device profit). A vastly better story.
6 Comments:
Thanks for lesson! One item you didn't get into is the opportunity to cross-sell which Zune can do easily in a end-to-end system. MarketPlace is going to be key to your success. By tieing in XBox, Zune and eventually Media Center to MarketPlace you will be able to keep churn at a minimum.
If I can ask you guys one thing when you eventually add Movies. Please consider offering rental/subscription similiar to blockbuster and netflix.
Example Monthly Rental Subscriptions
$9.99 (4/month) $2.49/movie
$14.99 (8/month) $1.87/movie
$19.99 (12/month) $1.66/movie
$34.99 (24/month) $1.45/movie
$59.99 (Unlimited)
and it would be a great to offer a $7.99 HighDef Upgrade
..continued
After customer has finished viewing the movie don't delete the video file immediately. Instead, when system periodically looks for movies to purge (say after a 15 day grace period) it would be the perfect opportunity to prompt the customer if they want to purchase/store the movie permanently in the customers library.
Dave, Does the $12/month per sub to run the service include payments to the content owners (record companies?). How much per sub per month goes to the record companies. I'm really curious as to how much ends up in the artist's pocket and how a record company determines how much to pay each artist.
I shouldn't be too specific, but I can say the VAST majority of the cost is licensing to the labels and publishers.
David- I'm working on a team project for a marketing class and we're wondering what the basis is for your $30 TAC. Can you give us any insight or point us in the right direction? Any help would be appreciated. Thanks in advance.
$30 TAC is actually absurdly low - estimates run from $50 to $150. TAC is marketing costs / net subscriber ads, and the low additional customers means a huge number. it also includes things like free devices, promotional discounts, COGs on trial subscriptins, etc....
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