Subscription models won’t make digital ecosystems more money

subscription models
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In response to slower growth and Apple’s depredations upon data collection, the digital ecosystems are experimenting with subscription models. But RFM research has long indicated that this is not a particularly viable alternative – and nothing has changed to alter that view.

Meta Platforms is the latest ecosystem that monetizes through advertising to try its hand at subscription. It is offering an $11.99 per month package that offers a verification mark, extra account protection, customer service and improved visibility and reach. This will be available on both the Facebook and the Instagram service, although users will require a separate subscription if they wish to use it on both services.

This looks to me to be targeted at content creators or those that use Facebook and Instagram for marketing their wares rather than regular users who will have little use for the additional features being offered.

This makes sense – RFM research has previously concluded that switching from an advertising model to a subscription model is not a viable option for the large digital ecosystems. This is because all users are not created equal, and some users are far more valuable than others.

The 80:20 rule

The best example of this is the fact that despite having only a small percentage of their users based in the US, both Meta Platforms and Google generate almost half of their revenues there.

Distributions of this nature tend to follow the Pareto distribution which is better known as the 80:20 rule which is that 20% of the users generate 80% of the value. RFM has previously calculated that if Google and Facebook were to switch from advertising to subscription, they would need to charge between $30-40 per month to be certain that they would not lose any revenues.

Google is pretty much the only one I would consider paying for. Consequently, a move from advertising would probably trigger a collapse in the user base which neither can afford.

Twitter and Snap are more viable options, as they would have to charge less than $5 per month. But because their services are used much less, even this might be a stretch. By all accounts, the Twitter Blue program, which is priced at $8 per month, is not faring particularly well – which, again, does not come as a big surprise.

Users are used to ads

Users like monetization by advertising because they tend to think that they are getting something for nothing. In fact, what they are doing is selling some of their privacy in return for a service and becoming the product rather than the customer. The customer is the advertiser who then pays the digital ecosystem to send advertisements in a targeted fashion to its users.

The fact that users prefer this arrangement is evidenced by figures showing that 97% of all users never pay anything to play games on their smartphones. They’re content to consume advertising in order to get access to the game.

Furthermore, one downside for Apple in its war on the advertising business model is that the epicentre of gaming on smartphones has now shifted from iOS to Android due to developer difficulties with monetizing via advertising on iOS.

Subscription models won’t make much difference

The net result is that these moves by the big digital ecosystems to offer subscriptions are really about squeezing more money out of the traffic that they have than a real switch of monetization method. This will be done by offering premium services on top of what is already there rather than switching completely from advertising to subscription.

However, I am not convinced that this is going to make any meaningful difference to the financial performance of any of these companies. So it may be quietly dropped if they turn out to be more trouble than they are worth.

Meta Platforms has rallied strongly and is now discounting better 2023 performance than its guidance indicates, implying that there are more cost cuts on the way. However, I am not inclined to chase this one, but would wait on the off chance that sentiment badly sours once again.

Related article: Wearables market embraces subscription model – but will users pay?

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