Thursday, 10 August 2017

Good and Bad Subscriptions

Finally, in this five-part series that just grew like Topsy, let's look at how subscriptions such as Prime work.

First, let’s explain how an honest subscription offer works. At one end is the Financial Times: you can subscribe to it at the same cost as you would pay over the counter, but they offer delivery. If you want online services, you pay for those as well. Very few products can get away with a zero per cent discount, and the FT is one of them.

Then there’s the Cineworld Unlimited card. It’s £210 a year for the basic card, which gets you a regular seat for as many movies as you want, plus discounts on hot dogs, ice cream and popcorn. Given that a ticket costs around £11 now, you’re in profit at the twentieth film. So you need to see two films a month. Every month. If I was in my twenties, I could do that. Now? I doubt they show a film a month I want to see. My guess is that most Unlimited card holders see between fifteen and twenty-five films a year - not counting repeats and the Bollywood audience. Those discounts on the ice cream? I bet they make us buy more. This sort of offer makes money two ways: first, the films left unseen, the people who see fewer than breakeven; and second, that people take Unlimited as a way of seeing more films. They go from, say, ten to, say, twenty.

Then there are magazine subscriptions. Men’s Health offers eleven issues for £33 against a counter cost of £43.89, and that includes delivery. That’s a 25% discount. I bet their research tells them that the the majority of readers buy it between four and nine times a year, and that very few buy it more than that. Marginal costs of production are fairly small - it will be printed in Eastern Europe or China - so the calculation is about the increased revenue from sales plus the increased revenue from advertisers. The math isn’t hard to do, but get it wrong and the publisher loses money.

All of these are honest models. The subscribing customer gets what they would have got over the counter, usually delivered and at a discount to the counter price. The company gets greater sales, and in the case of the Unlimited-style offers, more revenue per customer.

Now let’s talk about Prime and Netflix. How does something get onto Prime? An Amazon buyer is talking with one of the networks. They are going over the autumn releases, and quibbling about discounts for Amazon. Then the buyer says something like “We could ease the discount a little if you could give us something for Prime”. That’s ‘give’ as in beer. Gratis. So the network throws in a handful of straight-to-DVD duds and kids stuff. That’s what appears in the Prime program. For stuff that needs delivery, the "free delivery” comes out of the manufacturer’s end: maybe Amazon promises to optimise where it appears in return. Or whatever else. Netflix does the same. You didn’t think you would get the good stuff free when it still sells in DVD discount stores for £5? Did you?

Ah. But what about House of Cards? Or Orange is the New Black? Sure, great value if you bail out after a month of binge-watching. Doesn’t make the rest of their catalogue any less bargain-basement. With the Netflix / Prime type of subscription service you are not getting the good stuff at a reduced rate, as you are with the magazine or Unlimited type of offer. You’re getting the stuff that studios and networks are willing to let go for free. Or may be promoting.

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