Zuora Inc.

02/14/2020 | News release | Distributed by Public on 02/14/2020 23:24

From Netflix to Spotify, are we paying too much for our subscriptions?

February 14, 2020

This article was originally published on Telegraph.co.uk by Matthew Field

The UK has a subscription addiction. From coffee beans to TV shows, the nation has become hooked on getting a monthly fix of products and services.

There are boxes for beauty from Glow, meal kits from Hello Fresh, unlimited food delivery on Deliveroo Plus and a £12.99 per month Revolut metal card. Craft beers selected by experts, are on tap for a monthly payment, and a Peloton exercise subscription to burn them off costs £39 per month.

On top of these luxuries, there are the millennial essentials: music and video streaming services like Spotify, Netflix and Amazon Prime add to the monthly direct debits.

According to figures from subscription management platform provider Zuora, Britons spent on average £44.50 per month on subscriptions in 2018. The 45-55 age group spends the most - up to £54 per month.

In 2017, the average person in the UK spent three times more per month on subscription services than the previous year with the figure rising to £56 compared to £18.49.

Today, around nine in 10 UK consumers subscribe to at least one subscription service - and many may not be getting value for their money.

'It's just a way to waste cash if you get it wrong,' says Steve Nowottny of Moneysavingexpert. 'A lot of these businesses are relying on an inertia factor, unless you can really take advantage of offers and free trials. There is a convenience factor, but it would probably always be cheaper if you went to the supermarket.'

According to data from the Money Advice Service, two fifths of people don't use their video streaming subscriptions every day. Consumers also regularly vastly underestimate just how much they are paying for all their subscriptions. A 2016 study of US consumers gave consumers 10 seconds to estimate how much they spent on subscriptions. They guessed $80 (£62). The real average was $237.

Businesses are increasingly capitalising on the money-making potential of subscriptions.

A survey from McKinsey published in 2019 estimates that the subscription box market alone could be worth up to $15bn - even before companies like Amazon are counted for its Prime service.

Some companies noticed this trend early. Spotify, for instance, moved early into the music subscription business, dragging the stalling record industry into the age of apps. It now has 110 million paying subscribers. Netflix launched its streaming service in 2007. It now has more than 167 million paying users worldwide.

This concept is being increasingly replicated. In recent months, giants including Disney, NBC and Apple have all launched subscription services. Newcomers, too, are hoping to break in, like Quibi, the smartphone video streaming app.

Other companies that have ventured into subscriptions include Uber, through its unlimited 'ride pass' and Google's cloud gaming service Stadia. In physical retail, box-based subscription sales have continued to rise.

Whether we are closing in on 'peak subscriptions' is a question puzzling analysts and investors. Disney Plus, the streaming app that features Star Wars spin-off The Mandalorian, seemed to steamroller such fears - bringing on board 28 million subscribers in its first three months.

But there are questions over how far this trend can run. Increasingly, a price war is emerging as rivals attempt to cannibalize each other's services. Apple TV Plus is one example, launching at £4.99 to undercut Netflix and Disney.

And direct to consumer subscription brands, such as subscriber boxes, have struggled with retention.

'A lot of these new direct to consumer companies employ subscription based models and a number of them have had major issues,' says Jeff Wlodarczak. 'I would assume a slowdown in growth.'

While companies like Spotify and Netflix have continued to add subscribers, this has not always been reflected in their share prices. Spotify shares are only up around 3pc on its original 2018 float price. Netflix was one of the biggest earners for investors of the 2010s, its share price is down from a peak in 2018.

Until now, the subscription machine has shown little sign of slowing. According to eMarketer, some 34pc of consumers believed they would be using more subscription services in two years time than they are now. That number was as high as 53pc in China - although spendthrift Britons were lower at 25pc.

Data from Zuora estimates that young people may be driving further growth. Around 73pc of UK millennials responding to a YouGov poll for the company said they expected to add more subscriptions in the next two years.

According to Brian Wieser, an analyst at GroupM, there is still room for consumers to pay more for video streaming, for one thing. 'I don't think we are necessarily at peak subscription when it comes to subscription video on demand,' he says.

'Consumers may shift how they are paying for other sources of entertainment,' he adds, for instance, cutting down on spending on the cinema or DVDs.

But other segments may be hitting their peak sooner. While razor maker Harry's shook up the market for shaving by undercutting rivals with its direct offering, its exit plan was blocked by the US Federal Trade Commission - ending plans that would have seen it merged.

Blue Apron, the US meal box company, has endured perhaps the starkest fall from grace. Since going public in 2017, the New York company has nearly halved in value. It is now only worth $52m down from a $2bn private valuation in 2015.

Criticism has also been reserved for such box delivery companies for their perceived environmental waste, in particular adding to packaging waste.

McKinsey estimates that around 40pc of ecommerce subscribers cancel their subscriptions - with around half ending their payments within six months.

Meal kits suffer the worst churn, with as many as 70pc of consumers signing up for their free meal boxes, before ending their payments early.

'Companies should be careful not to overinvest in free trials or heavy discounts unless these promotional investments have a clear payback,' according to the firm.

Even giant companies attempting to corner new markets for subscriptions have had difficulties. Liz Schimel, the editor of Apple News Plus, Apple's paid-for news service, was reported to have left the service earlier this month after a slow start to the subscription service launched in 2019, according to Bloomberg.

But the bulls are still out for many subscription-based businesses. 'From my perspective, we're far from this idea of 'peak subscription',' says Carl Gold, head of data science at Zuora. One example is the New York Times, which hit five million digital subscribers in January.

Zuora's research says subscriptions are moving beyond technology companies, as people seek to own less 'stuff' and consumers move towards renting and other flexible services. Its research claims as many as 57pc of adults say they want to declutter and own fewer products - the so-called 'Marie Kondo' effect as consumers do away with owning items they never use - and instead switch to subscription apps they never use.

However far subscription services have to run, competition for consumers' spare change is getting fiercer. The more big brands switch to subscriptions, the higher the cost of acquiring and retaining those customers.