The Rise of Paid Services: The End of Freemium Model and Why Everyone is Willing to Pay
THE STATE OF FREEMIUM:
Ah, freemium. The business model that has dominated the 21st century. Whether you’re trying to consume media, trade stocks, or stream music, you can do it all for free. You just need an internet connection. This was one of the biggest revolutions brought on by the internet. It made information, education, and building businesses more accessible than ever before. But more recently, there seems to be a trend against free services. YouTube has managed to garner 80 million paid subscribers. Apple Music has managed to garner 78 million paid subscribers. And even ProtonMail, a premium email client with paid tiers, has managed to garner 70 million users. Each and every one of these services has a free alternative. Instead of YouTube premium, you can just watch YouTube with ads.
Instead of Apple Music, you can just stream free Spotify. And instead of ProtonMail, you can use virtually any other email client. But despite this, more and more people are choosing to pay for these traditionally free services. In fact, it’s almost become sort of a status symbol. Oh you still watch ads on YouTube, what a peasant? This mentality is especially prominent amongst the younger generation of high schoolers and young adults. But it goes beyond just superficial looks. The reality is that there is no such thing as a free service. If you’re not paying with cash, you’re paying with attention, time, and/or privacy. And as people become aware of this reality, the more willing they are to reclaim their attention, time, and privacy using cash. Companies are even starting to use this as a pitch as to why users should pay for a service. ProtonMail for example proudly claims “Privacy isn’t free. Here’s why that’s a good thing.”
But, while I agree that reclaiming privacy is a definitely good thing for customers, it’s not exactly a great thing for businesses. And I’m not talking about Google or Facebook. This is great for them. If they can just directly monetize their billions of users, they no longer have to be the bad guy that’s collecting and selling data. The companies that this is bad for are the ones that are trying to advertise on these platforms. Suddenly, everyone who’s well off or even middle class are impossible to reach making it exponentially harder to craft successful ad campaigns. This could lead to a pretty scary future for YouTube as advertisers become more aggressive. So, join me as we take a look at why free services are falling out of favor and what this means for the freemium economy.
NEVER WORTH IT:
The bottomline is that free services are never ever worth it. While it’s great that these companies are able to offer their amazing services for free, if you have to means to pay for the ad free version or the private version or whatever, you should always take it. The reason is that free services are terrible at monetizing users. Yes, platforms like Google and Facebook do make a crap ton of money but that’s just because they have mind bending levels of scale. On an individual basis, these platforms make next to nothing.
And it’s no wonder why. There’s simply so much friction when it comes to monetizing a free use base. Take YouTube for example. Let’s say that you watch about 1 hour of YouTube per day. Nowadays, you usually get an ad once every 3 minutes and each ad is about 10 seconds so you’re watching about a 100 minutes worth of ads every month. Let me phrase that in a different way, by not getting YouTube premium for $12/mo, you’re essentially selling your time for $7.20 per hour or basically minimum wage in the US.
Also, that’s if you do it stupidly. The smarter choice would obviously be to go for the family plan and split it with your friends and family. The family plan costs $23 per month and allows for up to 6 members, so each member is only paying about $4/mo. So, by not getting YouTube premium, you’re actually selling your time for $2.40/hour and that’s if you watch just 1 hour of YouTube per day. If you watch 2 hours a day, you’re selling it for $1.2. If you watch 3 hours a day, you’re selling it for just $0.80 cents. And if you’re a YouTube addict and watch 5 or 6 hours a day, you’re selling it for just $0.40 to $0.50. Not to mention, you’d be sitting through 10 hours of ads every month.
YouTube was an easy example but this is the case with all free services. It’s impossible for it to be any other way because of the physics of the situation. For a normal service to work, only 2 parties have to be happy. The business and the user. For a freemium service to work, three parties have to be happy. The business, the user, and the monetizer. This is made worse by the fact that most users don’t want anything to do with the monetizer. I mean, who wants to watch ads? This makes it especially difficult for the monetizer to make the transaction worth their time. And by extension, it also makes it difficult for the business and the user to have it be worth their time either. Back in the day, users didn’t think consider this inefficiency too seriously. As far as they were concerned, they were getting media or email or news or whatever else completely for free. But nowadays, if you don’t know how these platforms make money, you’re definitely living under a rock.
And people are simply coming to the logical conclusion that giving up so much time, data, and privacy just to save the $5 or $10 that the service would’ve otherwise cost is stupid. Now again, it’s great that you can access such great services for free but if you can afford, you should stay far far away from such deals as they’re always a ripoff for everyone involved.
So, that’s kind of the logical argument as to why people are ditching free services but this shift is much deeper than a simple time vs money relationship. The reality is that people simply don’t trust free services. Back in the 2000s, the average internet user might’ve thought: “Oh, it’s just a website. How much could it possible cost to run? That must be why its free.” But, no one in their right mind thinks this today. Everyone knows that internet companies are some of the most profitable and wealthiest companies in the world. So, how exactly are they making this money and more importantly, where does that leave the average user. Of course, the average user would be giving up time, data, and privacy but I don’t even think that’s what annoys users the most. I think what annoys users the most is the fact that they no longer have a voice because they’re no longer the customer.
They’re the product being sold while the monetizer is the real customer. This is what leads to the disconnect between users and platforms that’s so common nowadays. Oh, how could YouTube remove the dislike button. Why does YouTube censor great content just because its a little edgy. Why did Robinhood halt GameStop. Do these companies even listen to what their customers want? Well, the answer is yes. These companies are very much aware of what their customers want and they give them just that. Advertisers want family friendly content that they can get behind. As such, that’s what YouTube pushes to the top. At first, users will complain about it but eventually they’ll get over it. Something that they don’t get over though is the loss of trust.
Users start classifying these businesses as sell outs that don’t even care about their customers. But the reality is that the only way that these businesses could have done it differently is if their users were also their customers. So, naturally, people have started to flock over to services where they are the customer, where they feel valued. This has already started to become more of a status thing actually and you can thank Apple for that. Apple is one of the only big tech companies who’s users are actually their customers. And they’re very much leaning into this. Just take a look at all of this marketing material about privacy.
“Privacy. That’s iPhone.” | “Privacy Matters.” | “Privacy. That’s Apple.” | “What happens on your iPhone, stays on your iPhone.”
All of this is actually very similar to that ProtonMail slogan that we we’re talking about at the beginning of the video. All of this enforces the idea that an ad free experience and data privacy come at a premium cost which you can get at Apple. And let’s just say, people are eating this up. The iPhone has barely changed over the past 5 years but the same cannot be said about the iPhone’s marketshare. iPhone marketshare has gone up substantially from about a third of the US market to over half of the US market. And as Apple continues to grow their dominance, you can bet that people will only be more inclined to pay to be the customer.
So why are people ditching free services? Well, people have simply come to the realization that free services aren’t exactly free and people are very much fed up with free services and their ulterior motives. Personally, I think this is great thing for companies and users. Companies make more money directly from the consumer and consumers get a better experience while paying for exactly what they’re consuming. It makes perfect sense but it’s not great for everyone. It’s especially bad for advertisers. You see, advertisers have already been getting destroyed by the new age of media. On YouTube, we’re literally complaining about 3 minutes of ads for every hour of content. On TV, it used to be like 12 minutes of ads for every hour of content and it still is. It’s just that no one really watches TV anymore. At least, no one from the younger generations.
So, advertisers were already fighting for 4x times less ad space but ad free offerings are just making this exponentially worse. I mean, who tends to pay for premium on YouTube, or Hulu, or Netflix or really any platform. Well, people who are well off and are able to spend a little more on entertainment. And who is the most likely to convert from ads. Well, people who are well off and are able to spend a little more on entertainment.
So, these ad free offerings are literally removing the most valuable audience from an already limited marketing pool. This leaves advertisers with only one option. Target the content. This of course means more companies doing sponsorships and paying way more. We’ll also see more brand placement, more affiliate marketing, more giveaways, more brand deals, and all of the usual stuff but is that where it’ll end? I’m sure you’ve noticed one common thread amongst all of these. They’re all skippable. Now, there are advantages to skippable ads. Only people who are really interested in the product will watch the ad and the advertisers can get away with paying less. But, with that being said, some advertisers will always be looking for a way to push unskippable ads. How would they be able to do this? Well, would YouTube ever push out a feature that allows creators to show ads even to premium members? You’re probably thinking that this would be blasphomous.
Why the hell are you paying YouTube a premium price if you still have to watch forced ads? Well, I don’t think YouTube would necessarily make money from these ads. I don’t even think it would necessarily be feature that YouTube adds in on their own. Rather, it could very well be a feature that creators ask for due to how much brands are willing to pay. They would probably justify it by saying that they can make even better content if viewers watched just one unskippable ad at the beginning of the video. And then it’ll become 2 and 3 and 4 pretty soon it’ll become just like mainstream TV.
YouTube will make money from the premium subscription just like DirecTV or Dish Network. And then creators will make money from ads and infomercials just like TV channels and their shows. So, is the trend towards premium subscriptions all that great? Well, it really comes down to your personal preference. Would you rather see higher quality content with more ads or lower quality content with less ads. Comment that down below.
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