Dog Days of Discounts: Will Free Trials Help Streaming Services During a Pandemic?

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With music subscription services in heated competition for shares of a fast-growing market, potential subscribers around the world have a menu of free trials to choose from.

But as markets worldwide struggle through unemployment and retail closures, the free trial could take on a greater importance for suddenly budget-conscious consumers. Interestingly, market research suggests people plan to keep subscriptions long-term.

Late adopters of streaming services in the United States, Argentina or Turkey, could have received a three-month free trial from Spotify through June 30 -- not a bad deal during a recession. As of July 1, the offer changed to a 30-day trial period in each country, and was the same in some Eastern European and Asian countries. Regardless of location, a first-time subscriber -- not a current or past subscriber -- gets a freebie before deciding to pay a monthly fee of $9.99 in the U.S., $1.95 in Argentina or $2.63 in Turkey.

The pandemic has been a transformational event for streaming services as consumers, met with large chunks of free time due to shelter-at-home orders, gorged on video and music for both comfort and entertainment. Subscriptions soared as a result: Disney+ subscribers grew by 20 million in February and March, and Netflix added 15.8 million subscribers in the first quarter of 2020. Music services benefitted, too. In five MRC Data/Nielsen Music surveys from the week of March 23 to the week of June 8, between 38% and 49% of people surveyed by MRC Data/Nielsen Music subscribed to a music streaming service in the previous two weeks; about 80% of them planned to keep their streaming service post-COVID-19.

Now in its third decade, the music subscription model employs free trials for one simple reason: they work. Russ Crupnick of MusicWatch has surveyed consumers for the last decade about their motivations to pay for music. Year after year, "number one is free trials," he says.

Last year, an estimated 19 million U.S. consumers used a free trial for a music subscription service, says Crupnick. He has found that a free service is an effective stepping stone to signing up for a free trial: half of Spotify, 62% of Pandora and 69% of YouTube free trial users came from the respective service's ad-supported version.

Dan Mackta, managing director at Qobuz USA, which offers high-definition audio, says free trials might have helped lure subscribers in recent months -- although gains could be coming from the company's marketing. "If there weren't a pandmeic, maybe the numbers would be better. But there hasn't been a negative. It hasn't slowed down and it's stayed on course with our aggressive projections."

People Billboard spoke with agree that free trials have consistently been an effective tool to attract paying customers. As a result, rights owners, whose approval is necessary for free or discounted offers, have consistently allowed services to give potential subscribers a taste of paid services. "Labels are comfortable with them," says an attorney with experience in licensing agreements.

As for Apple Music, a three-month free trial is a standard offer but can be twice as long. When Apple Music launched in 52 countries in April, consumers were given a six-month free trial. In December, Apple began offering six free months through Shazam, the music identification app it purchased in 2017.

Free trials have become widely mimicked marketing tools. When one service offers three months free, other services follow; when one service offers six months free, its competitors will try to match the offer. Over the last decade, the length of free trials have ranged from one week (Rdio's 2012 launch) to 30 days (Spotify's 2011 U.S. launch) to three (Apple Music's 2015 launch and now a common offering) and as long as six months (Apple).

In 2020, it's impossible to subscribe without first going through a free trial. Apple Music's standard trial lasts three months; it launched in 52 markets in April with a six-month free trial. Currently, Amazon, Qobuz (30 days), Tidal (30 days), YouTube Music (30 days), Pandora Premium (30 days), and Deezer all offer 30-day free trials.

Since the early ‘00s, streaming services' main challenge was to educate consumers who were accustomed to buying downloads and CDs. Free trials were effective in getting people in the door. Now the trials attract the late adopters who are familiar with the streaming model -- they might have Netflix or Amazon Prime Video -- and might listen to Pandora or SiriusXM but haven't tried a music subscription service yet.

Labels aren't subsidizing the services' lengthy marketing efforts. In a standard arrangement -- with exceptions -- for a free trial, streaming services do not pay royalties for the first month and pay only 50% of normal royalties if the trial extends to a second or third month. The discounts end there: a streaming service pays 100% of royalties in every month the trial extends beyond three months. So, labels receive no royalties for a one-month free trial. For a three-month trial, labels receive one-third of normal royalties.

Two metrics are vital to streaming services: subscriber churn rate and customer acquisition costs. A small percent of subscribers are going to leave the service each month, whether purposely or accidentally due to an expired credit card, for example. Three-month free trial costs a streaming service $7 on a $9.99-per-month subscription (first month free, half of standard royalties in the second and third month). In that scenario, and assuming rights owners get 70% of royalties, the service would recoup acquisition costs in only four months.

Even so, labels and services might fear that free trials devalue music in the eyes of consumers (this has been an ongoing concern throughout the course of digital music). Indeed, people that Billboard spoke with are concerned that constantly extending free trial periods is a race to the bottom: "We sometimes want to get rid of the free trial" for fear it may devalue music, says Mackta. "We almost feel like we do free trials reluctantly because it's such a good way to get people in the door."

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