Content Acquisition by Streaming Platforms:Premium vs Freemium

Elias Carroni, Dimitri Paolini

Dipartimento di Scienze Economiche, Università di Bologna Dipartimento di Scienze Economiche e Aziendali, Università di Sassari

under reviewPresented at EEA-ESEM 2017

2017.09.19

Yunhyoung Kim

Table of Contents

• Introduction

• Model

– Agents and Their Utilities

– Sequential Game

• Analysis

– Premium

– Freemium

– Premium vs Freemium

• Conclusion

Introduction

Advent of Media Streaming Platforms

Three-sided market : Consumer, Copyright Owner, Advertiser

ConsumersCopyright

Owner

Advertiser

Reach to listen to the music

Seek to sell a product by advertisement

Provide contents

Example : Music Streaming Platform

Platform

Introduction

Premium and Freemium

What are the main drivers in the choice between the “Freemium” and “Premium” models?

Two types of streaming platform

Free-of-ad premium subscriptionwith Free-of-charge Plan

Free-of-ad premium subscriptionwithout Free-of-charge Plan

Freemium Premium

Model

Agents and Their Utilities

ConsumersCopyright

Owner

Advertiser

Reach to listen to the music

Seek to sell a product by advertisement

Provide contentsPlatform

Profit from Subscription - Royalty Payment

Freemium

Premium

Profit from Subscription and Advertisement - Royalty Payment

Model

Agents and Their Utilities

CopyrightOwner

+ royalty (per user)

– Cannibalization effect on other distribution channelsProvides content

Heterogeneous on : density function

Advertiser Sell a product by AD+ sell products to subscribers exposed to the AD

– pay per-user fee

Consumers exposed to the AD always buy

Heterogeneous on

ConsumersReach to platformto listen to music

+ variety of contents

– pay subscription price / nuisance cost of AD

Heterogeneous on

Model

Sequential Game

1. (Monopolistic) Platform attracts contents by offering royalty �

(Monopolistic) Platform sets the subscription price �and advertising charge �

3. Given �and �, consumers and advertisers choose to enter

2.

Analysis

1. Premium Platform

Profit from subscription Royalty payment

Consumers

Stage 3.

Stage 2.

Stage 1.

CopyrightOwner

: Heterogeneous on

Content owner with participate

∴ ( )

Analysis

1. Premium Platform (continued)

Stage 1.

Platform

Price increases as �(potential market size) grows Number of contents increases as � grows, Increased surplus are extracted by higher price

Small royalty is enough to attract all contentsAs � grows, the platform save payment on

content acquisition

Analysis

1. Premium Platform (continued)

Size of Content Owner

Size ofConsumers

Subscription Price of Platform

Size ofConsumers

Size of Content Owner

Fixed

Subscription Price of Platform

Fixed

Royalty Payment of Platform

at some point

Analysis

2. Freemium Platform

Profit from subscription Royalty payment

Consumers

Stage 3.Profit from advertisement

Heterogeneous on

Advertiser

Heterogeneous on

Stage 2.

Analysis

2. Freemium Platform (continued)

Stage 1.

CopyrightOwner

: Heterogeneous on

Analysis

2. Freemium Platform (continued)

MaximalNuisance Cost

Subscription Price of Platform

Heterogeneous on

AD feeof Platform

Size of Advertiser

Size of Content Owner

Size ofConsumers

Royalty Payment of Platform

Analysis

3. Premium vs Freemium

Size ofConsumers

MaximalNuisance Cost

Conclusion

DefinitionContribution

- Try to understand the main driver in the choice of Premium and Freemium

Main Results

- Emergence of different business models by means of AD nuisance and size of potential market

= AD nuisance is strong, platform choose subscription-based model (premium)= Otherwise, platform choose mixed model (free contents + paid access)= Big platform (potential market size is large) prefers premium model= New platform (potential market size is small) prefers freemium model= Content owners prefer premium model when market size is sufficiently broad