Bad business model: Turning subscriptions into gambling

Dear Unnamed_Music_Service:

I visited your site after seeing the ad in The Nation magazine. After I read your terms of service and your rate scale, I decided not to sign up (and, not incidentally, NOT to steal your 25 free songs by canceling at once). I thought you might like to know why.

Your subscriptions charge monthly fees (or yearly fees) and force users to lose their unused downloads at the end of each month. You have transformed a straightforward financial arrangement into a gambling routine.

Were it not for that stipulation, I'd gladly use your service. But the prospect of paying for music I don't download because I happen to be too busy in a particular month to visit your site and force myself to buy stuff does not appeal to me.

I have been teaching strategic applications of information technology since the 1980s and have been a programmer since 1965; I think your business model illustrates a poor grasp of how to use technology to your advantage.

It's not as if our not buying the stipulated number of songs in a month costs you anything: on the contrary, you get free use of our money without having to give anything up.

Why not reconsider your terms? Why not let your accounting system simply keep increasing the total number of downloads if someone pays but doesn't use the service for a while? Why have any cutoff at all – what have you got to lose? Your computer programs can easily be set to handle such accounting, and you wouldn't lose anything at all.

The business model that forces customers not to pile up huge numbers of unused credits for subscription products is rooted in real-world, physical inventory. Allowing someone to build up an enormous supply of credit that they can cash in at any time could exhaust supplies of the products they buy, leaving a store unable to supply other customers. But that issue simply does not apply to electronic intellectual property. You don't run out of copies of songs because someone buys 3,600 songs all at once after a year of accumulating credits.

Yes, you would have to pay royalties on the huge purchases, but if you set aside a portion of the unused credits to cover the necessary future expenditures, that money would earn interest while it waits. You could draw on your reserves to pay for the sudden bursts of purchasing if that’s what happens.

But how often do you think someone would pay indefinitely without downloading anything? Who would want to wait three years while paying monthly fees and never downloading a thing?

In any case, your model of setting monthly and annual download targets with discounts based on volume is also rooted in the physical world. Discounts in traditional bricks-and-mortar stores are based on lower overhead associated with bulk purchases; it takes less work and costs less money to sell 1,000 items at once than to sell one item in 1,000 sales. But again, in your world of electronic sales, you don’t (or shouldn’t) care. The costs charged by the credit-card companies are calculated on expense; whether you bill $30 or $300 at a time, you still pay the same percentage. And your computer time is a nearly fixed cost too: it’s irrelevant whether your computers are storing one transaction record for 1,000 purchases or 1,000 records for individual purchases (OK, there may technically be infinitesimal incremental costs for more orders – but not on the order of your discounts).

M. E. Kabay, PhD, CISSP-ISSMP, specializes in security and operations management consulting services and teaching. He is Chief Technical Officer of Adaptive Cyber Security Instruments, Inc. and Associate Professor of Information Assurance in the School of Business and Management at Norwich University. Visit his Web site for white papers and course materials.