When to switch between subscription-based and ad-sponsored business models: Strategic implications of decreasing content novelty

Abstract

Business model change is typically seen as an adaptation to market contextual changes or as experimentation to find the optimal model for a given context. We highlight an alternative rationale for business model change by showing formally that switching from a subscription-based to an ad-sponsored business model over time can generate more life cycle revenue (LCR) than committing to either business model in specific contextual conditions. This is because business model change involves an abrupt change in content consumption costs (i.e., “from fee to free”), facilitating intertemporal discrimination between heterogeneous consumers of content with decreasing novelty, which shortens the content life cycle and so limits LCR potential. These results have important implications for managing ad-sponsored digital content platforms in particular and illustrate the strategic viability of business model change in general.