Best of new boom in sub­scrip­tions econ­omy yet to come

We ex­plain why this old-hat model is get­ting a new lease of life and how this can ben­e­fit in­vestors

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The sub­scrip­tion busi­ness model is boom­ing and could be con­sid­er­ably big­ger in the com­ing years, so in­vestors need to sit up and take no­tice.

We tend to think of sub­scrip­tions in terms of news­pa­pers, mag­a­zines, gym mem­ber­ships and pay-TV ser­vices. You could ar­gue that util­ity bills and mo­bile phone con­tracts are also types of sub­scrip­tion even though they are deemed as non-dis­cre­tionary spend­ing.

Busi­ness-to-con­sumer sub­scrip­tion busi­nesses at­tracted more than 11m sub­scribers in the US in 2017, ac­cord­ing to Har­vard Busi­ness Re­view, and the in­dus­try as a whole has been grow­ing at 200% an­nu­ally since 2011. There are now thou­sands of con­sumer­fo­cused sub­scrip­tion busi­nesses tai­lor­ing prod­ucts and ser­vices to the di­verse re­quire­ments and pref­er­ences of mil­lions of cus­tomers.

To give you a sense of the scale, Net­flix has more than 130m peo­ple world­wide pay­ing monthly fees to ac­cess its vast and of­ten ex­clu­sive li­brary of TV and film con­tent. Sky

(SKY), about to be taken over by US me­dia gi­ant Com­cast, has some­thing like 8m UK sub­scribers.

Ama­zon re­ported hav­ing more than 100m peo­ple signed up to its Prime ser­vice at the start of this year, which gives users ac­cess to its own ex­clu­sive TV and film con­tent and next-day de­liv­ery on thou­sands of items pur­chased through its on­line store.

Su­per­mar­kets are try­ing to get in on the game such as en­cour­ag­ing cus­tomers to sign up for monthly or an­nual de­liv­ery plans to lower the cost of home de­liv­er­ies.

It is not just con­sumers ei­ther; in­creas­ingly busi­nesses are buy­ing goods or ser­vices via sub­scrip­tions, most typ­i­cally seen via soft­ware-as-a-ser­vice (also known as SaaS).


While the sub­scrip­tion model is hardly new, the abil­ity to em­brace the in­ter­net means we may be at the early stages of some­thing far more trans­for­ma­tional.

It could be more dis­rup­tive even than the adop­tion of per­sonal com­put­ers in the 1980s and 1990s, or ar­ti­fi­cial in­tel­li­gence and the con­nected world of the in­ter­net of things (IoT) that grab so many head­lines to­day, ac­cord­ing to an­a­lysts at Gart­ner.

Ac­cord­ing to the mar­ket re­searcher, trans­for­ma­tional dis­rup­tor sub­scrip­tion mod­els are ‘ren­o­vat­ing ex­ist­ing mar­kets, gen­er­at­ing large-scale so­ci­etal ef­fects, ag­gre­gat­ing ca­pa­bil­i­ties,

and en­hanc­ing ex­ist­ing or cre­at­ing new busi­ness mod­els.’

The un­der­ly­ing premise is that al­most any­thing could even­tu­ally be sold on an as-a-ser­vice ba­sis.

For ex­am­ple, think about trans­port-as-a-ser­vice, where we are start­ing to see car shar­ing schemes as a real al­ter­na­tive to own­ing a car your­self. It might even be health­care-as-a-ser­vice, data-as-a-ser­vice or a thou­sand other ‘as-a-ser­vice’ sub­scrip­tion op­tions.

If it can work for Harry’s with ra­zor blades and shav­ing cream, it can prob­a­bly work for any­thing.


Sub­scrip­tion mod­els go down well with in­vestors be­cause of their re­peat­able and pre­dictable in­come streams which are nor­mally re­ferred to as re­cur­ring rev­enue.

Cus­tomers build up fa­mil­iar­ity with a ser­vice and can of­ten be psy­cho­log­i­cally re­luc­tant to move to an­other provider. In some cases, a sub­scrip­tion ser­vice can be­come so em­bed­ded in an end user’s own op­er­at­ing model that it be­comes al­most im­pos­si­ble to switch away.

There’s also the prom­ise of net­work­ing ef­fects, where a ser­vice be­comes more valu­able to users as over­all users grow. Face­book is per­haps the best ex­am­ple of this sit­u­a­tion in that the more of your friends and fam­ily use the plat­form, the more you are likely to use it to so­cialise with them.

An­a­lysts at stock­bro­ker Peel Hunt says sub­scrip­tions also end up as cus­tomer re­ten­tion tools too, in that if the sub­scriber can­cels, they stop get­ting the ser­vice. Equally im­por­tant is what ser­vice providers can learn about their cus­tomers, gain­ing valu­able us­age in­sight on which ex­tra or pre­mium ser­vices might be sold.

This last point is re­ally im­por­tant when it comes to un­der­stand­ing the fu­ture prof­itabil­ity po­ten­tial of a sub­scrip­tion busi­ness.

Mar­ket re­search com­mis­sioned by cloud com­put­ing busi­ness Zuora last year sug­gests that some­thing like 70% of sub­scrip­tion busi­nesses pri­ori­tise

a cus­tomer land grab, with lit­tle ef­fort put into cus­tomer re­ten­tion (circa 20%) or up­selling ex­ist­ing users (10%) and in­creas­ing an­nual rev­enue per user, or ARPU as it is known.

This is at odds with re­search find­ings that show up­selling ad­di­tional ser­vices to the ex­ist­ing sub­scriber base is, by far, the most ef­fec­tive way to gen­er­ate ex­tra rev­enue.

With no cus­tomer ac­qui­si­tion costs (you al­ready have them) sub­scrip­tion mod­els can de­liver what Peel Hunt calls ‘add-on creep’. This means push­ing in­cre­men­tal fea­tures or prod­ucts, per­haps for free at first, and then slowly turn sub­scrip­tion taps later on.

It also has ad­van­tages for buy­ers, mak­ing rel­a­tively small payments on a reg­u­lar ba­sis rather than in a large up­front chunk. That takes a lot of pres­sure off a user’s own cash flow, mov­ing the pur­chase from cap­i­tal cost into ev­ery­day op­er­at­ing ex­penses.

Putting that sit­u­a­tion into an ev­ery­day con­text, a Net­flix sub­scrip­tion of £7.99 a month will seem to many or­di­nary peo­ple as in­ci­den­tal – it is ef­fec­tively the same price as a cheap cinema ticket or a pie and a pint.

But how dif­fer­ent would you feel be­ing asked to cough up nearly £100 up­front? Most of us get paid monthly and £7.99 is eas­ier to man­age than £100 gone in month one.

It’s not a one-way street; there is the cost of at­tract­ing new cus­tomers to think about (mar­ket­ing cost, for ex­am­ple), cus­tomer churn (users that drop a ser­vice) and other fac­tors.

But it is not re­ally sur­pris­ing that some of the UK mar­ket’s most highly-rated busi­nesses are, at least in part, on this sub­scrip­tions ‘as-a-ser­vice’ curve. Think Right­move (RMV), Auto Trader (AUTO) or cy­ber

se­cu­rity spe­cial­ist Sophos (SOPH), for ex­am­ple.

Even Rolls-Royce (RR.) sells many of its plane en­gines at lit­tle bet­ter than cost to milk the ‘ser­vic­ing-as-a-ser­vice’ prof­its stream for many years into the fu­ture.

As Zuora founder and former Sales­force ex­ec­u­tive Tien Tzuo puts it, com­pa­nies like Net­flix, Spo­tify and Sales­force are just the tip of the ice­berg for the sub­scrip­tion model. ‘The real trans­for­ma­tion, and the real op­por­tu­nity, is just be­gin­ning.’ (SF)


Source: Peel Hunt


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