Steady monthly outgoings have been the bane of our existence since we all got a bit richer. Rent, mortgages and bills ensure we must work. The system demands that we work (a philosophical point for another time, perhaps). What has shifted over the past 10 years or so is the increase in the number of monthly subscriptions. It started off rather innocuous with gym memberships, TV (the likes of Sky) and mobile contracts; it has now grown to include Spotify, Netflix, YouTube and Amazon Prime. Software that used to be standalone such as Microsoft Office and Photoshop have also gone down this route. We’re no longer confined to software either, businesses are serving daily needs such as meals and snacks via subscription too. Our lives have become dominated by the damn things.
Understanding why subscriptions became popular is pretty straightforward – companies get recurring revenue and users get locked in. In established software suites such as Office and Photoshop, it extracts a better life time value (LTV) from a customer compared to a single product purchase (as well as allowing companies to control authentication and number of users working off a single copy). Actually extracting a better LTV is applicable to most subscription based startups. Lastly the predictability of subscription revenue helps you plan churn and growth with much more confidence – something investors love to see.
“It’s mine and you can’t stream it”
So are we at ‘peak’ uptake? To demonstrate how subscriptions affect a maturing market, I will use an industry that has been on the forefront of subscription in the digital era – content streaming.
Disney will soon launch their own subscription service to compete with the current streaming king, Netflix. They will also remove any licensed content from Netflix and make it exclusive on their own platform. This has two consequences – firstly it puts further pressure on the consumer to potentially buy another subscription service. And secondly, if the consumer is wavering between one or the other, Netflix has to do more to retain them. How do they do that? By ensuring there is even more high quality content.
Let’s first look at Netflix’s revenue and profit. 2018 revenue was up 35% from 2017 to $16bn which resulted in an operating profit of $1.6bn (doubling from 2017). The number of subscribers by end of 2018 was approximately 139 million. Now let’s look at content expenditure –
Though profits are good, look at how content spend has increased over the past years. This includes both licensed and exclusive – with the latter becoming even more important as a differentiator. We haven’t even touched upon fixed costs and marketing – both increasing over the same time period too. It makes you question at what point does Netflix become unprofitable and unsustainable? They will have to continue upping their content spend to stay competitive. Plus they will also have to charge customers more – Netflix recently increased monthly subscriptions in the US and UK. Either way, consumers are likely to become overwhelmed with higher costs. What is the end result? Piracy.
Riding the seven seas!
Season 8 of ‘Game of Thrones’ was watch legally on HBO (or licensed) by 17.4 million (source: Nielson) people and illegally watched by 55 million (source: Muso) in the first 24 hours of release. let that sink in – 55 million, three times the legit numbers! Now piracy is not a new concept and companies have endured through the various forms over the decades. But with increased subscriptions services, will customers turn ever more frequently towards piracy? And will it contribute in breaking the content streaming subscription model?
If I’m honest, I’m not convinced. There will probably be a bit of both – users will keep one or two subscriptions and then pirate shows that do not fall in their packages. The learnings for startups however, especially consumer ones are clear – relying on subscription revenue is risky. Consumers will filter and limit the number of things they subscribe to – mostly the things they already deem as indispensable. Thus the barrier to enter people’s lives becomes even higher.
Getting creative with revenue
I talked about incentives last week, https://junaidrahim.com/2019/06/04/bootstrapping-your-launch-in-2019/ – firstly go read it if you haven’t done so! Incentives can be a good trick to get people to try your service, but heed the warnings of falling into a vanity metric trap – subscriber numbers will look good on paper but churn and increased customer acquisition cost (CAC) will mask reality. So what revenue strategies are open to you? That is ultimately the billion dollar question and on the face of it, it looks tricky.
Journalism has had a particularly difficult time. People went from paying for a newspaper to expecting the same quality of reporting for free once the Internet became ubiquitous. The industry answer – paywall subscription journalism has had mixed success. This means advertising becomes a key revenue channel – in some cases this can be 30% of the entire revenue stream! Disregarding the pros and cons of advertising, what it shows is the need to be diverse. But it doesn’t mean you cannot be novel. The Guardian have been particularly successful in asking for contributions. How have they done this? The reader understands their values and The Guardian clearly outlines why their cause is so important. The urgency and call to action resonates. Will this work for everyone? Likely no, but it does show people’s attitude to paying for online content is changing.
Let’s look at a slightly less successful example, travel. Travel startups have struggled – the affiliate model has been nigh on impossible to break. The domination of Booking.com and Expedia have effectively controlled the entire market. The affiliate models works well for the big players because it gives startups just enough incentive to keep on going, but not quite enough to grow to a position of strength.
Every industry has its own challenges to break the traditional revenue ideas. And there is no denying it, it’s hard. Investors will no longer tolerate letting you grow your base first before focussing on revenue. You have to build it in from the start. Take inspiration from The Guardian in being novel! It also goes back to an idea I touched upon last week (go read it!) that ‘Product is King’. Ensure you understand your core product and clearly communicate why consumers should pay for it. A bold strategy? Perhaps. A difficult sell? Maybe. But success could lead to a major disruption. And that is ultimately why we love startups!
Let me know in the comments on you revenue model success!