Subscription economy is the future
Subscription economy is here to stay. By 2020, eighty percent of software providers will be subscription businesses.
Subscription economy is currently sweeping the world, and particularly its youth. India is fast catching up. The change pertains essentially to consumer behavior or a business model, depending on where you stand. It probably also reflects a deeper philosophical transformation in how we look at material possessions. The phenomenon has been noted for some years, at least since 2012, but mainstream economics or business research has started paying serious attention to its various dimensions only recently.
It is not as though nothing was known about it until now, but there has been an unprecedented surge in its reach and visibility over the last few years, and that in turn has provoked a new and respectful attention to its potential. This new surge is reinforced by a new outlook towards ownership of material commodities, which in turn makes subscription economy positively futuristic in its appeal.
Subscription economy in its basics is an incredibly simple phenomenon. It means an economy in which consumers pay a subscription fee for using a product or service without having to own it for life. This is distinct from pay per product or service model which had characterised the traditional rent economy. The phrase has been coined by Tien Tzuo, CEO of Zuora corporation. When you watch movies on Netflix or Amazon Prime or listen to music on Spotify or Gaana, you have private access to a huge library of movies and music, without any need to buy a single CD. Or when you pay a monthly subscription to Kindle Unlimited, you hire an entire library, without actually buying or storing a single book. When you shift to a new city and look for fully furnished accommodation or service apartments, you dispense with the need or anxiety to buy or sell or transport your furniture. As a matter of fact, several new and respectable ventures rent furniture, including mattresses and even pillows, to young professionals in almost all major Indian cities. There are full-service meal suppliers for young students and professionals who offer tailor-made meals around the clock. It is not an overstatement anymore that in a good many middle-class households in urban India today, cooking or going to the kitchen is a matter of choice, not compulsion. The subscription companies allow their consumers to pay as they go, or pay per subscription monthly, or via a long term contract. The point is they offer greater flexibility and freedom from hoarding or lifelong ownership. All you have to do is make a phone call or download an app and enter your address.
On the other side of this transformation are new economy businesses. They are quietly transforming their operations from making or selling products to offering services. This change is building up only gradually, but in expanse, it ranges from aircraft engines to writing software, all on rent or lease. The trend is affecting not only small startups but established global corporations too.
Several new factors are enabling this business or consumer behaviour renaissance, and the internet is probably the most important among them. Physical copies of software, music, or newspapers or magazines are often less convenient to having their latest and updated versions sent to your mobile phone or computer. The companies no longer have to manufacture multiple versions of the same product and to carry them to distributors’ warehouses and shops.
More importantly, it is leading to seismic changes in our attitude to property ownership. For the last so many years or even centuries, ownership meant purchase and lifelong possession. You did not rise in the esteem of parents, peers, or society until you bought a home or a car or tasteful furniture since the acquisition of moveable and immovable properties was traditionally considered a respectable distinction. That kind of achievement benchmarking was convenient in days when jobs were stable, properties affordable, and income incrementally elastic. But the contemporary economy is making unstable rise and fall in income the norm, and interruptions between stable jobs is a reality for everyone to learn to live with. Consequently, the attitude to holding properties for life too is undergoing a gradual shift, whether we like it or not.
The second factor behind the roaring success of the subscription economy is a mental or psychological trait among human beings. People generally hesitate to try new things. But once they get into something that requires small and regular contributions, they find it harder still to opt out. This is the psychology that encourages the success of the EMI culture, for instance. That you pay a small amount every month and not a huge one at one go typically nudges you to think less before making large purchase decisions. Likewise, when we subscribe to monthly services from operators such as Netflix, or a magazine, we get so used to it that we no longer consider it an expense worth worrying about. Eventually, we get so taken in that we end up never considering unsubscribing. It is the same psychology that makes us click on subscription buttons to hundreds of free email newsletters that clutter our inboxes over the years. They are often irritating, and yet few of us spare the time to unsubscribe from unwarranted newsletters. We delete them en masse from the inbox and then wait for our email service providers to permanently delete the trash mail bin. But we rarely exercise the unsubscribe option. This customer inertia plays a major role behind the incremental but sustainable growth of the subscription business and consumption model.
I have myself subscribed to a range of top of the line globally respected journals and magazines at an affordable subscription price. Even a few years ago, their print copies would not be available in India, except perhaps in the embassies. Now they offer not only regular subscriptions to the online or app version of their latest edition, but also access to their entire archive, and most of them have had their entire run digitised. Till a few years ago, we would wait for a handful of scholars who went abroad or visited India in the winter break to tell us about the latest publications in our academic or professional domains. Now, affordable subscription services to reputed newspapers or magazines bring them to our phones or laptops, in real time.
Amazon Prime is probably the most obvious example of the subscription economy model. It is an annual membership plan which allows unlimited free shipping of over 100 million items, and access to unlimited free streaming of thousands of movies, songs, and TV programmes, Alexa voice shopping, and unlimited free access to hundreds of kindle books. In some instances, it also offers free same-day delivery of products. There are nearly a hundred million Prime subscribers in the world, and I am quoting a one-year-old figure. A May 2018 report in Forbes claims that 70% of Americans with incomes of $150000 and shopping online have Amazon Prime membership. Amazon Prime international membership grew at a 56% compound annual growth rate between 2016 and 2018. By 2022, there will be some 56 million Prime subscribers in the US alone, and 122 million worldwide. Revenue from subscriptions to Prime grew by 49%, practically doubling the profit from the online store business of Amazon, which grew by a steady 20% year on year. Amazon was quick to seize on the trend and raise the subscription price from $2 per month to $ 12.99 in the US in January 2018. There will be similar trends in India too. Those who have been tracking the rise in prices for apps such as Hotstar over the last while will see what I am talking about. Hotstar now offers the entire bouquet of all Star TV channels, including its entire archive of all TV serials, past and present, apart from the movies, news, and sports channels. An April 2018 report in India Today claimed Hotstar already had 100 million subscribers in India.
This is a fundamental shift away from the way the retail business worked in the twentieth century. Except for those with loyalty cards, customers would be treated alike and there was little opportunity for retailers to appeal to individual customers with tailor-made offers. It has major implications on how big corporations decide on their marketing and advertising strategies. Earlier, big brands would simply buy up the prominent display spaces of the local grocery store, for their products to gain maximum visibility. But the internet has changed all that. Now Amazon, for instance, can target you with your preferred choices, because it has a record of all your past transactions, and knows that you prefer smaller but more eco-friendly brands. Smaller brands have a hypothetically greater chance now to compete for your attention.
It is no coincidence either that this business model has grown in stature at a time when the debates around ‘free internet’ have largely been resolved in favour of a pay for good content model. Consumers are tired of random advertisements flooding their screen, cross-subsidising their free newspaper viewing, for instance. They’d rather pay to access quality reading, at their discretion, and with the least possible advertisement interruption.
The ease with which the technology of online payment has largely made online payments safer and smoother has also contributed to this surge in the subscription economy. Did you notice, for instance, how during the last two years several new players have entered the digital payment space? Google and Amazon are leading the pack among the new entrants, of course, but Phone Pe and the leader PayTM too are major players in the sector.
But it is not all a bed of roses. As we subscribe to Amazon, Hotstar, or any other subscription-based service, the company pieces together a profile of our demands, habits, and spending patterns, as do free but advertisement subsidised services such as Facebook or Google. How they propose to use it is still somewhat unclear, but how Facebook has used the data in its disposal is a matter of record. Whether or not they choose to sell it to unscrupulous operators, or political parties, they happen to possess, entirely without any additional investment, the most detailed profile of a very large number of consumers, including their most intimate desires, price sensitivity, or leisure habits. For all we know, it may well make the traditional methods or practices of market surveys at least partly redundant.
We now have Facebook planning to introduce a subscription service. YouTube has already done that, partly to contest with the hugely successful Netflix. Last heard, Netflix was expecting $15 billion in revenue this year. It both serves what its customers want, as well as commissions new shows based on their preferences. Apple’s fastest-growing business is no longer laptops or phones but subscription revenues from Apple Music or iCloud. Microsoft and Adobe are encouraging customers to go for renewable subscriptions of their products rather than choose a one-time purchase option. Hyundai now offers a subscription to cars. That is not to rent a single car, but with the freedom to change your cars. Volvo expects that one in every five cars by 2023 will be delivered by subscription. By 2020, eighty percent of software providers will be subscription businesses.
There is a need to review our cultural choices or preferences in response to these developments. What is the point of owning a house if your entire working life is spent paying for it every month? How many years do you get to live a healthy life in the house as an unencumbered owner once the loan is paid off? Why buy a car and sell it every few years when you can ride different cars every month for a subscription? You will probably say ownership means transferable or saleable assets and insurance against a future crisis. Ownership, you may say, encourages greater responsibility. Does it? Or does it breed a risk-averse mentality? Can we at least start talking about it, before we are forced to?