From DVDs to cars, products that we once purchased are transforming into services to which we now subscribe.
Why buy a DVD, when you can subscribe to Netflix and choose from a whole library? Netflix, the world’s largest online movie rental service, now has more than 10 million subscribers. Why buy a car, when you can subscribe to ZipCar and get the whole fleet? Car-sharing service ZipCar now has ¼ million drivers, representing half of all car-sharers worldwide. Why call one restaurant to make a reservation, when you can see every open table in town with OpenTable? Restaurant-reservation service OpenTable – a company with a subscription-based, recurring revenue model – recently went public with the best IPO performance since 2007.
With more selection, greater control, and fewer upfront costs, subscription services make it easy for everyone to buy less and subscribe more. Companies like Netflix, OpenTable, and ZipCar are just the tip of the iceberg in the steady progression toward the subscription model.
Thanks to the power of the Internet and cloud computing, the tech industry has moved from selling products to delivering services online. Over a decade ago, salesforce.com introduced the world to the idea that software belongs in the Internet as a service to which you subscribe and not on a CD that you purchase. Today over 1 million people subscribe to salesforce.com’s CRM services, making software a relic of the past.
Recently, every major tech company has announced a cloud initiative. Hewlett Packard sells hardware to cloud providers, and offers several services via the Web. EMC, Intel and Sun have also followed suit with cloud initiatives of their own. We also see Adobe’s recent acquisition of Omniture as a play to integrate software-as-service DNA into Adobe’s traditional business model.
The shift to a subscription economy has big operational implications for businesses that decide to enter. Running a subscription business is different, and it’s harder than you might think.
In the product world of the past, the sale was straightforward: a product shipped, an invoice was sent, the customer paid, and the financials were complete. Conventional ERP systems were designed to support this one-time transaction business model.
In the subscription world, the financial relationship is ongoing and ever-changing, and conventional ERP systems can’t support it. Invoices are generated on a recurring basis: monthly, quarterly, annually, or even daily. Customers can request service changes anytime: add more users, add more services, change pricing plans, or cancel service. Pricing and packaging must be flexible to satisfy light users, heavy users, plus everyone in between. These scenarios overwhelm systems designed for a one-time transaction. As subscription services grow, so does the the need for a system that can handle the complexities of subscription business.
The subscription trend isn’t just limited to the cloud. Traditional ad-supported businesses, like newspapers with online content, are offering more subscription pricing and packaging as well. Ads just don’t work anymore, and companies are moving beyond them. Last month, on Z-Blog, I discussed how the subscription business model could benefit the struggling online publishing industry.
News Corp Chairman Rupert Murdoch announced plans to roll out paid content on all News Corp Websites. And Journalism Online LLC recently announced that publishers representing more than 1,000 newspapers and magazines will join its mission to move journalism to an online subscription model.
The shift to a subscription economy is part of the broader shift from a manufacturing sector to a services sector, and the Internet is only accelerating this shift. I believe that subscriptions aren’t just the future of software, but the future of our entire economy. I can easily imagine a world where instead of buying things, we subscribe to all services in the cloud— everything from software and infrastructure to organic produce to cars and jets. It’s not a dream; it’s the new subscription economy.