Recently I wrote a couple of posts about Apple’s plan to charge vendors 30% of the transaction price for anything sold through the Apple Store (aka App Store). For many things like software and songs I think this makes a lot of sense. If you consider that the SG&A line of a company’s balance sheet is typically forty to fifty percent and that many of the companies that sell through the App Store have little or no marketing or sales functions, thirty percent sounds very good indeed. In fact, with a price of a few bucks, most of the applications on the App Store would not see the light of day if their developers had to market and sell through more conventional channels. The same is true with songs selling for ninety-nine cents.
But the post was about what happens if content providers like newspapers have to work under the same rules. Unlike a song or software, a newspaper gets rewritten daily — you only sell so many before you need to reload and the overhead associated with active development of a daily product is high. But also, a newspaper brings with it a recognized brand and a readership.
In that situation, it’s not clear that a service like the App Store delivers much more than a different kind of distribution infrastructure and the post questioned the fairness of a one size fits all pricing model. You might argue that a paper with digital distribution loses its printing and transportation overhead so Apple’s offer is a good deal. But no publisher is going to simply flip a switch to the digital world and those legacy costs will be with publishers for a long time. Essentially, the publishers can’t afford to do both. It’s a classic “innovator’s dilemma.”
The post concluded that Apple’s billing system might have something to do with this apparent rigidity. A transaction-based system that works for songs and software appears ill-suited to a relationship like a subscription because it does not have to deal with the rigors of a relationship. For instance, a billing system for subscription services needs to be very flexible and capable of making all sorts of changes to the purchased service, daily if needed.
The post got several comments including the one below, which was surprising.
“How do you know Apple’s current billing system won’t do exactly what you describe? Perhaps Apple doesn’t want to do this.
Why should they? They are a powerhouse in this market, and if companies don’t want to distribute through iTunes, they can hit the road.
70% of something is better than 100% of nothing.
The surprise was the “hit the road” attitude of the writer. Today, competition is so fierce that a hit-the-road attitude seems not only wrong but like an antique from the robber baron era. With a solution (and an attitude) like that it’s just a matter of time before other solutions, with more generous terms or, perhaps, one specialized for publishers, hit the market.
Our simple question is, what could make a company like Apple behave in such an apparently self-destructive way? The post said that the billing system’s inadequacies might be the problem but, on second thought, that seems like giving too much “benefit of the doubt” given the number of emerging companies with billing solutions out in the market. A company like Apple could always buy one of those companies. It’s more likely this is a form of un-strategic overreach stemming from not knowing or understanding the customer.
Knowing the customer, or customer intimacy, has become a strategic necessity as one sector after another reverts to the mean after many years of rapid growth driven by high demand for new products and product categories. Instead of pioneering completely new product categories, many companies today are innovating around established products and bringing out the next version. Typically, they do this by adding features and functionality to existing products, replacing an expensive component with a less expensive one or fusing several components into one at lower cost, and by providing an experiential element to their offerings.
But I must stress that those approaches work for PRODUCTS. Subscriptions are different. If product differentiation thrives on features and functions, subscriptions thrive on experiences. In this example, Apple is set up to provide low cost products, much like the brick and mortar retail giant Walmart. But Apple is poorly suited to mediate third party experiences — notice I said third party experiences.
Apple is a master of orchestrating your experience with an iPhone or iPad or the shopping experience in its stores. But it hasn’t learned the fine art of making itself invisible in transactions where it is only supplying basic infrastructure. Its third party billing policies — encoded in a billing system — don’t help matters.
Beyond the billing issue is a more substantial economic issue as basic as supply and demand. The Apple approach looks like a supply side, build it and they will come model but we’ve crossed over into a demand side era. If you’ve noticed over the last couple of years with credit tight and the consumer tapped out, demand isn’t what it used to be.
The highly leveraged balance sheets of individuals, corporations and governments mean that, absent a return of John Maynard Keynes from the grave, demand will remain slack for a prolonged period. Increasing or maintaining supply without doing something about price is like pushing on a proverbial string in this situation.
If you look at the newspaper industry today you will notice that readership is declining for two fundamental reasons. Younger people don’t read papers as much as older people do and there are many more older people. As Baby boomers give up the daily habit or (yikes!) begin to give up the ghost, there are fewer people demanding papers.
Most papers have already cut their coverage, laid off newsroom staff and wrangled pay cuts from their unions. These actions have not been enough as advertising sales have declined and many have cheapened their products by printing fewer pages and covering less news.
Back to Apple.
Charging a high price for using its infrastructure for a third party subscription transaction is not going to excite publishers or make lots of money for Apple. Publishers (and SaaS software companies) will go elsewhere. There is a fundamental difference between selling products and selling subscriptions. For all of Apple’s hip twenty-first century marketing and customer service prowess, its approach to subscriptions says loud and clear that it is still a twentieth century manufacturer and supply side fan.
Zuora, the subscription billing company announced that it has concluded its Series C round of financing raising $20 million and bringing its total capital investments to $41.5 million. The round was led by Redpoint Ventures and the existing investors including Benchmark Capital, Marc Benioff, Shasta Ventures and Tenaya Capital also participated.
This strong performance says a lot about the company, its management and the idea of the subscription economy. In a time when credit is tight and venture funds are raising much less capital than they did five or ten years ago, Zuora’s success marks a kind of breakthrough that says good ideas can still be funded and that the subscription economy is a real good idea.
Analysts refer to the just finished recession as a balance sheet recession rather than the more familiar inventory related type. In classical economics when inventories get out of hand, production slows, causing a decline in economic activity, and inventories are sold off to rebalance the system. Inventory recessions have become less prevalent in the last several decades as powerful analytics software has been employed for inventory management and ERP technology has better managed production.
The balance sheet recession happened when the banking system became over leveraged and credit collapsed. Over the last two years corporations and individuals have worked to deleverage their accounts and in the process low credit availability caused a recession.
This recession precisely points out the importance of the subscription economy and may be a harbinger of recovery, albeit on different terms. Leverage is being replaced by subscriptions as companies and individuals come to the realization that they don’t have to own everything they use if a viable subscription is available.
So far, companies like Salesforce.com, RightNow Technologies, NetSuite and many others have leveraged the subscription model to good effect with Salesforce becoming the first company to achieve billion dollar revenues based on the subscription model.
But subscriptions are not simply for software and that’s where Zuora comes in. Many other industries could profitably take advantage of the subscription model if only they could accurately invoice and collect. The hidden issue for many companies wanting to enter the subscription economy is that their antiquated billing systems cannot support the high transaction flows inherent in the subscription model.
Enter Zuora and its ilk. As a leading company in the rapidly growing subscription billing industry, Zuora has figured out the business process including the transaction flows. Zuora, or a company like it, will be at the heart of a change in the publishing industry as newspapers and magazines begin moving their subscriptions to the Web. Periodical publishing is a great example of an industry hamstrung by its billing processes. With billing so difficult all but a small handful of newspapers—The New York Times, The Wall Street Journal for example—give away their product. Those papers have begun to stop the revenue drain and they are in the vanguard.
So, Zuora has twenty million dollars more in the bank this morning and because the company has been cash flow positive for most of this year, it looks forward to spending the new money on growth. It is hiring sales people and opening up its European offices, for starters. You can do a lot with that kind of money, including spark a business revolution, which will surely follow.