Apple and the Rising Subscription Economy

Apple (AAPL) introduced App Store subscriptions this week. Although people disagree on the fairness of the company's 30 percent take of all revenue resulting from subscription sales, the feature is here to stay. Might its introduction signal a subtle shift toward a new paradigm for paying for mobile content and apps?

At least one person thinks so. Tien Tzuo, founder and chief executive officer of Zuora and former chief marketing officer at (CRM), has suggested to me that by introducing in-app subscriptions to the App Store, Apple is joining a general trend toward a subscription-based economy. A subscription economy basically means that instead of a single lump sum payment, you pay a smaller, repeating fee for continued access to goods or services.

Examples of subscription-based economies can be found in just about every industry. Software-as-a-service (SaaS) is a prime example in the digital world, including such accounting services as Freshbooks or project management tools as Basecamp. Dropbox provides subscription-based cloud-storage, as does Apple's own MobileMe. Media companies like Rhapsody and Netflix (NFLX) are trying to move subscription-based music and video access into the mainstream. You can even subscribe to cars, via rental-sharing companies such as Autoshare and Zipcar.

The benefits of paying by subscription are guaranteed support through the life of a product and freedom from quickly outdated software or hardware in a rapidly shifting marketplace. If I buy Photoshop CS5 (ADBE), for example, that's the version I'm stuck with until I cough up the money to replace it with a new one. If I become a Freshbooks subscriber, I always have access to the most recent version and I don't have to worry about the company dropping support for my product until it shuts off the lights for good.

Cheap Apps Require New Buyers

The current App Store economy, while it may appear robust and healthy, actually has serious problems For many developers, a continued revenue flow depends on ever-expanding growth because their apps are priced low, designed as one-time purchases. Customers have come to expect lengthy, free update tails for said apps. If they aren't selling to new customers, there's no income to cover the costs of ongoing support and iteration.

Tzuo sums up the problems inherent in such a model quite nicely: "The relationship between people and businesses—and the products and services they use—is no longer a one-time event. In fact, why should get developers just get paid 99¢ vs. $5 a year to continue to reinvest in their app?"

Adopting a subscription model would give developers a bit of breathing room, providing a sustainable model for apps. You could do much better with niche apps because selling to a small, targeted audience would still provide an income stream once you'd reached market saturation.

While much of the early focus around in-app subscriptions has fallen on the publishing industry, Apple clearly wants developers in other areas to consider implementing the system. It just sent out an e-mail to developer account holders announcing the new subscription features, using language clearly aimed at a general audience. Why not? If developers can entice iOS users to embrace recurring payments, Apple wins because it would receive more app revenue.

Consumers could also gain because a subscription model would help developers focus on delivering a user experience that gets better with time instead of quickly becoming stale. Buyers can reap the rewards of investing in a service over the long term instead of buying a 99¢ throwaway app that will get deleted after one day of use or when something shinier and faster comes along.

For Content Storage: the Cloud

A subscription-based app economy could also be useful if Apple intends to create a cloud-based iPhone, as recent rumors suggest. Kevin pointed out one way Apple could keep onboard storage requirements down for such a device: selling apps as subscription services with limited on-device life spans. It's probably more likely that Apple would use subscriptions to encourage developers to keep in-app rich media content stored off the device—accessible on demand via the cloud, depending on a user's membership level.

In addition to many potential benefits, there are barriers and downsides to an App Store subscription economy. The first and biggest hurdle is developer criticism that Apple is asking for too much in demanding a 30 percent share of all revenue. I think we'll find, though, that developers who were content to hand over that much of their one-time sales will probably agree to do it with recurring revenue, so long as the model catches on with consumers.

The second barrier is that App Store customers are accustomed to one-time payments, an abundance of free apps, and even free feature updates and app enhancements throughout a product's life. Convincing consumers that paying repeatedly for a product or service is preferable won't be easy, especially if that product or service is locked to a specific device (or set of devices). Apple will have to foster partnerships with some of the App Store's most popular developers to convince users to come along for the ride. Developers will have to get creative with what they can offer in exchange for subscription payments to make such commitments irresistibly attractive.

In the end, the barriers blocking the wide adoption of a subscription-based App Store economy are significant but they aren't insurmountable. Freemium, a similar concept, is already a huge success in the App Store. Subscription-purchasing models have demonstrated their value in many other areas. All that remains is for a few brave App Store pioneers to demonstrate that the same value exists in App Store subscriptions, too.

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