Category: Innovation

Moving to a subscription economy

Customer subscription models are changing many industries which opens up opportunities for smart businesses

One of the biggest changes in business is the move to subscription based services rather than selling one-off, lump sum products. This is affecting industries ranging from the motor industry to software.

Business Spectator has a good interview with Tien Zhou of Zuora on the subscription economy and how it’s changing the business world.

We’re pretty passionate in our belief that every company will be a subscription business in the next five, 10, 20 years. That’s certainly what we’re seeing with digital companies, whether they are technology firms (software, hardware), media and publishing firms, or telecom companies. The ideas of content and access are starting to blend together and we are seeing more and more commerce companies dip their feet as well. So we’re really see this as an across the board phenomenon.

Probably the industry most focused on the subscription model right now are newspapers – subscribers have always been an important revenue stream for the print media and the loss of their advertising rivers of gold means they are looking at ways to get more money from readers.

As Tien Zhou points out, businesses moving to subscription services is an across the board phenomenon.

Yesterday I mentioned the Google Maps connected treadmill, that is a subscription model where the treadmill seller gets money from the initial purchase, but also a revenue stream from the services attached to it.

The same business model applies to connected motor cars or the social media enabled jet engine. The aim is to replace lump sum purchases with lifetime subscriptions.

Getting customers onto lifetime subscriptions has been one of Microsoft’s aims for the past decade as the company realised that software users, particularly those using Microsoft Office, hung onto their CDs for years and increasingly decades.

Perversely it took Google and Apple to show Microsoft how to wean customers onto subscription services.

That Microsoft Office is a good example of the evolution of subscription software, or Software-as-a-Service (SaaS), isn’t an accident. The enterprise computing sector is currently the most profoundly affected as companies like Google and Salesforce threaten high cost incumbents.

A good example of the changing economics of software is the supermarket chain Woolworths moving onto Google Docs.

With 26,000 seats, the reseller can expect to make $260,000 a year in commissions based on Google’s standard terms of $10 per seat per year.

That total sum is less than the commission a salesperson would have earned for a similar sized IBM, Oracle or Microsoft installation.

A whole generation of IT salespeople who’ve grown fat and comfortable on their generous commissions now find their incomes being dramatically reduced.

Similar things are happening in industries like call centres with Zendesk, point of sale systems and event ticketing with Eventbrite – incumbents are finding their incomes steadily being eroded away by online services.

At the same time agricultural and mining equipment suppliers are introducing big data services for their customers where the information gathered by the sensors built into modern tractors and bulldozers are providing valuable intelligence about the crop and ore being gathered.

The subscription business model is nothing new, King Camp Gillette perfected the strategy with the safety razor at the beginning of the Twentieth Century. The razors were cheap but the blades were where the money was.

Microsoft and the rest of the software industry tried to introduce subscriptions in the late 1990s with Software as a Service, but failed because the internet wasn’t mature enough to support the model. Today it is.

Like many things in today’s economy, the subscription model is going to change a lot of markets. It’s a great opportunity for disruptive businesses.

Subscription envelope image courtesy of jaylopez through sxc.hu

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Hurtling into the post PC era

The latest computer sales figures are not good for those businesses who depend up personal computers.

Consulting firm IDC quarterly report on PC shipment figures this quarter shows a stunning 14% drop of global computer sales. On those numbers, the PC era is definately over.

Across the board the figures are horrible with double digit declines across the board. Market leader HP reported PC sales had fallen by nearly a quarter yet they retained their market lead as all of their competitors reported similar falls.

What’s also notable is the PC industry’s ultrabook attempt to wean consumers off cheap nebooks has backfired terrible, as the analysts note;

Fading Mini Notebook shipments have taken a big chunk out of the low-end market while tablets and smartphones continue to divert consumer spending.

Instead of buying higher priced ultabooks, consumers have abandoned portable PCs altogether and gone to smartphones or tablet computers.

The PC manufacturers must be rueing how they let the tablet computer market slip through their fingers during the 2000s.

Failing to ship decent tablet computers is symptomatic of a bigger problem for the PC manufacturers – their inability to innovate.

The PC industry is struggling to identify innovations that differentiate PCs from other products and inspire consumers to buy, and instead is meeting significant resistance to changes perceived as cumbersome or costly.

As IDC point out, even if they do introduce new products, consumers are wary that any “innovation” is going to be cumbersome. Basically the PC manufacturers have lost their customers’ trust.

How this affects Dell’s proposed buy out remains to be seen; it’s hard to see how investors would not be concerns at a 10% fall in sales, although Dell was one of the better performers.

For Microsoft, this news should further accelerate their moving products and customers to their cloud and enterprise products. For their Windows division it looks like there are tough times ahead.

The decline of the PC market is itself a study in product and innovation cycles. It could well be that the personal computer is going the way of the fax machine.

For some businesses that will be tragedy, but the market – and the opportunities – move on.

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Tasmania and the travelling circus

Big events are good for giving a local economy a short term boost, but how does Tasmania build its economic foundations?

“We bring in almost everything,” says V8 Supercars director Mark Perry as he guided journalists around Launceston’s Symonds Plains racing track.

Everything Mark showed us – a fleet of trucks, communications equipment, hospitality tents and the racing teams themselves would be packed up on Sunday night, shipped to Melbourne and flown to New Zealand for the next race.

The V8 Supercar management are very proud of their work, and they should be given the massive task they have, but it exposes a weakness in the Tasmanian economy in that almost all the high value employment and equipment has to be flown in.

Quiet times in downtown Launceston

Arriving into Launceston on the Friday before the races, it’s interesting how little hype there is around the event. In Sydney, San Francisco or Cannes there would be banners and flags around the city welcoming visitors, in Launceston there’s almost nothing despite the race meeting being one of the state’s biggest events.

It was also surprising how there were no downtown events to complement the main attraction.

Almost every major sporting event from the Olympic Games and FIFA World Cup to the AFL Grand Final and Australian Open has some inner city satellite venues with big screens for the locals who can’t make it to the stadium.

Having those satellite events adds to the buzz and hype in the host city. Something that downtown Launceston needs at 7pm on a Friday night.

That lack of support by the community is notable, particularly in light of the $600,000 per year the cash strapped Tasmanian government pays in subsidies for the V8 Supercars.

I’m against government support for events like these, but if that money is going to spent it may as well be spent properly to maximise the economic benefits.

Subsidies like this would be even better if they were part of some grander economic plan, but like all the payments given to the film production, motor manufacturing and other industries, they are based more on populism than any strategy – the politicians may as well be giving free beer out in Launceston’s main street.

Why the community support is so tepid for the Supercars event is so tepid is something I’m going to be exploring in the next few days as I meet various business leaders in Launceston and Hobart to hear how the state is positioning itself in the 21st Century.

In the meantime, the V8 Supercars “travelling circus” has moved on, hopefully Tassie will have some more long term jobs to show for it.

Paul travelled to Tasmania and the V8 Supercars courtesy of Microsoft Australia

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Are Australians too risk adverse for startups?

Does a culture of property speculation hinder new businesses and startups?

Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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Does Google have corporate Attention Deficit Disorder?

Are Google paying the price of not paying attention to their core business?

The news that Google were releasing a service called Keep designed to store things you find on the web for future reference received a hostile response yesterday.

It seems the company’s dropping Google Reader into the deadpool proved the final straw for many of the tech early adopters who’d invested too much time building their feeds and other digital assets only to find services taken away from them.

This isn’t just Google Reader, various other services are suffering; Google Alerts has become functionally useless while the Frommers guide book franchise is slowly dying after the company bought it from John Wileys.

Corporate Attention Deficit Disorder

Google are suffering corporate Attention Deficit Disorder (ADD) where management find a bright shiny thing, play with it for a while then get bored and wander off.

This is trait particularly common amongst cashed up tech companies. In the past Microsoft and Yahoo! were the best examples, but today Google is the clear leader in the Corporate ADD stakes.

Corporate ADD requires a number of factors – the main thing is a big cash flow to fund acquisitions.

In companies with this luxury, bored managers find themselves looking for things to do with all the money flowing through the door and when a hot new product or market sector appears those executives want to be part of it.

So a company gets acquired or a project is set up and the advocate drives it relentlessesly within the corporation, usually with lots of PR and write ups in the industry press.

Then something happens.

Usually the advocate – the manager or founder who drives the project – gets bored, promoted or sacked and the project loses its driving force within the organisation.

Without that driving force the service stagnates as we saw with Google Alerts or Reader and eventually company closes it down.

This has unfortunate effects on the marketplace, users invest a lot of time in the company’s service while  innovators in the affected market struggle to get funding as the investors say “we can’t compete with Google’.

A changed perspective

What’s interesting now though is the sea-change in the attitude towards Google’s Keep announcement – rather than dozens of articles describing how competing services like Evernote are doomed in the face of the search engine giant entering their market, most are saying this validates the existing startups’ investment and vision.

More importantly, most commentators are saying they are going to stick with the services they already use because they no longer trust Google to maintain the product.

This is what happens when you lose the trust and confidence of the market place.

One of the mantras of the startup community is “focus” – focus on your product and the problem you want it to fix. That large businesses lack that focus shows how far from being a lean startup they have become.

Google’s real challenge is to regain that focus. Right now they have rivers of cash flowing through their doors but in an age of disruption, it may well be that they could dry up if no-one pays attention.

Ritalin image courtesy of Adam on Wiki Images

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The high cost of new media experiments

The BBC’s expensive exit from their Lonely Planet investment shows the costs and risk for old media empires as online business models evolve.

The BBC yesterday sold Lonely Planet to US media company NC2 Media. Their £80 million loss on the venture puts them in good company as established media struggle to find new online channels and revenue streams.

While the losses aren’t trivial, they are not quite in the league of News Corporation $545 million loss on MySpace or Time Warner’s billion dollar adventure with AOL.

All three stories show how tough it is for ‘old media’ adapting to a new landscape.

The problem is there for ‘new media’ as well, most ventures struggle to make money and many of the success stories like Huffington Post rely on a combination of free content and a greater fool buying them.

No-one has really figured out what the new media revenue models are; not the established publishers or the online upstarts.

Lonely Planet’s online success was due to their forums which, like most web discussion boards, can feature discussions politely described as “robust”.

This was always going to a problem for the BBC’s public service management culture and it resulted in the shutdown of the Lonely Planet Thorn Tree forums over Christmas.

So it’s not surprising that the BBC has decided to end its experiment and now the corporation’s management is dealing with the criticism of those losses.

While it’s easy to criticise the BBC for the deal, at least the broadcaster was attempting something different online, doing nothing is probably a poorer strategy than buying MySpace or Lonely Planet.

Over time, we’re going to see a lot more experiments and many will be public embarrassments like those the BBC and News Corporation have suffered, but there will be successes.

Someone will crack the code and they will be the Randolph Hearsts of this century. It could one of the Murdoch heirs, it could be the owners of NC2 Media or it could be some young, hot shot developer working in a Rio favela or the slums of Kolkata.

But it will be someone.

It’s an exciting time to be in business.

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Will Google Deals be the next service to join the graveyard?

Google Deals was an attempt to compete with group buying services like Groupon, that experiment has failed and another tombstone for Google’s Graveyard should be on order.

Google’s graveyard of discontinued services is getting crowded, with Google Reader being one of a dozen services to bite the dust in last week’s springclean.

As Google ruthlessly cut services that don’t make the grade, the question is ‘which ones are next’?

Towards the top of the list has to be Google Offers, the group buying service that was set up in a fit of pique after Groupon spurned the search engine giant’s $6 billion acquisition offer.

Google Offers has only rolled out in 45 locations across the United States over the last two years and the deals in recent times have become increasingly desperate, here’s a recent New York deal.

an example of how Google offers is dying

Schmakery’s Cookies may well be fine products, but getting one free cookie isn’t exactly a jump out of your seat experience and it shows just how Google are struggling with this service.

That Google are struggling with Offers isn’t surprising though, the daily deals business relies on sales teams working hard to acquire small business advertisers. Small business is a sector that Google struggles with and running people focused operations is the not the company’s strong point either.

Google’s exit from the group buying market may be good for Groupon and other companies in the sector. The Economist makes the point that Google’s presence in these markets distorts the sector for other incumbents while scaring investors and innovators away.

This is rarely permanent though as companies like Google and Microsoft often suffer a form of corporate Attention Deficit Disorder – Knol is a good example of this and Seth Godin describes what happens “when the 800 pound gorilla arrives”.

Eventually the 800 pound gorilla finds there aren’t a lot of bananas, gets bored and wanders off.

Which is what has happened with RSS feeds and Google reader. Now the little guys can get back to building new products on  open RSS platform while Google, along with Facebook and Twitter, try to lock their data away.

For Groupon, the departure of Google from the deals business may not be good news as it could mean smart new competitors enter the field. Either way, there’s some challenges ahead for the owners of group buying services.

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