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Building a Strategy for the Subscription

Economy
Published: 11 April 2011

Analyst(s): Chris Fletcher

The subscription economy is a market reaction to a growing range of media

and technology products that can be delivered digitally to devices ranging
from tablets, such as the iPad, Xoom and PlayBook, to smartphones and
mobile devices. Companies that are not offering or building strategies
around subscription management may miss the opportunity.

Key Findings

By 2015, more than 40% of companies selling media and digital products, such as software,
services and content, will rely entirely on software as a service (SaaS) or hosted subscription
management services to manage their fulfillment, entitlement, billing, renewal and customer
loyalty requirements.

By 2015, 35% of Global 2000 companies with nonmedia digital products will generate
incremental revenue of 5% to 10% through subscription-based services and revenue models.

Subscription revenue streams can help to smooth out seasonal revenue peaks, generate
incremental revenue from add-on services, and strengthen the customer experience and
customer loyalty.

Subscription management raises new concerns, including subscriber churn; management of

unprofitable or low-profit subscribers; and privacy, security and payment-processing
challenges.

Recommendations

Companies with subscription management systems in place should use data from customer
subscriptions to re-examine products, revenue models, and, most importantly, your company's
customer relationships and customer experience.

Companies with subscription management solutions, particularly internally developed solutions,

should re-evaluate their solutions on a regular basis, given the new developments in the
subscription management market.

Consider the potential cost savings, but also the potential disruption involved in moving from
currently implemented solutions to new offerings.

What You Need to Know

Companies that are not offering subscription options as part of their product mix should put a
priority on assessing the value of developing a subscription strategy. However, subscription
business models also raise new concerns regarding issues such as managing subscriber churn;
managing unprofitable or low-profit subscribers; and addressing privacy, security, and payment
processing challenges.

Strategic Planning Assumption(s)

By 2015, more than 40% of companies selling media and digital products, such as software,
services and content, will rely entirely on SaaS or hosted subscription management services to
manage their fulfillment, entitlement, billing, renewal and customer loyalty requirements.
By 2015, 35% of Global 2000 companies with nonmedia digital products will generate incremental
revenue of 5% to 10% through subscription-based services and revenue models.
By 2015, more than 50% of Global 2000 companies that offer subscription-based extensions to
their product lines will rely on internally developed applications or extensions to packaged ERP,
CRM or financial management applications that do not have explicit subscription management
support capabilities.

Analysis
The Subscription Economy
Subscription management applications (SMAs) enable a company to manage the business
processes required by a subscription product model. A subscription business model is
characterized by a product or service that is paid for by the customer or consumer on a continuous,
periodic basis; includes ongoing access to content, products or services for the life of the
subscription agreement; and fosters a degree of customer experience or customer loyalty that is
unique from a purchased product.
The "subscription economy," as it is sometimes referred to in the press, is a market reaction to a
growing range of media offerings (newspapers, magazines, books, music and movies) and
technology products (applications, services and related content) that can be delivered digitally.
Subscription management business models are most common in companies that provide products
that can be delivered electronically, including media and software, and, in some industries, add-on
services that can be delivered digitally.

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Interest in subscription management is also being spurred by the rapid popularity of tablet devices,
including Apple's iPad, Motorola's Xoom, Research In Motion's (RIM's) PlayBook, and other
portable devices that encourage the consumption of applications, movies, publications, data and
related digital content. Today, subscription management is largely limited to companies that sell
media-based or digitally delivered products, such as music, movies or publications on a
subscription basis. However, some companies that sell physical products to industries such as life
sciences (medical devices and diagnostics), high tech (computers and communications), or process
and discrete manufacturing (automated manufacturing tools) are developing strategies to generate
incremental revenue streams through the use of subscription business models based on
subscription services, such as diagnostics, monitoring and data collection.

Adoption Cycles
Adoption of subscription management falls into three categories (see Figure 1):
Figure 1. Subscription Management Market Adoption

Type A:
Established
Markets

Type B:
Emerging
Markets

Type C:
Embryonic
Markets

Industries with products that are

subscription-based and
dependent. Majority of revenue is
subscription-based.

Type A markets evolving from

purchase/license models to
broader adoption of subscription
products and services. Minority of
revenue is subscription-based.

Industries developing new

revenue streams through
subscription-based services that
augment mainstream, digital or
physical products.

Communication (mobile devices,

phones, cable and satellite TV,
Internet service providers); media
(publishing, newspapers, music,
movies); software (SaaS
applications, some data content).

Media (publishing, newspapers,

music, movies); software (SaaS
applications, app stores;
application data/content).

Technology, life sciences,

industrial and line-of-business
products that will expand the
customer experience via
subscription-based purchases and
usage models.

Adoption level:
Deep adoption and use of
subscription management, but
majority of company revenue still
comes from purchased or licensed
products.
Subscription management is
mostly based on internally
developed solutions.

Adoption level:
Deeper use of subscription models
and subscription management
applications/services. Minority of
revenue is subscription-based, but
growing strategically. Incremental
revenue generated through
subscription-based services, and
value-adds.

Adoption level:
Little/no current adoption, but
strategy development occurring in
some companies.

Source: Gartner (April 2011)

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Apple's Wristlock on the Industry

Apple's recent announcement of its iTunes-based subscription service provides a good illustration
of the power of the ecosystem in Apple's case, the controlling of a vertically aligned ecosystem
that includes the device, content management and delivery, subscription management, and billing.
The first impact is on publishers and media, which have felt the financial effects of the Internet, and
are now seeing the potential loss of a sizable amount of margin from products sold through Apple's
iTunes.
Apple provides a subscription ecosystem in which the device, device application and digital product
fulfillment are all tightly controlled, presenting a consistent user experience across a series of
devices, such as the iPad, iPhone and iPod touch. Rapid consumer adoption of iPad devices, in
particular, may give media, publishing and digital product companies access to a demographic and
market that they may not otherwise reach. However, the cost of entry not only in the 30% of
revenue that Apple requires, but also in the loss of access to customer data is simply
unacceptable to most publishers. Companies with nonmedia digital products will have to decide
whether Apple's infrastructure opens up enough new market opportunity to make the 30% revenue
loss acceptable, or whether they'd be better served by developing their own subscription
management infrastructure.
Apple's announcement also highlights the value of subscription billing models the ability to build
a more stable and, over the midterm to long term, a larger revenue stream, compared with the
revenue from a one-time sale. The value of customer information is brought into sharp focus, as
publishers and manufacturers mull the implications of their channels in this case, Apple
keeping customer data that could be used to underpin marketing campaigns, and improve
customer intimacy and the customer experience.

Business Benefits of Subscription Management

The potential business benefits of subscription business models include:

Enhance the customer experience through new or evolving business/product models.

Manage revenue (ensure appropriate billing for usage and entitlements).

Generate incremental revenue from add-on or cross-selling services.

Ensure revenue consistency and predictability; reduce spikes.

Manage customer experience through subscription management and related areas, such as
billing and entitlement.

Encourage customer loyalty through renewal management.

Leverage growing digital economy and the "Internet of things."

Provide targeted marketing through richer, transaction-based customer insight.

Build a customer annuity through predictable revenue, services and revenue recognition.

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Business Challenges of Subscription Management

The potential business challenges involved in subscription business models include:

Address concerns with intellectual property protection, licensing, access control and dynamic
fulfillment.

Control customer churn.

Ensure customer loyalty.

Manage delinquent and nonpaying customers, and a higher volume of payment transactions.

Maintain privacy and security of customer data, transactions and payments.

Summary
Leverage the subscription management strategy process to re-examine products, revenue models,
and, most importantly, your company's customer relationships and customer experience (see
Figure 2).

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Figure 2. Subscription Management: Core Application Architecture

Device, Application and User Experience/Interface

Subscription Management

Usage
Management

Billing
Management

Entitlement
Management

Content
Management

Fulfillment
Management

Delivery
Management

Source: Gartner (April 2011)

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