Subscriptions: Everything-as-a-Service

Host Walter Isaacson explores how a multi-industry shift to the subscription economy impacts companies and consumers.
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In this episode:

  • Past due (0:00)
  • The end of ownwership (3:33)
  • Rethinking the movie rental (9:07)
  • Dinner delivered (12:52)
  • The subscription shift (16:05)
  • Data on demand (17:21)
  • Signs of the Times (18:07)
  • Members only (24:50)
  • Subscription fatigue (26:37)
  • A fever pitch (27:30)

Subscription services have been around for centuries, but while newspaper publishers have struggled to retain paying subscribers since at least the 1800s, software, music and even food are now part of a huge “subscription economy” that’s growing at a rapid rate. How has this shift encouraged innovation for companies and how does it impact consumers today? Listen and subscribe to find out.

Remember to smash that subscribe button and check out these links for more:

  • Salesforce led the way with software on the cloud. See how to optimize your cloud usage.
  • We covered meal kits, but we can’t forget about snack kits! Learn the history of snacking in our episode.
  • Thinking of cancelling your gym membership? We discussed how the gym can be anywhere in our fitness episode.

“There's a new world that's opened up and it's not one of the ownership, it's a world of usership.”

— Tien Tzuo, founder, chairman and CEO of Zuora

Guest List

  • Tien Tzuo is founder and CEO of Zuora, the leading subscription management platform, which he started after nine years at Salesforce, serving as the company’s chief marketing officer and chief strategy officer. Tzuo is also the author of the USA Today, LA Times and Amazon best-selling book “SUBSCRIBED: Why the Subscription Model Will be Your Company's Future―and What to Do About It.”
  • Katie Vanneck-Smith is the co-founder and publisher of Tortoise Media with James Harding and Matthew Barzun. Tortoise is a slow media news platform that is committed to looking at what is driving the news and is built on a membership model that is inclusive and open. Prior to this role, Katie was the president of Dow Jones, publisher of The Wall Street Journal, where she led the company to over 3 million subscribers, the largest number in WSJ history.
  • Robbie Kellman Baxter is a consultant, author and speaker. She wrote both “The Membership Economy” and “The Forever Transaction,” and hosts the podcast Subscription Stories. Robbie has more than 20 years of experience providing strategic business advice to major organizations, including Netflix, Microsoft and The Wall Street Journal. She has been focused on subscription and membership models for the past 20 years.
  • Matthew Wadiak is the founder and CEO of Cooks Venture, a vertically integrated AgTech and food company paving the way for the future of agriculture. Cooks Venture breeds and raises a proprietary slow-growth, heirloom chicken, taking into account the health of the animal and the health of the environment. Prior to Cooks Venture, Matthew founded and served as the COO of Blue Apron, the trailblazing meal-kit company that reimagined the way food is produced, distributed and prepared for home cooks.
  • Marc Randolph is the co-founder and first CEO of Netflix, though his career as an entrepreneur spans more than four decades. He’s founded or co-founded half a dozen other successful start-ups, most recently including Looker Data Sciences, which was sold to Google in 2019 for $2.6B. He is currently mentoring a handful of other early-stage companies, has advised hundreds of other entrepreneurs, is an active seed investor in startups all over the world and the author of the international bestselling memoir “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea.”

Speaker 1:

Get your paper, read all about it [crosstalk 00:00:04]

Walter Isaacson:

The year is 1809 and Hezekiah Niles, the editor and publisher of the Baltimore Evening Post, is in a tough spot. His newspaper appears to be doing well. He has nearly 2,000 subscribers, but below the surface, things are starting to unravel.

Walter Isaacson:

After paying for newsprint, ink, wages, rent and equipment, Niles can only eke out what he described as a trifling profit. But earning that trifling profit depended on subscribers paying their bills, and too many of them were refusing to pony up the money they owed. Niles calculated they owed him $12,000, so he took to the pages of his newspaper to publicly call them out. There was no question that Americans loved their newspapers, but most of these people were reading their newspapers for free in libraries, coffee shops and reading rooms, or they were subscribers who hadn’t paid their bills. Americans believed access to news was their birthright and a vital part of modern democratic life. Perhaps that’s why they thought they should get the news without paying for it, and that put Niles and other publishers in a bind.

Walter Isaacson:

Without subscription revenue, publishers were becoming increasingly reliant on advertising dollars, and advertisers only wanted to buy space and papers with large subscriber list. They didn’t care whether those subscribers were paid or not. It was a dilemma that Niles was never able to resolve at the Evening Post. So in 1811, facing mounting losses and tired of chasing deadbeat subscribers, he decided to close the newspaper. But the lessons Niles learned working at Baltimore’s Evening Post helped his next venture flourish. A few months later he launched the Niles Register. It was an ad free, subscription only publication that became America’s first weekly news magazine and one of the nation’s most widely circulated papers.

Walter Isaacson:

Today, newspaper and magazine publishers face challenges that Niles could easily understand. But while the publishing industry continues to struggle to make the subscription model work, subscriptions are taking off in other unexpected areas and the consequences of this shift, for both consumers and businesses, have been profound. I’m Walter Isaacson, and you’re listening to Trailblazers, an original podcast from Dell Technologies.

Speaker 3:

Get the story, get it to the paper, get the paper on the street.

Speaker 4:

Netflix is the world’s leading entertainment service.

Tien Tzuo:

Now it’s offered as a service, anybody can do it.

Speaker 6:

These girls of the circulation department are typing metal address plates for new subscribers.

Robbie Kellman Baxter:

I think milkmen, for a lot of people, that’s their first experience with subscription.

Tien Tzuo:

We are witnessing nothing short than the end of ownership, and this is pretty profound, and I know this sounds far reaching, but there’s a new world that’s opened up and it’s not a world of ownership. It’s a world of usership.

Walter Isaacson:

This is Tien Tzuo, the co-founder and CEO of Zuora. Zuora provides software to companies that runs subscription businesses. He’s also one of the world’s leading evangelists for the subscription economy.

Walter Isaacson:

In 1999, Tzuo joined a San Francisco based startup called Salesforce.com. He was employee #11 at a company that now employs more than 55,000 people and has an annual revenue of more than $21 billion. Salesforce was a software company that set out to radically transform the relationship between its product and its consumers. Software had traditionally been sold like anything else, customers bought it and owned it, end of story. When upgrades or new versions were released, consumers found themselves stuck with an obsolete piece of software. But Salesforce had a different idea.

Tien Tzuo:

What we really saw that, because of the internet, that it didn’t make sense for software to be delivered on a CD anymore and to have people wrestle with how to install and maintain it. We simply wanted to offer it in the internet, what people now call “in the cloud” if you will. And if we’re going to do that, then instead of asking people to buy software with one time fees, it made more sense for them to rent it or have a pay as you go model where we’ll take care of everything. We’ll take care of the maintenance, the backups, making sure it’s up and running. And so, this whole software as a service industry was born and we really shifted software to the subscription model that we all find ourselves living in today.

Walter Isaacson:

Today, software as a service, or SAS, has become the norm for most web-based businesses and individuals. Instead of paying a couple of thousand dollars to buy a graphic edit program such as Photoshop, you can now get a Photoshop subscription for about $20 a month and cancel it if you no longer need it. Software is one industry where the era of usership rather than ownership has already arrived, and Tzuo believes it’s only the beginning. What’s got him excited these days is the extension of the SAS model to products in the physical world.

Tien Tzuo:

Because every physical product is now coming off the assembly line with sensors, with connections to the internet, if you’re buy a washing machine now, it’s connected to the internet. If you buy a car now, it’s connected to the internet. So now you visualize all these engineers with all the physical products that we use having that same experience of saying, “That’s how my customers are using my product. That’s how much they actually drive. That’s how much detergent they actually put into the washing machine.” And so the same revolution that really took hold in the software sector to completely transform it into a service, is starting to happen in the physical world. And that’s really exciting, our whole world is about to change again.

Walter Isaacson:

At Zuora, Tzuo works with companies that, at first glance, might seem unlikely to embrace the end of ownership. Take the company Caterpillar, for example. They manufacture heavy equipment for the construction and mining industries.

Tien Tzuo:

Well, we used to play this game, it’s late at night, we’re out at dinner and we used to ask ourselves like, “What is the industry that’s going to be last to fall? Is there an industry that will never make the transition?” And we used to talk about, “Well, how about like heavy machinery? How about like excavators? How about tractors?” Like, “How do you subscribe to a tractor?” And we started working with a company like Caterpillar a few years ago. And what we found, that it wasn’t really about the machinery. People weren’t looking a to buy an excavator, they were looking to move some dirt. So if you can go to the customer and say, “Look, how many tons of dirt are you looking to move?” And, “Why don’t we charge you for that?”

Walter Isaacson:

Tzuo believes that to operate successfully in the subscription economy, companies need to develop long term relationships with their customers. They need to understand what those customers are actually trying to accomplish, and in many cases, that means a subscription makes more sense than a sale.

Tien Tzuo:

So that’s what we discovered. So any company that is able to rethink what they do, start from the customer, understand the outcomes the customer are actually looking for, and then use modern technology, including smart devices, to achieve that outcome. It’s not really about the robot vacuum, it’s really about keeping your house clean, and if I can keep your house clean for $30 a month, isn’t that something that you would pay for?

Walter Isaacson:

At the same time Salesforce was turning software from ownership to usership, two other Silicon Valley entrepreneurs were looking for ways to disrupt another deeply entrenched business. They didn’t start out with a subscription based model, but when they finally stumbled upon it, they created a powerhouse that has revolutionized an industry.

Mark Randolph:

We started Netflix in April of 1998. And at the time, the only thing we were trying to do really was do video rental a different way. And the original model, there was not a huge amount of innovation.

Walter Isaacson:

Mark Randolph is the co-founder and first CEO of Netflix.

Mark Randolph:

Our model was to have a video rental store on the internet that carried every movie available on DVD at the time. And instead of you walking into your corner of video store to pick it up, we would mail it to you. But that’s pretty much where the innovation stopped. We had due dates, we had late fees, it was a regular video model.

Walter Isaacson:

For a year and a half, Netflix tried to make their regular video model work with little success. Then desperation drove them to innovation.

Mark Randolph:

Reed Hastings, my co-founder, and I were in the Netflix warehouse one afternoon. And at the time we probably owned several hundred thousand DVDs, the great majority of them that were sitting on the shelves in our warehouse. And I remember us talking about how useless it was, having all the DVDs sitting here doing nothing. You’d finish a disk, you’d mail it back, then you’d have to come to the website and pick out the next one. And we said, well let’s cut that friction out. Let’s have them start off by making a list of movies they want to see, and we can automatically mail it to them. And then came the big intuitive leap, which said, well, rather than charging them $4 each time they want to swap out a disc, why don’t we just let them watch as much as they want in a month, it’ll be unlimited, all you can eat, and we’ll just charge them a regular monthly fee, a subscription.

Walter Isaacson:

At the time, there weren’t a lot of places that Netflix could look to see how a subscription model might work. In the 1920s, a publisher named Harry Sherman created the Book of the Month Club. It sent members a new book every month in exchange for a commitment to buy a fixed number of volumes over the course of a year. In the 1950s, the Columbia Record Club lured new subscribers by offering 12 albums for a penny, but it was hard to unsubscribe, and many people soured on the experience. Netflix’s original offer was 30 days free, and then $19.99 a month for all the DVDs you could watch, no due dates, late fees or shipping charges. Thousands of people signed up, but the real question was would they stay once a free month was over?

Mark Randolph:

And I remembered distinctly that day, running back and forth every 10 minutes asking our analytics folks, “Is anyone canceling yet, who’s canceling?” And it became clearer over the course of the day that in fact people weren’t canceling and as it came through, I think it was something like an 86% retention rate for the first month, which was a phenomenally good number for us. And I knew that we had something that was going to work at that point.

Walter Isaacson:

From that humble beginning, Netflix has grown to become one of the most successful subscription services in the world, with more than 200 million paid subscribers. It’s a business model that has been widely emulated companies strive to become the Netflix of books or video games, and even the Netflix of food.

Matthew Wadiak:

My name is Matthew Wadiak. I’m the founder and former COO of Blue Apron.

Walter Isaacson:

There are a lot of ways to sell food to consumers, but until Blue Apron came along, selling it by subscription was not really on anyone’s radar. Matthew Wadiak was a chef with an entrepreneurial bet. When he was approached by a friend named Matt Salzberg. Salzberg was lamenting how difficult it was to cook the kind of meals he wanted to cook at home. It was expensive and time consuming. Ingredients were sometimes hard to find. And so too were recipes that you could trust. Surely there were were a lot of other frustrated chefs out there who would welcome getting great recipes and fresh ingredients delivered right to their door. And so the idea of meal kits was born. The idea was to have recipes and perfectly proportioned ingredients delivered to the subscriber’s home within 24 hours, so they could make and eat a fresh meal for dinner. In August 2012 Wadiak and his co-founders shipped the first orders from a commercial kitchen in Long Island City.

Matthew Wadiak:

I think the first boxes that we sent out, obviously we didn’t know what was going to happen, but it was literally one of those things where we sent boxes out to friends and family, and a few folks that we kind of knew through the grapevine. I think our first week was only like 40 boxes. It was very small. And within hours there were social media posts of people tagging us and writing about it. The second week, there were a few people we didn’t know that had joined as subscribers. And then by the third week, the majority of our customers were unknown to us, which is fascinating.

Walter Isaacson:

Today, Blue Apron has more than 300,000 customers worldwide. And the global meal kit industry is valued at more than $10 billion. Wadiak left Blue Apron in 2017 and a year later, he started Cook’s Venture, an innovative, vertically integrated, poultry company, committed to a more sustainable food chain through regenerative agriculture. Cook’s Venture sells its heirloom chickens and other meats to grocery stores, restaurants, and directly to consumers through an online subscription service. Ten years ago, selling food through subscriptions was an exotic and to many people, impractical idea. Today, Wadiak believes that for many home chefs looking for healthier and more sustainable options, meal kits are an obvious choice.

Matthew Wadiak:

If shopping is inconvenient for you, or you live in a food desert, or you don’t have the quality of ingredients that you want in your local neighborhood, or you want to explore different kinds of cooking, having staples like food delivered to your house in a subscription make a lot of sense, and it’s a huge part of their revenue. So when used properly, it’s just a modern convenience.

Walter Isaacson:

Meal kit companies such as Blue Apron, a part of a much broader multi-billion dollar subscription box industry, pet foods, shaving products, wine, cosmetics, even underwear are all available at your doorstep for a flat fee. And companies that never considered embracing a subscription model are now jumping on in the bandwagon. Taco Bell is experimenting with a Taco Lover’s Pass. Subscribers get one taco a day for 30 days, for a subscription fee of between $5 and $10.

Walter Isaacson:

General Motors estimates that offering subscriptions to owners of GM cars for enhanced security, mapping, and data analytics could bring in an additional $20 to $25 billion by 2030. For companies, the subscription model offers the promise of predictable, recurring revenues, something that’s highly valued by investors. They also get a treasure trove of data about their customers and how they’re using the product.

Robbie Kellman Baxter:

That behavioral data is so valuable for helping organizations figure out where to go next with their product offering with their pricing, with everything.

Walter Isaacson:

Robbie Kellman Baxter is the author of the book, The Forever Transaction, and works with many companies in the subscription economy.

Robbie Kellman Baxter:

And so being able to track what makes somebody join, but also what gets them engaged, what gets them to make our products and services a habit, which features are they using, which features aren’t they using, and what does that mean about what we should do next? I think that’s tremendously important and increasingly is something that organizations are getting pretty sophisticated about.

Walter Isaacson:

Ironically, the industry that has struggled the most to adapt to the new subscription economy is the one that’s been at it the longest, publishing. When the internet arrived in the 1990s, publishers abandoned their well established subscription model in favor of giving their online content away for free. They hoped advertisers would reward them for their increased readership.

Katie Vanneck-Smith:

When this new way of publishing became open and available to the news industry, the decisions that were being made in the ’90s by the journalists and the commercial leads lent into the way that the news industry was making money, which was, “Oh, this is a brilliant way for us to publish, get more eyeballs, get more people seeing it. We can drive for scale and we’ll make loads and loads of money out of advertising.”

Walter Isaacson:

That’s Katie Vanneck-Smith. In 2000, she was a digital director of the Times Online in the UK. The Times, whose print edition has been around since the 18th century, was one of the first newspapers to give their online content away for free. Vanneck-Smith was watching the numbers closely, and she didn’t like what you was seeing. Yes, readership was way up, but the amount that advertisers were prepared to pay to reach those readers was dropping sharply.

Katie Vanneck-Smith:

I could see very quickly that if the advertising dollar was going to decline in value and you were going to publish more and more of your content available for free, you were basically creating a perfect storm, and a perfect storm whereby I could read everything that I was reading in the printed edition for free so why would I buy it? Yet the advertising return was declining very rapidly. So it was very clear to me, within 18 months of being the digital digital director of Times Online, that the model was at that point already unsustainable.

Walter Isaacson:

What followed was 10 years of Vanneck-Smith trying to convince her publisher, Rupert Murdoch, that the Times would need to embrace paid subscriptions for its online content. They needed to go back to what they had always done for their print edition. She also tried to bring the Times’s reporters and editors on side with her plan to charge for content, even though it would inevitably mean fewer readers on their site. That proved to be a greater challenge.

Katie Vanneck-Smith:

You were going to journalists and the editors of the Times, and you were saying, “Well, look, even if the best case business model scenario plays out, you will go from having 35 million unique users on your website every month to maybe 3 million.” So that’s quite a tough thing to hear when you’ve grown up in an industry that values scale and eyeballs and audience as the sort of shining golden goose of why you’re there and what you’re doing.

Walter Isaacson:

In 2010, the Times implemented a paid subscription model for its online content. And two years later, the paper reported a profit for the first time in its history. It turned out that readers were willing to pay for content if they were given something worth paying for. Katie Vanneck-Smith left the Times in 2014 and spent four years as president of the Wall Street Journal. In 2019, she surprised many in the media world when she became co-founder and publisher of a new venture called Tortoise Media.

Katie Vanneck-Smith:

I think we all feel in our different ways that the news has become a lot more noisy. And it felt as if there was a place and a space to potentially have a slower, more reflective form of news journalism that was not about the breaking news, but really about the issues driving the news.

Walter Isaacson:

Tortoise’s motto is “Slow down, wise up,” and it offers just a handful of stories every week. There are no ads and the content is available only to people who pay to access it. But Vanneck-Smith says, don’t call those people subscribers.

Katie Vanneck-Smith:

So we sort of said, “Okay, we’re going to be slower and we’re going to build a business that ultimately isn’t a subscription business.” So whilst I love the subscription economy, we can’t compete with subscription businesses. We are building something that’s a membership economy. And there is a difference, because a subscription relationship works for news brands that produce a lot of content, because a subscription relationship is a transactional relationship. So every month you pay your subscription and your value exchange is based on, to be honest, how much you use it. So to be a really good subscription business, be it Spotify, be it Netflix, be it the New York Times, it is built on a volume of content that you must deliver. It is a sort of very expensive, labor-intensive business in a content creation world.

Walter Isaacson:

One of the privileges of Tortoise membership is the opportunity to participate in daily story meetings called ThinkIns. It gives readers a voice in determining which stories get covered and how they’re covered. It’s an opportunity not available to your average, New York Times subscriber.

Katie Vanneck-Smith:

Because we weren’t doing breaking news, we could never compete in a subscription economy set of dynamics. We set out because we were building our newsroom with and for our members, ie. an open newsroom that gave people a seat in our editorial conversations. We ended up building a business that was very much looking at the membership economy rather than the subscription economy.

Walter Isaacson:

Tortoise Media currently has more than 80,000 members, and about two more years of venture capital funding before it needs to become profitable. It’s too early to tell if that will ever happen, but what is clear is that by talking about their users as members rather than subscribers, Tortoise is writing what appears to be the next iteration of the subscription economy.

Robbie Kellman Baxter:

I use the phrase membership economy rather than subscription economy, because I think the most important part is the way that the organization is thinking about their customers and treating the customer like a member. Membership is a mindset and subscription is a pricing decision, it’s a tactic.

Walter Isaacson:

Robbie Kellman Baxter is a big fan of the membership economy. In her consulting business, she helps companies transition from subscribers to memberships.

Robbie Kellman Baxter:

A lot of businesses start with, “We want to get some subscription revenue,” and they focus on getting people to sign up for the subscription revenue. But if they don’t really dig in and understand the process that gets somebody from the moment of transaction to relaxing into the membership and saying, “I’m going to pay for the foreseeable future because I trust that this organization is going to continue to help me achieve my goals.”

Robbie Kellman Baxter:

That is the really important place to focus. So what I encourage organizations to do is not just focusing, let’s say, on the content itself, but on the experience that is actually going to bring people back to your product and make it a habit. Because if you don’t have engagement, you’re not likely to have retention. And if you don’t have retention, then the subscription pricing isn’t really working for you.

Walter Isaacson:

According to the financial services company UBS, the subscription economy will grow 18% annually for the next four years, hitting $1.5 trillion in 2025. That trajectory seems unstoppable. But when you ask people inside the industry what could possibly kill the golden goose, the answer is invariably subscription fatigue.

Robbie Kellman Baxter:

Now what people say when I tell them that I spend my time in subscriptions is, “I had this subscription to such and such, and they wouldn’t let me cancel. And they overcharged me and I can’t get out of it,” or “I have a subscription and I don’t even use it. I haven’t been to the gym in three months, and I even forgot about this other subscription I was paying for. And Robbie, can’t you tell your subscription clients to stop charging us on subscriptions. They’re exhausting.” And that’s subscription fatigue. It comes with the territory of so many subscriptions being out there, but focusing on thinking about what does the member actually need, and then optimizing pricing to support that. I think that’s not going away.

Walter Isaacson:

Government regulation may ultimately be necessary to curb the worst excesses of the subscription economy. Most consumers would embrace rules that make canceling a service as easy as signing up, and that restrict automatic renewals. The enthusiasm around the subscription economy is currently at a fever pitch, fueled in large part by pandemic-induced changes to shopping habits that may well be here to stay. According to one survey, 78% of global consumers now subscribe to some kind of subscription service. The extent to which we are actually entering an era of usership rather than ownership remains to be seen. And many companies that are currently experimenting with subscriptions may find they’re more trouble than they’re worth.

Walter Isaacson:

But there’s at least one thing we can all agree is definitely worth subscribing to, this podcast. I’m Walter Isaacson, and you’ve been listening to Trailblazers, an original podcast from Dell Technologies. If you’d like to learn more about any of the guests on today’s show, please visit delltechnologies.com/trailblazers. Thanks for listening.