No. 298: Retention is the new currency

Contributor. The much mused about sharing economy jump started by disruptors like AirBnB, Rent The Runway, Netflix and Uber is running past its adolescence. In 2019, both Uber and its rival Lyft expect to go public.

According to Fortune, Uber alone could be valued at as much as $120 billion, higher than the valuations of Ford, General Motors and Fiat Chrysler combined.

It’s also close to double Uber’s valuation at a fundraising round two months ago and would be the biggest debut since Alibaba went public in 2014.

AirBnB, too, is expected to file as early as 2019, bringing some of the biggest disruptors of the last decade to Wall Street. But their impact has already been felt beyond their Silicon Valley offices.

The sharing economy has given rise to the subscription economy:

  • An economy preferred by investors for it’s stability.
  • An economy loved by consumers for its accessibility.
  • An economy coveted by entrepreneurs for it’s long-term customer relationships.
2PM, Inc. contributor: Tracey Wallace

The rise is thanks to the ubiquity of internet access and smartphones in the U.S. across nearly all segments. “Customers, the ultimate endpoint of any business, are today just as connected as the employees of any large enterprise,” writes Ben Thompson on The Stratchery.

This gives consumers and businesses alike endless access to on-going services that don’t function like gym-memberships of old. Instead, modern subscription models are gym-like in execution and participation.

  • They are based on service, not product: The product is the means not the ends.
  • They build convenient communities of like-minded individuals with end-goals in mind: Think Shopify users want to be seen as successful entrepreneurs. Spotify users want to be seen as having the best playlists and musical tastes.
  • They rinse and repeat the experience: The service begets the product, the product begets the goal, the goal begets the service.

Retention is the new currency

Costco – perhaps the longest standing subscription business around – has perfected the model. Amazon evolved it online with Amazon Prime. Giants like Apple and Google are touting their subscription services as differentiators for their products.

  • Google is offering six month free YouTube Premium subscription for all Google Home devices (and varying YouTube Premium subscription access for nearly all Google devices).
  • Apple is packaging their streaming music service and phone care services into single packages –– selling you a full suite of services that beget a product.

The success of the model is clear. You need only look at Dollar Shave Club on the consumer side to see the impact on the industry (or look at newer DNVBs like Quip following similar paths). Or, on the B2B side, look at the stock prices of Adobe (up 770% since 2012), Microsoft (up 320%) or Autodesk (up 360%), which have shifted to offer internet cloud-based software for a monthly or annual fee.

Indeed,  many DNVBs are putting their own spin on the subscription model business. In retail alone, there are more than 5,000 brands offering clothing, cosmetic or the like “subscription boxes” each month.

“It is totally faddish right now,” says Robbie Kellman Baxter, a consultant with Peninsula Strategies and author of The Membership Economy. “Most of them are going to fail. How many ties does dad need?”

But in technology, the rent-rather-than-own trend is holding stronger. In health care, too, it is growing in popularity with brands like SmileDirectClub and MDVIP, a direct primary care service, gaining more and more subscribers.

In media is where we will see the most pronounced shifts. After all, subscriptions are the easiest way around an unforgiving advertising world inhabited by Google and Facebook’s duopoly.

That duopoly began hitting media brands as early as 2015, when many considered the “gold standard” of online content to be free and commoditized. Many digital media brands have yet to recover from this mistake.

According to CNBC:

Vice Media has been the gold standard, earning a valuation of $5.7 billion in June 2017. Earlier this month, Disney wrote down some of its investment in Vice by 40 percent, suggesting a declining overall valuation.

Buzzfeed has built itself into a company that tops $1 billion in value. Still, Buzzfeed missed its 2017 revenue forecast by up to 20 percent, the Wall Street Journal reported last year, pushing back hopes of an initial public offering indefinitely. Vox Media, the owner of sites including SBNation, Eater and The Verge, also missed internal revenue forecasts and is not planning to go public any time soon, said people familiar with the matter, who asked not to be named because the company’s financials are private.

Separately, media companies including The New York Times, The Wall Street Journal, The Washington Post, New York Magazine, Quartz, Bloomberg, Business Insider, Vanity Fair and Wired have all returned back to media’s subscription business model roots by completely paywalling, introduced paywalls or hardening their paywalls beginning in 2018.

We’re living in an environment where Facebook, Google, and Amazon are sucking up so much of the advertising revenue,” says Sterling Auty, software analyst at J.P. Morgan. “Subscriptions and ecommerce are an antidote to that.”

These media companies are looking to lower their reliance on Facebook and Google algorithms and return to their service roots through subscription payments –– adding yet another monthly subscription to consumers’ bank accounts.

On paid subscription tolerance

According to eMarketer, 71% of U.S. consumers with internet access subscribe to at least one streaming video service. However, the number for all other verticals drop dramatically beyond video.

This leaves ample room for other verticals to grow their subscription services, especially as consumers become more accustomed to the model and testing out various offerings. Paid subscriptions through Apple’s App Store reached over 330 million last quarter. That’s up 50% year over year and includes both Apple and third-party services like Netflix.

Consumers are downloading. They are trying. They are testing. And there will be winners. Some analysts like Eddie Yoon, a consultant and author of the book Superconsumers, see the subscription economy as a 20-year trend –– just now beginning to hit its growth stage.

But there are caveats:

“All brands will try to offer subscriptions, but only a few will take,” he added. “Consumers will push back if they feel overwhelmed with subscription services,” Yoon says. “People won’t tolerate a world where everything is subscriptionized,” he said. “For the things that you really care about, you’ll definitely subscribe.”

The experience economy edges in

This is where the experience economy matters most. Subscription business models create desirable P&Ls, forecasting models and enable brands to act in the best interest of their most dedicated subscribers (rather than advertisers), but fail to provide the experience and you’ll lose your list and your recurring revenue.

Ben Thompson from The Stratechery pulled out this quote from Bill McDermott, the CEO of SAP, on this challenge on an investor call:

There are millions of complaints every day about disappointing customer experiences. This is called the experience gap. Businesses used to have time to sort this out, but in today’s unforgiving world, the damage is immediate, disruption is imminent. This has shifted the challenge from a running a business to guaranteeing great experiences for every single person.

It’s best here to remember that subscription and membership are separate things. Membership provides experience and community. Subscription just gets you access to something behind a gate.

Take a look at Peloton, for example. The company has long argued that it’s bike ($2,000) and subscription program ($39 monthly) are a bargain compared to regularly attended SoulCycle classes. And SoulCycle is hard to beat. Similar to fitness organizations like CrossFit, Inc., it has a hardened fanbase and community.

But where Peloton succeeds is its content –– the ability to stream classes on your bike, forgoing a trip to a physical class. All for substantially lower costs than regular in-person classes anyway. Peloton reports its churn at less than 1%.

You have to do delightful things and leave money on the table,” says Peloton CEO and co-founder John Foley.The monthly service is what you really buy. That was the flaw with the old models. It was just hardware.

Of course, not every company can be a Peloton. The subscription model itself does not lower the cost of doing business. It cannot, on its own, generate demand.

As subscriptions proliferate, investors need to dig deeper into the dynamics of their models,” says Aswath Damodaran, a finance professor and valuation specialist at New York University’s Stern School of Business.Many venture capitalists and public investors are pricing user-based companies on user count, with only a few seriously trying to distinguish between good, indifferent, and bad user-based models.

What’s next in the subscription era is a dwindling down to those brands, media packages, and services which can offer the experience worth paying for –– the service that begets the product, and the product that begets the consumer’s goal. A subscription model, alone, won’t be enough. Consumers will seek membership and the benefits that come with it: experience, community, and camaraderie. For the product companies, the software companies, and media companies that figure it out – the prize is recurring revenue and stability until the next preferred model comes along.  

Read the rest of your No. 298 curation here.

Additional reading. Member Brief: The Subscription Economy

By Tracey Wallace | Edited by Web Smith | About 2PM

Editor’s Note: Tracey serves as the Editor-in-Chief at BigCommerce and a public speaker. She is launching a DtC pillow brand, this spring. She is a paid contributor of 2PM, Inc. 

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Commerce as context. Shopping will evolve and Prime Video could be at the forefront. Amazon debuted a new format for their Thursday Night Football broadcast. As part of a two-year deal with the National Football League, Prime Video has rights to all 11 of the games played on Thursday.

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No. 288: An open letter to publishers


To digital publishing executives. Yesterday’s Wall Street Journal published an eye-opening look at one of the best-positioned digital publishers in the industry.  Founded in 2008, Vox Media has raised $307.6 million in venture capital and made several key acquisitions. None of these acquisitions are more important than Recode, the tech news site founded by Kara Swisher. At a valuation in excess of $1 billion and nearly 700 employees (via Linkedin), Vox Media is by most accounts, the model venture-backed publisher.

Ryan Pauley, the brand’s talented SVP of biz ops and strategy also serves as the head of Concert, Vox Media’s attempt to platformize their sophisticated advertising operations. And recently, the company launched “The Goods”, the media conglomerate’s editor-driven attempt at driving affiliate commerce.

The Goods by Vox’s editorial team will publish a range of news, features, ongoing series, videos and Explainers each weekday. There will be an email newsletter delivering The Goods by Vox content to your inbox twice per week.

Vox’s Deputy Managing Editor Eleanor Barkhorn will oversee The Goods by Vox, as well as a team of talented reporters and editors, including Editor Julia Rubin and Deputy Editors Meredith Haggerty and Alanna Okun.

Vox Media PR

This doesn’t sound like the profile of a company that will struggle to reach $185 million in 2018 revenue but it is so. Digital advertising’s collapse is diminishing or has diminished several top publishers: Vice, Mashable, The Outline, and Buzzfeed. And there is no end in sight, as long as the duopoly of Facebook and Google persists.

2PM Data



One consistency that you’ll find across many of these media platforms, amidst sagging performance, is the outsized cost of managing advertising executives.

In August, Vox Media announced internally a reorganization of its advertising sales workforce, creating one team to handle major categories and accounts and another to focus on cultivating new business. In April, the company promoted Chief Marketing Officer Lindsay Nelson to become its chief commercial officer in charge of leading revenue growth efforts.

Amol Sharma | Wall Street Journal

One study places the average salary for lower level advertising sales employees at $120,000+ per year, cutting into companies’ gross margins while deepening the dependency on these personnel investments. Meanwhile, commerce operations are often reduced to inconsequential merch operations.

Screen Shot 2018-09-24 at 1.29.02 PM
Vox Media: SB Nation’s Shopify store

But not everyone in the industry sees it this way. Buzzfeed has one of the most robust commerce operations in the industry. In a recent report by The Information, Jonah Peretti’s strategy was laid bare:

Late last year, Mr. Peretti unveiled his “Nine Boxes” strategy in an employee memo outlining the areas the company was focusing on to increase revenue. They included ecommerce, programmatic ads and BuzzFeed News making TV shows for streaming services and TV networks. The goal of the memo was to provide clarity to employees about where they stood in the company’s strategy, one thing some employees had said was missing, Mr. Peretti said.

Publishers must begin deemphasizing digital advertising to invest in direct-to-consumer (DTC) commerce teams. These commerce teams should be equipped to handle all affiliate operations, in line with the brand’s strategy for commerce and advertising. Affiliate commerce operations is not a suitable role for journalists; they should focus on their crucial, core competency: creating and building community around their content. They are the priority!

Issue No. 280: Media companies are brands too

The digital landscape is changing beneath our feet. For publishers to continue building organic readership, they must become brands. Operating as a source of content is no longer enough. To do that, efforts can no longer be siloed, the traditional factions of legacy-styled newsrooms must fall.

There are publishers who are doing this successfully. In No. 252, 2PM took a deep dive into content and commerce. We recognized the media brands that drive meaningful operational margins with DTC commerce. Of these media brands, Uncrate may have the most notable blueprint for a publishing revenue ecosystem. The company generates revenue with (1) well-performing display ads, (2) a coveted native advertising offering, and an (3) online store featuring direct access to a curation of the brands most desired by the publisher’s target demo.

When this flavor of revenue operations works alongside a team focused on delivering relevant content, these three revenue components actually feed an aggregate growth in viewership, advertising interest, and social referrals. Investments into commerce operations indicate that digital publishers have prioritized the growth of self-sustaining ecosystems void of reliance on Google and Facebook. While publishers need the duopoly of Silicon Valley advertising giants, their pie is growing at your expense.

Read more of the issue here.

By Web Smith | About 2PM