Subscription Economy: So?
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Subscription-economy player Netflix (NASDAQ: NFLX) broke the cardinal rule in how to deal with customers who are in a long-term relationship with an enterprise. The terms and conditions of the contract were changed, abruptly. Unlike the transactional economy, in which a product is bought and that’s the end of that story, the subscription economy demands ongoing attention to customers. The stock, once at over 300, crashed. Yet, as Motley Fool analyst Andrew Tonner points out, the stock and the business of the company recovered. The problem now with the stock price at 77.38, in a 52 week range of 62.37 to 304.79, is primarily the result of the competition catching up in online streaming. Comcast, Verizon, Amazon, and Google are among the new entrants. And because they have other lines of business to subsidize marketing subscriptions at prices lower than Netfix, which has only one horse in the stable, they will likely win. This invasion of the low-cost competition is a play from a dog-eared script in the traditional economy.
Yet another situation in which there was a hit to the customer bond in the subscription model was when Verizon (NYSE: VZ) announced it was imposing a $2 fee for payment of bills online. There was a massive pushback, including by subscribers, and before the end of the day, Verizon deep-sixed that plan. Currently, Verizon is a darling of The Street, with its stock at 41.16, in a 52-week range of 32.28 to 41.43. Again, the old rules apply. Verizon is a well-run telecommunications company which was an early adopter of the iPhone. For its reliable 4G network – which held up in the Northeast during a hurricane – it has been able to charge what some perceive as premium rates.
A third case was AT&T (NYSE: T) which announced it would not offer new subscribers unlimited data and was rerouting current ones to a slower-speed service for data. There was a big stir about customer relations. Today its stock is at 33.59, with a 52 week range of 27.29 to 33.92. What counts is that this telecommunications company is successfully navigating the shift from landline to mobile. Until recently Internet company AOL (NYSE: AOL) had not been so effective and fast at making a transition of that scope. That’s why The Street penalized it. In a 52 week range, the stock was down to 10.06. Now it’s at 26.06, near the 52 week high of 27.47. The chief executive officer Tim Armstrong is finally expanding lines of business such as video and mobile which could possibly generate revenue that dial-up used to. The Street rewards movement in promising directions.
Subscription-economy experts hammer that this represents a new model and it will change the way business is done. Actually, it is not new. There are many of us businesspeople who have been leasing cars instead of buying them for tax purposes. When we Baby Boomers were renting our first apartment for $110 a month, we often went to one of the rental stores and leased all the furniture. In addition, so much of the so-called changes seem very traditional smart business practices. For example, chief technology officer at TheStreet.com and Capital Thinking Don Woods writes in FORBES that subscription economy services such as those provided by Salesforce.com allow for “extensive customization.” But so does just about every contract for purchase rather then lease, at least in these competitive times.
When I went into a GM dealer to finally purchase a car I had the option to customize my order as much as I wanted. Very old economy, the salespeople want to sell cars so they will do whatever it takes to accommodate me. Woods contrasts the customization to “off-the-shelf.” When I go into most upscale department stores, the salespeople are wide open to finding out what I require and pulling out all stops to deliver, including immediate alterations. My need was for somewhat casual work attire for a job interview to be conducted in Starbucks the next day. I got it in the old transactional way business is done.
Perhaps what business and the investors who evaluate them should take notice of in the subscription economy is the availability of options which carry no stigma. For example, the cool aura of Zipcar makes it okay not to own one’s own car. The recent lousy track record for the return on investment on much of home ownership makes renting seem smart, at least for now. The invention of devices like the Barnes & Noble Nook eliminates the need to have actual books in the office and home to transmit a message about one’s professional and personal identity. Therefore, these options embody value that might not have been present before. That's not a big deal. And it shouldn't be positioned by the subscription-economy evangelists as such.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.