The New York-based company promises to take the technical wizardry out of app making, easing the pathway to subscription revenue for those with eager — if nonpaying — online audiences.

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Spoiler alert! No one outside of a handful of Googlers really knows.

But we can make some educated guesses:

As previously reported, Google’s Android unit wants to launch a subscription service.

This one’s a no-brainer. Music is a key part of mobile, and Andy Rubin doesn’t want to cede that to outsiders like Spotify and Pandora. (Android’s effort to break into music via a download store and a scan-and-match locker have had little take-up.) And this one is relatively easy for music owners to sign off on, since they’ve already bought into the Spotify model — free ad-supported music that pushes users into a $10-a-month mobile offer.

As previously reported, Google’s YouTube unit wants to do … something with a subscription service.

At a minimum, YouTube is trying to collect the rights to sell music, in both audio and video form, via subscriptions. But it hasn’t told music owners what it actually wants to do with those rights, and it hasn’t shown outsiders a prototype of what it’s working on.

This one also has some logic to it, but it’s not quite as clear-cut. More on that shortly.

Before we get there, though: Regardless of what you’ve read about timelines (“imminent,” or “Q3,” or “2013,” or “sometime” are all options), none of this can happen if Google doesn’t get deals with the music owners.

Right now, as Billboard reports, Warner Music Group has signed on to both ideas. I hear that Universal Music Group, the world’s biggest music label, is interested, but is at least a month or so removed from inking a deal. But industry sources say that Sony Music is resistant to all of this. For now.

Even if Google gets all three of the big labels on board, it’s not home free. It needs buy-in not just from the people who own music, but from the ones who own the publishing rights — the underlying compositions for each song.

Sometimes those rights are owned by the big-three labels, but sometimes they’re not. And particularly outside the U.S., Google will need to make peace with the agencies that represent music owners. That could be tough, given that its relationship with some of them is frequently fractious.

So there are lots of ways this could get slowed down/crippled/derailed.

One encouraging sign that all of this could get done is the fact that Google is no longer insisting that music owners negotiate their deals with both an Android team and a YouTube team. Instead, YouTube content head Robert Kyncl is representing the search giant in all of its talks — though the deals are still going to get done separately.

Small beans? Sure. But at least it shows the Googlebots are beginning to grok the way the humanoids in the content business would like to work.

For argument’s sake, let’s say Google does get all of its deals done. What next?

The Android scenario is relatively easy to map out. Google has yet to show a competence for selling content, but its huge installed base will still make it a serious contender. And that will be an issue not just for Spotify, but Pandora and Apple and anyone else with a vested interest in digital music. At a minimum, it could make Android phones more attractive and/or harder to switch away from. And that may be enough to make Rubin happy.

The YouTube version is harder to nail down. As many people have pointed out, YouTube already functions as the world’s biggest digital music service. That’s in part because of the official music videos it serves up in conjunction with Vevo, the video company it is set to invest in.* But mostly because of all the music that its users upload to the service, with homemade visuals and without permission, which ends up staying there with the blessing of the music owners.

So why does it need to sell music? As Eliot Van Buskirk notes, all of that free music may be the reason YouTube is talking about subscriptions. Offering a paid version may make the music owners more likely to keep their free stuff up there, too.

Background: In olden days, music owners got paid a small fee every time someone played their stuff on YouTube. All those small fees added up, which was nice for the labels, but a real problem for YouTube, particularly when it didn’t have much of an ad business to absorb those costs.

Fast-forward to today: Now the music owners get a cut of the ads YouTube shows when it plays their songs. Much better for YouTube, but music owners grumble that they’re not making enough. And their deals are all up for renewal right now.

Subscriptions can solve problems for both sides. YouTube can tell music owners that it’s providing a funnel to encourage people to actually pay for music. And the music owners can let YouTube hang on to what may be its most valuable asset, which it can keep offering for free.

I don’t believe music subscriptions indicate a real change in Google’s plans for YouTube, though. As far as I can tell, Google fundamentally sees the site as a giant advertising platform, and I don’t think a new music product changes that. Just like the talks YouTube is holding with other content owners about other subscriptions.

I also don’t see how YouTube’s audience, which skews very young and probably hasn’t bought a thing from Google in their lives, is likely to pay for any of this stuff.

But if subscriptions — or even the idea of subscriptions — help convince YouTube’s partners to keep supplying their stuff to the site, then that’s probably good enough to keep everyone happy.

*As far as I can tell, none of the subscription talk affects Google’s plan to renew its Vevo deal and put money in the site. The reason the Vevo deal hasn’t been finalized, I’m told, is because its closing has always been contingent on Google wrapping up other deals with the labels, including subscription rights, as I reported earlier.

But next month, the Los Angeles-based company plans to relaunch subscriptions, hoping to bring back customers who stopped visiting on a regular basis without the monthly obligation.

The change is one of many taking place at the company since CEO Bill Strauss was replaced by its founder, Brian Lee, three months ago.

Lee calls the new subscription offer “Amazon Prime with a twist.”

The old deal cost $40 a month to receive a new pair of pumps, wedges or heels based on your likes and preferences. The new deal costs only $9.95 a month and can be used like a credit that can be applied toward the purchase of a pair of shoes.

The ShoeDazzle-branded shoes will continue to cost only $40, but the company will also start selling name-brand shoes for up to $80, providing a wide variety of styles to choose from. The credit can accumulate for up to 12 months, allowing women to apply multiple months of credit toward one pair of shoes.

Lee said the program is designed to increase loyalty. If someone already has $10 to spend on the site, they will find more reasons to return on a regular basis. (Its closest competitor, JustFab, is still charging $40 for its shoe subscription.)

Since launching a beta program a couple of weeks ago, Lee said, they already have 12,000 people signed up and thousands more on the wait list. The members already have increased visits to the site by 12 percent and have a 30 percent higher buy rate.

When ShoeDazzle discontinued its subscription service a year ago, Lee said it was successful in opening up the site to more buyers, but more importantly, they lost engagement.

As part of re-engaging its fan base, Lee has also hired designer and stylist Rachel Zoe as chief stylist, the company’s second celebrity spokesperson. ShoeDazzle was founded, in part, by Kim Kardashian.

The celebrity angle is one that Lee has tapped multiple times. He is also the CEO at The Honest Company, a monthly subscription service he co-founded with actress Jessica Alba that delivers eco-friendly diapers, wipes, skin care and cleaning products to your home.

A new subscription offering and a new celebrity aren’t the only changes Lee has made since rejoining ShoeDazzle. In October, he laid off 22 of the company’s 240 employees and cut back on other verticals the company was getting into like swimwear, lingerie and handbags.

He also relaunched the site, adding two new features that are designed to give customers reasons to return on a daily basis. Rachel Zoe’s Edit gives fashion advice to shoppers, and the Daily Fix introduces a new pair of shoes everyday.

Despite all the changes, Lee said the company recorded $100 million in revenue in 2012, an 80 percent increase over the year earlier. He expects the company to be cash-flow positive by the end of the year.

No need to ask whether this one is a Netflix-killer, because it clearly isn’t.

Instead, it’s comparable to Comcast’s Streampix, which is also priced at $5 month, and which doesn’t attempt to rival the large Netflix catalog of movies and TV shows.

Instead, AT&T digital video service is primarily stocked with titles from Sony and MGM. But if you’re looking for anything remotely new, you’re going to be disappointed.

I asked AT&T PR for an example of the stuff they’re going to offer, and got this response: “American Teacher, Assassin’s Code, Charlie’s Angels, Summer in Genoa, Lars and the Real Girl, Rudy, The Wedding Planner, Hotel Rwanda, Legends of the Fall, Snatch and more.”

So there you go.

Like Comcast, AT&T has the ability to sell its service nationwide, but for now is only marketing it to its existing pay-TV customers. Hard to see many folks shelling out for this, but presumably AT&T will use it as a retention device, and give it away for free while telling people they’re getting a $5-a-month value.

Here’s a statement from the company on the move, first noticed by Pocketlint: “We recently updated Spotify to further simplify the service and pave the way for new features announced at the end of last year. In-app purchases aren’t part of this update but we’re not ruling out their return. Credits/gift cards already purchased are still redeemable.”

In plain English: Spotify has shut down its MP3 store, which has never been an important part of the company’s strategy. At one point, it might have seemed like a good idea for the company to sell music a la Apple’s iTunes, but Spotify never pushed downloads, and its users were happy to ignore them.

Meanwhile Spotify’s U.S. users won’t notice the change, since they’ve never been able to buy tracks from the service at all.

Meanwhile, a question for the Web video guys: Are you bummed out about Al Jazeera’s Current TV deal? Maybe you should be.

Because this is a deal you could have had for yourself.

The Internet isn’t going to get its hands on TV’s most valuable properties, like big-time sports, anytime soon. But Al Jazeera would have been a perfect candidate to bypass cable and go digital-only.

Consider:

You’ve already got the infrastructure: A few years ago, the Web’s capacity to handle lots of streaming video was an open question. But now we’ve seen — courtesy of the Olympics and Felix Baumgartner’s space jump – that this isn’t a problem, at least not for a cable-sized crowd.

You’ve already got the eyeballs: No need to reiterate the size of YouTube’s audience (but it’s around 800 million people worldwide, in case you’ve forgotten). The more important part is that Al Jazeera’s prospective U.S. audience — news junkies, Muslim Americans, Muslims living in America, etc. — are quite certainly already getting most of their information from the Web. They do that now because they have no choice, but my hunch is that even when Al Jazeera shows up on cable, they’ll keep consuming most of their news on the Web. Because that’s where they like to consume it.

You’ve got the flexibility: Right now, anyone in America can stream Al Jazeera whenever they want, for free, without paying for cable. But that’s not the case with Current TV or nearly any other cable network, because the cable providers who pay for cable programming don’t want it going out on the Web for free. They want to package Web access (along with phones, tablets, connected TV, etc.) as a “TV Everywhere” bonus for pay-TV subscribers. Maybe Al Jazeera wants that, too. But moving from Web-only to cable means it will have much less choice in the matter, regardless.

So why not spend much less than a half-billion dollars and make Al Jazeera the Web’s first “real” TV news operation?

If you’re a Web video guy who wants to make yourself feel better, you can tell yourself that its owners have misjudged TV’s value. Maybe they’re like all those guys who bought newspapers at the end of the ’90s. Or maybe they’re like Japanese trophy hunters buying Pebble Beach and Rockefeller Center at the end of the ’80s.

But if you’re waiting around for an ambitious, deep-pocketed player with global appeal to make a big bet on Web video as a real TV alternative, you just missed a huge opportunity. May be a while before you get another one.

(Image courtesy of Shutterstock/Altay Kaya)

That means Dow Jones’ business newspaper has joined thousands of other magazines and newspapers that market their stuff through Apple’s iTunes store — in exchange for giving Apple a cut of sales, and control over their relationship with their customers. (News Corp., which owns Dow Jones, also owns this Web site.)

The move is worth noting because up until now the Journal was one of the highest-profile print publishers that wasn’t selling app access via Apple. Earlier this year, Time Inc., which had been the most prominent holdout, also signed on.

The move means that Apple will retain 30 percent of all subscription revenue the Journal receives from “in-app” sales, and it will retain control of customer billing information like credit card numbers and billing addresses.

Like other publications, the Journal will be able to ask subscribers to submit their email addresses, a strategy that publishers say has been effective.

No comment from reps at Apple or Dow Jones. Sources noted that former Dow Jones president Todd Larsen, who left the company last summer, had opposed selling subscriptions via Newsstand.

The Journal will still be able to sell digital subscriptions, which include the use of its Apple apps, via its own Web site. It will retain all of the revenue and customer data for those sales.

The move also makes it much easier for Apple customers to become Wall Street Journal customers, since they can use their existing iTunes account to pay for the paper. And it makes it easier for them to read the paper, since Newsstand gives developers the ability to update their publications automatically via “background” downloads.

And you say you’d also like to read lots of articles from People.com on your iPhone, without going to People.com?

Voila! Meet People Magazine’s CelebWatch app, which will fit that very specific bill. And say goodbye to People’s old mobile apps, which got about 500,000 downloads over the last three years.*

Think of the new one as a very curated mashup of Twitter and People’s Web site, and you’ll get the basic idea.

This is the kind of app that will be very useful if you want to keep track of everything Rihanna says on Twitter, and everything People.com says about her (and other famous people).

But it won’t do you any good if you like to use Twitter for other stuff, like telling people what you had for breakfast, or tracking revolutions in Egypt, or anything else.

Even if you’re not a candidate for CelebWatch, the app is still worth noting for the strategy Time Inc. is using here: It’s selling access to the app  for $1 a month, or $10 for a year, and giving it away for free to People’s “all-access” subscribers, who are already getting print and digital bundles.

It’s the second part that’s more important. Time Inc. executives will be pleased if they see a few new dollars coming in from app sales. But what they really want to do is make their magazine subscriptions more valuable. Maybe throwing in something that costs other people a buck a month will help.

“We wanted to have a mobile pillar for the business we’ve already built out,” says Jennifer Ogden-Reese, who heads up consumer marketing for Time Inc.’s Style & Entertainment Group.

To spell that out: People, which has 2.4 million subscribers, is perhaps Time Inc.’s most important title. So if a modest app like this helps keep those numbers up, it’s going to gain a lot of stature.

*And if you’re an Android user, hang tight. People says your version is coming soonish.

What Ek didn’t talk about: Any fundamental changes to the way the service operates — anyone can use it for free, and subscribers who pay $10 a month get extra features. And he didn’t mention any plans to change its marketing strategy, which to date has been largely dependent on word of mouth and a big boost from Facebook.

That’s because things are working well the way they are now, Ek said in an interview after the event. Equally important is his assertion that Spotify’s business model is sound, and that the company can succeed without big changes in the way the music business licenses its product.

If that claim pans out, it means Ek will have won where just about everyone else has failed. Here’s an edited transcript of our conversation:

Peter Kafka: Your event today was mostly about product changes. But you have to be a current Spotify user to appreciate the changes. How will the changes help you bring in new people?

Daniel Ek: I think the social part is really core to this. Social isn’t just about engaged people who are already on the platform. It’s also about sharing that music on other networks. So now I have all this great content, like the playlist Bruno Mars created, and I can repost that onto Twitter, on to Facebook. I believe that’s really great content that a lot of people will want to click on.

But I could already share songs and playlists on Twitter and Facebook from Spotify.

What we’re doing is removing friction. We’re making it a lot easier for people to do that. We’re making it a lot easier for people to find great content to share.

So if you make the product better it makes me more inclined to share really interesting stuff?

Yes. We’re creating a viral cycle, where new people are able to discover new content.

Since Spotify started it has been oriented around this idea of playlists, and sharing playlists. That made sense for some people, but not for a lot of other people, who were just trying to figure out how to listen to an album. Now you’re changing that — what took so long?

We look at what our users are doing. There were a lot of users who were perfectly happy with just playlists. What we realize now is that as we’re appealing to a much broader audience, we also have to support both. And we’ve been wrestling for quite a long time to figure out the balance, and we think we’ve finally done it.

Today was all about product stuff. No changes in the way the business operates, or the value proposition you’re offering. Will that change, and does it need to if you’re going to grow?

Would we ideally like a lower consumer price? Yeah. But at the same time, we’re doing really, really well as it is. And that’s reflected in our numbers.

Can you guys succeed as a business with the way your label deals are structured now? Pandora is struggling with the terms they have, and every other music service has failed to break through.

We’re incredibly happy with the structure and the terms that we have.

You don’t need the labels to change their rates for you to be profitable?

No, what we’re doing is we’re investing in growth. As I said earlier, we want to reach every single person on the face of this planet. And that means we’re going to forego profits, to keep investing in growing.

So if you stopped trying to grow now, you’d be profitable?

Yes.

A lot of today’s presentation seemed geared toward artists, some of whom have been vocal about the fact that they don’t think your model works for them. They think you guys make piles of money and they get pennies. How can you fix that?

By doing these kind of things. Telling the story, being honest about how much we’re paying back to rights holders.

But that’s part of the problem — you said you’ve paid $500 million back to rights holders, but most artists see very little of that. It goes to the labels.

I don’t know what kind of deals exist between the artists and the labels, and that’s a part of the controversy.

What is also fair to say is that Spotify is a young service. We’ve only been live in the U.S. for one year. And quite often it takes a year, or 18 months, for many artists to see their first checks from Spotify.

So there’s really this mismatch — people think, “there’s this big service out there called Spotify, and I haven’t gotten paid yet.” But the word is “yet” — not that they’re not going to get paid.

But some have gotten paid, and they’re complaining that the payout is tiny. And then they see that you’re worth $3 billion. Are you always going to have that kind of conflict?

I don’t think so. If we scaled up to a service the size of iTunes, the music industry would be two or three times the size it is today, in terms of revenue. We know that our fundamental model is sound. Now it’s just a perception problem. But more and more people are coming around.

Shares of Adobe fell as much as 3 percent in after-hours trading on Wednesday following the report, but later cooled to only a fractional decline. The stock closed the regular session up 1.7 percent at $33.12.

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Whatever, comes the response from some of Apple’s most ardent fans. That’s what they said about the iPhone five years ago, and now look what’s happened.

True enough! And we should also note that there’s a scenario where the new, still-theoretical Apple TV plays by the TV industry’s rules and does very well for Apple.

But we should also point out that a TV box is not a phone, and that the parallels fall apart in some crucial places.

The biggest difference: In the case of the phone business, Apple ended up revolutionizing the way handset manufacturers worked with the mobile carriers.

With TV, if Apple really wants to re-order things, it will eventually have to negotiate with two different industries — the pipe guys and the content guys — who are both quite happy with the status quo. Their interlocking interests are what make the TV industrial complex so successfully resistant to change.

And here’s more along those lines from a great Bernstein Research note, which teases out the implications for Apple, the cable guys, the content guys and the tech guys like Google, Netflix and Amazon.

Bernstein’s analysts believe the Apple as set-top box scenario is “perhaps the least disruptive model one can envision for Apple’s entry into Pay TV.” But even getting to that point will be a challenge, they argue:

While similar challenges have been overcome in the mobile telephony market, the challenges here are far larger and more complex.
First, the distributors in video share in the economics of the content that they deliver. Cannibalization matters.
Second, the Pay TV business has no analogous hardware subsidy model to the one that prevails in post-paid wireless.
Third, the U.S. cable industry has become accustomed to near complete control over the development of set-top box and cable modem technologies (e.g., all the MSO-sponsored Cable Labs work on DOCSIS and tru2way).
Fourth, cable MSOs are clearly advantaged over their telco and satellite competitors when it comes to distributing a device that supports both linear and Internet TV – for reasons of both scale and ability to integrate broadband –giving them disproportionate negotiating leverage.
All of these factors make it harder for any device manufacturer to strike a favorable deal with the largest MVPDs. A successful conclusion to the “talks” reported by the Wall Street Journal is by no means a foregone conclusion.

But the bottom line hasn’t changed. Apple keeps poking at the TV industrial complex, and keeps concluding that it’s better off playing along than playing a new game.

To spell that out: If Apple really wanted to change the way people watched TV, it would change the way people paid for TV. And that would involve setting up new arrangements with the people who make TV content.

But Apple can’t do that — either because the content guys don’t want to change the way their business works, or Apple isn’t willing to pay enough to make them change. Or both.

The result is the same: If you want to use a theoretical Apple TV of the future, you’re still going to end up paying someone a monthly fee for a bundle of channels, the majority of which you don’t watch.

Depending on how the deal works out, you may end up paying a pay-TV provider, or paying a broadband provider plus a programming provider. But the results will effectively be the same — and your checks will probably end up getting cashed by the same people, regardless, since there’s little to no competition for the pipe that goes into your living room.

You can argue that this is terrible for consumers (because they subsidize waste), or that it’s great for consumers (because all the other consumers subsidize their favorite programs). But it’s a model that has proven very hard to dislodge.

If Apple — or anyone else — wants to blow it up, they’re going to have to find a way to get people the stuff they want without paying for everything else.

There are a couple ways of going about that:

• You could drive very big trucks full of cash up to the existing content guys, and pay them a ginormous amount of money to sell their stuff — say, pro football — directly to your new TV business, with the understanding that they might lose their existing deals with everyone else. Apple, Google and a handful of other big tech companies could afford to do this, but they have yet to do so.
• Or you could build up a whole lot of stuff that people end up valuing as much or more than the stuff they’re already paying for, and deliver that to your customers directly. Google and YouTube are playing with this, but the $200-million-plus they’re betting on “channels” isn’t an all-in bet. It’s just a test.

Meanwhile, if you want to play by the TV industrial complex’s rules, those guys are happy to play along. See: Google, which is in the process of competing directly with the established cable providers, but is still able to get cable TV programming — even from from Viacom, which is still suing Google — because it is acting just like any other pay-TV provider.

It’s fun to imagine a world where Apple helps get you your TV, and it’s very likely that an Apple TV experience would be much better than the cable TV experience you have now. Imagine ditching that craptastic TV guide for a sleek one designed by Jony Ive!

But unless Apple TV is going to offer something fundamentally different than the choice consumers have today, it’s hard to get riled up about this stuff.

——

For the record: So what does Tim Cook have to say about all this? Here’s the most specific answer he gave about Apple TV’s answer at the D10 conference in May – which is to say, a very oblique answer:

Walt Mossberg: As you think about improving the television experience, because you just said you’re thinking about that, can it be done with a box and leave the kind of big panel and everything to other people, and just really build a lot of smarts and software and other things into a box and not build the whole thing?
Tim Cook: Here’s the way, Walt, we would look at that is –
Mossberg: Whether it’s you or anybody.
Cook: We would look not just at this area but other areas and ask: can we control the key technology? Can we make a significant contribution, far beyond what others have done in this area? Can we make a product that we all want, because we think we’re reasonably good proxies for others? And so, those are all the things that we would ask about any new product category. It’s the ones we ask about products within families that we’re already announced. And so this is sort of how we think about it and how we look at it.

]]> http://allthingsd.com/20120816/apples-new-tv-plan-same-tv-different-box/feed/ 0 http://allthingsd.com/20120808/facebook-makes-subscription-payments-available-to-all-developers/ http://allthingsd.com/20120808/facebook-makes-subscription-payments-available-to-all-developers/#comments Wed, 08 Aug 2012 18:35:24 +0000 Tricia Duryee http://allthingsd.com/?p=239270 Facebook is opening up subscription services to all applications on the social network starting today. Now, if developers want to, they can provide premium versions of a game, or access to virtual goods, to consumers who are willing to pay a monthly fee. Kixeye, Disney’s Playdom and Zynga have been testing the idea in games since Facebook originally made the announcement in June.

]]> http://allthingsd.com/20120808/facebook-makes-subscription-payments-available-to-all-developers/feed/ 0 http://allthingsd.com/20120801/time-inc-droops-again/ http://allthingsd.com/20120801/time-inc-droops-again/#comments Wed, 01 Aug 2012 21:19:49 +0000 Peter Kafka http://allthingsd.com/?p=236844 Time Warner took time to boast about HBO during its earnings call this morning. But it was harder to brag about its Time Inc. publishing unit, which had another lousy quarter: Revenue was down 9 percent, and operating income was down 43 percent.

The best thing Jeff Bewkes and company could say about Time Inc. is that the rest of the publishing business is doing lousy, too. And that new boss Laura Lang is getting a plan together after six months on the job. Oh, and they said that the numbers won’t look as bad next quarter, because they’ll be going up against easier year-over-year comparisons.

Still, the “environment here remains challenging,” CFO John Martin deadpanned.

Here’s a slightly deeper dive: Subscription revenues were down 11 percent, and ad revenues were down 7 percent. The ad numbers would have been worse if Time hadn’t retaken control of SI.com and Golf.com from corporate cousin Turner during the quarter — Martin said if you took away the bump those properties provided, ads would have been down 9 percent.

Lang can seek solace in the fact that digital ads in general fared better than print, which means they were about flat instead of drooping.

And Bewkes held out the idea that Time Inc. will increasingly be a digital company instead of a print one. Which is the reason he brought on Lang, the former head of digital ad shop Digitas, in the first place.

“It’s way too reductive to conclude that ‘publishing’ has a constrained future,” he said, touting the company’s recent iPad subscription deal with Apple.

]]> http://allthingsd.com/20120801/time-inc-droops-again/feed/ 0 http://allthingsd.com/20120629/overblown-commerce-models-part-iii-subscription-commerce/ http://allthingsd.com/20120629/overblown-commerce-models-part-iii-subscription-commerce/#comments Fri, 29 Jun 2012 17:03:48 +0000 Brian O'Malley http://allthingsd.com/?p=225893 The third wave of e-commerce is officially here, and it may have already jumped the shark. Just as we saw the proliferation of flash sale sites in 2009 (first wave) and daily deal sites in 2010 (second wave), there are now subscription offerings for women’s apparel, artisan food and pet treats. In fact, there are more than a dozen companies playing into these three trends, and a Web site to keep track of them all. The cost to launch an offering has gotten so low, and angel money so plentiful, that anyone can pop up a new site … subscription coffee anyone? Oh, wait … I think that already exists. Subscription tea? Never mind.

Investors love the concept of repeatable revenue, but with high churn rates and the ability in several models to skip deliveries, retention may be only a function of how hard sites make it to cancel. To understand why some sites will work and others will fade away, we need to look closer at three elements: Type of subscription model, category of purchase and merchandising strategy.

There are three different types of subscription models, each with a unique value proposition.

• First, there are those that offer a better price on a product because someone is committing to a recurring purchase relationship. Let’s call this the “Columbia House” model, after the short-lived direct-distribution CD subscription business. Why do customers sign up? They’re lured by a bargain price and the reassurance that they can cancel/skip anytime in the future. Businesses know that negative opt-out will drive some repeat purchase and increase the Lifetime Value (LTV) of customers. This is key, because many of these businesses have become professional fundraisers. It is easier to justify high customer acquisition spend off an LTV versus most (nonsubscription) e-commerce businesses, which look at payback on an initial order.

  The challenge, however, is that consumers are not fools. Even though they see something they want to buy, they may not sign up, because they don’t want to have to worry about canceling later. Others may game the system to their advantage. For example, circa 1994, I signed up B. O’Malley, Brian O’Malley, B. Patrick O’Malley, etc., all as subscribers to Columbia House, so I could continue to receive free CDs. After watching what people will do for a free T-shirt, this behavior should not come as a surprise to anyone. Some of these challenges are forcing players to adjust: Some, like ShoeDazzle, are moving away from subscription, while others are making it more opt-in versus opt-out. Other players in the shoe category, like ShoeMint, JustFab and Sole Society have continued to run with their original model.

• The second model for subscription commerce is sampling. Merchants pick items they think you will like, and send them to you. Since you rarely know what is coming, let’s call this model, “Mystery Box.” Birchbox pioneered this model with a combination of beauty and lifestyle products all offered for $10 a month. Other companies leveraging this sampling model are Blissmo, Foodzie, Club W, Citrus Lane, etc. This is great for brands looking to drive new customer awareness and consumers looking for a little something fresh and different. Consumer packaged-goods companies tend to be forced into either television commercials or in-store displays. Sampling offers a more effective bridge to the customer, while providing deeper insight along the way. If the price point is low enough, customers will stick through months of poor selection, in the hope that next month is better. While curation is key in all these models, this is the only one where the merchant tends to have 100 percent liberty to send you what they have available. This is helpful, because some of these vendors (think artisan food) are limited in the supply they can direct toward samples. For them, variety is key to sustainable growth.
• The final model is specifically focused on consumable products: Flowers, razors, diapers and, yes, even condoms. For the right category, this model makes the most sense. Not only do consumers receive a discount by buying the product direct, they also should receive more product just as they’re running out. Let’s call this category the “Sushi Boat,” because whenever you run out, more automatically shows up. Kiwi Crate and BabbaCo, for example, sell subscription craft projects for children. Right when Johnny has finished last month’s project and you’re searching for some way to entertain him, a new box shows up with fun projects to reengage him. This model has been around for decades through mail-order prescriptions and diet plans, but only in the last couple years has the supply chain become specifically catered towards online distribution. There is a real-time content angle to these subscriptions, so not only do you get your eco-diapers from the Honest Company, but you can pick which pattern you want on the diapers each month.

While these different models will get just about any business school student excited enough to do an extra keg stand, the models are not what’s most important. Subscription is based on the idea of repeat purchases, but the category of product determines the repeat purchase rate more than the stated business model.

For example, check out the charts (below) showing cohort retention (what percentage of every dollar customers spend in Month 1 will be spent in Month 2, Month 3, etc.) for two of Battery Ventures’ portfolio companies, H. Bloom and Relay Foods. H. Bloom is a subscription flower business that delivers fresh, hand-cut flowers on a weekly basis to those who want flowers in their home at all times. This falls into the “Sushi Boat” category, because new flowers show up right as the old ones are starting to go. Relay Foods is a grocery delivery service that delivers food from local merchants to common drop-off points (office, gym, school, etc.) to avoid last-mile issues of most grocery delivery services. Both of these businesses have great retention, with roughly 50 percent of each dollar retaining in perpetuity, but only H. Bloom is actually a subscription business.

They both fare well, because consumer behavior around fresh flowers and groceries has a necessary replenishment model. Food is consumed, and flowers spoil. The subscription model has one additional benefit for H. Bloom, which is rarely discussed. Most flower merchants have to guess at demand on a weekly basis, and therefore have upward of 50 percent spoilage, while the predictability of the subscription model enables H. Bloom to almost perfectly measure demand, dropping the cost of wasted flowers. While it is no easy feat to change the behavior of where people buy flowers and groceries, once they do change, they tend to stick, and in Relay Food’s case, actually buy more over time.

Why is this so important? Besides viral adoption, retention is the only variable available to retailers that drives geometric growth. Despite the importance placed on initial order size, cost of customer acquisition and gross margins, great retention will trump all of these. As long as customers stick indefinitely, you can pay a ton to get people, have low contribution margins and, as they say, make it up in volume. It may take several years to reach scale, but you will end up with a sticky base of customers where you can accurately predict demand and not suffer the leaky bucket problem so common in all e-commerce businesses, subscription or not.

Subscription makes a ton of sense for the right categories of spending, where it is viewed as a service offered to the consumer. It is no secret that I appreciate businesses that play off people’s innate desire to be lazy; however, time will separate the Columbia House models that exploit laziness from the “Sushi Boat” businesses that cater to laziness.

Brian O’Malley is a General Partner with Battery Ventures, and leads the eCommerce practice.

Disclaimer: Battery Ventures is an investor in Groupon, H. Bloom, Relay Foods and Send the Trend (acquired by QVC). Elements of this article have also been discussed at http://gigaom.com/2012/02/14/subscription-commerce-startups/ and http://labaraka.tumblr.com/post/19452076036/please-stay-classy-and-stop-copying-birchbox and http://pandodaily.com/2012/05/11/subscription-commerce-isnt-a-revolutionary-business-model-its-a-smoke-screen/.

]]> http://allthingsd.com/20120629/overblown-commerce-models-part-iii-subscription-commerce/feed/ 5 http://allthingsd.com/20120524/google-adds-in-app-subscriptions-to-android/ http://allthingsd.com/20120524/google-adds-in-app-subscriptions-to-android/#comments Thu, 24 May 2012 17:04:55 +0000 Ina Fried http://allthingsd.com/?p=212011 Android app developers now have one more business model to consider.

Google said on Thursday it is adding support for in-app subscriptions, allowing apps or services within apps that are paid for on a monthly or annual basis. The subscriptions will be auto-renewing unless a customer chooses to stop them.

“Developers just set the price and billing interval and Google Play manages the purchase transactions for them, just as it does for other in-app products and app purchases,” Google Play product manager Ibrahim Elbouchikhi said in a blog post.

The move comes roughly a year after Google added in-app payments. Google says that 23 of the top 24 grossing Android apps use in-app payments and that revenue from in-app payments exceeds that generated from paid downloads. Google has also added support for carrier billing in a number of markets.

Game makers have been among the most aggressive adopters of in-app payments and are expected to be among those that gravitate to subscriptions as well, though the option will be for any Android app.

One of the first companies to adopt the new subscriptions will be Glu Mobile, which plans to offer a virtual currency that can be used across a number of its games, including Frontline Commando.

Glu senior VP Adam Flanders said subscriptions, which it already offers via Amazon, boost the value and experience for customers, while also boosting retention of those customers.

Also planning to use the new feature is music site Qello, which will start offering an “all-access pass” to its library of concerts and documentaries to its Android app. The company already offers that option on iOS and the Web.

Google said that, for developers already using in app payments, the move to add subscriptions will involve adding just a few lines of code.

]]> http://allthingsd.com/20120524/google-adds-in-app-subscriptions-to-android/feed/ 0 http://allthingsd.com/20120502/microsoft-preparing-to-sell-cellphone-like-subscriptions-for-the-xbox/ http://allthingsd.com/20120502/microsoft-preparing-to-sell-cellphone-like-subscriptions-for-the-xbox/#comments Wed, 02 May 2012 17:43:51 +0000 Tricia Duryee http://allthingsd.com/?p=202573 The Verge is reporting that next week Microsoft is planning to sell subscriptions for the Xbox, similarly to how wireless carriers sell phones. Under the plan, the Xbox plus Kinect will cost $99 plus $15 a month for two years, including access to the Xbox Live Gold service and its streaming TV and music. Right now, the package appears to be cheaper than paying upfront for the console, though that doesn’t factor in any future price discounts for the aging hardware.

]]> http://allthingsd.com/20120502/microsoft-preparing-to-sell-cellphone-like-subscriptions-for-the-xbox/feed/ 0 http://allthingsd.com/20111222/netflix-really-really-doesnt-want-your-dvd-money/ http://allthingsd.com/20111222/netflix-really-really-doesnt-want-your-dvd-money/#comments Thu, 22 Dec 2011 20:25:21 +0000 Peter Kafka http://allthingsd.com/?p=156352

Streaming is the future. We’re focused on it. DVD will do whatever it’s going to do. We’re not — we’re going to try to not hurt it, but we’re not putting a lot of time and energy into doing anything particular around it and then we’re focused on, how do we take advantage of this incredible global streaming opportunity.

That was Netflix CEO Reed Hastings, at the UBS media conference earlier this month, reiterating the point that Netflix has been making over and over again for some time: They want out of the DVD business, even though it is generating more than $1 billion a year for them.

Hastings and his team are convinced that even though consumers say that discs are important to them, their usage data shows that few people … use them. “Old fogey discs,” Hastings calls them.

Netflix tried very hard to accelerate the decline of DVDs with the Qwikster fiasco. Since then, Netflix has been careful to tell its subscribers who are still paying for DVDs that it is happy to have them around.

New subscribers are a different story, though. Netflix exclusively pushes its $8-a-month unlimited-streaming option, on its site and in its promotional materials. You have to work very hard to discover that the company still rents DVDs, and that’s by design.

Same deal for former subscribers that Netflix is trying to woo back: Even if you used to get both DVDs and streaming videos from Netflix, the company will only tell you about its streaming plan in its “come back!” emails. (See the screenshot of an email my colleague Tricia Duryee, who quit her hybrid plan this fall, got recently, at the bottom of this post.)

But the message is most clear for people who want to give someone a Netflix subscription as a present: The company no longer allows you to gift a subscription that includes a DVD plan, period.

Go ahead and see for yourself — there’s no way to give Reed Hastings and company an extra $8 a month for a service they’re still providing to some 11 million subscribers.

The one tiny workaround that the company offers (if you look very, very hard — or do what I did, and call up Netflix PR and ask) is the ability to let current subscribers extend their current deal. So, for instance, if you’re currently getting the equivalent of a $16-a-month hybrid disc-and-streaming option, and someone gives you a year-long $8-a-month streaming gift, you can convert that into a six-month hybrid plan.

But, boy, that’s complicated. Easier to just give someone a year of streaming, and then send them a check so they can add the DVD portion on their own. Which is what we just did this morning, here at the AllThingsD Brooklyn outpost.

So to repeat: If you work very, very hard, Netflix will let you give it money, and will let you rent DVDs in return. But it would really prefer that you didn’t.

]]> http://allthingsd.com/20111222/netflix-really-really-doesnt-want-your-dvd-money/feed/ 0 http://allthingsd.com/20111220/digital-game-revenues-werent-enough-to-offset-broader-industry-declines-in-q3/ http://allthingsd.com/20111220/digital-game-revenues-werent-enough-to-offset-broader-industry-declines-in-q3/#comments Wed, 21 Dec 2011 01:37:21 +0000 Tricia Duryee http://allthingsd.com/?p=155639 Revenue from mobile and social games, among other categories, is growing, but not at a fast enough clip to offset the declines witnessed in the traditional games market.

The NPD Group released a new report today that calculated the amount of money Americans are spending on games from the nontraditional market. That includes a lot of digital content, such as subscriptions, digital downloads, social games and mobile games, but also used games and rentals.

In the third quarter, it found that the amount spent on that “other content” totaled $1.64 billion.

While significant, NPD said it wasn’t enough to offset lower revenue from the traditional game market. NPD defines the traditional market as packaged goods sold at retail. In the third quarter, that totaled $1.3 billion.

“New physical retail sales had a rough third quarter,” said Anita Frazier, an analyst with NPD. “Increases in sales from some of these other monetization methods, and full game and add-on digital downloads in particular, only partially offset the decline see in the new physical retail channel.”

She said the overall market, including hardware, totaled $4.2 billion, down 11 percent compared to the same period a year ago.

For companies like Electronic Arts, which is investing heavily in mobile and social games and is placing big bets on online content, like today’s release of Star Wars: The Old Republic, the results of these monthly and quarterly reports are unrepresentative of the trends they are seeing.

“Everything is growing. If you look at the total interactive business, it’s a $50 billion market internationally, and that’s up double digits. That’s where we play,” said EA’s President of Labels Frank Gibeau. “We find it frustrating because it doesn’t tell the whole picture.”

In the second quarter, EA’s digital revenue, which includes downloadable console content, mobile and social — was up 30 percent year over year.

Even a company like Activision, which has been slower to develop games on Facebook and mobile, said that during the second quarter, revenue from digital channels — mostly downloadable content — increased 27 percent year ove year, and accounted for 37 percent of the company’s total net revenue.

For all-digital companies, like Zynga, which went public last week to raise $1 billion, its impact hardly seems to register.

“I think that ultimately we are an interactive entertainment company, not a packaged goods company,” Gibeau said. “We are platform and channel agnostic. The physical channel is a great channel and it’s going to be around longer than people think. … We are fine with that model, but then, when you bring that game home, you should be able to connect to the larger online world.”

]]> http://allthingsd.com/20111220/digital-game-revenues-werent-enough-to-offset-broader-industry-declines-in-q3/feed/ 0 http://allthingsd.com/20111208/2012-siri-is-a-stunner-amazon-is-amazin-and-security-gets-spendy/ http://allthingsd.com/20111208/2012-siri-is-a-stunner-amazon-is-amazin-and-security-gets-spendy/#comments Fri, 09 Dec 2011 04:59:40 +0000 Arik Hesseldahl http://allthingsd.com/?p=152034 On Thursday night, I attended a dinner at New York’s Waldorf Astoria Hotel, hosted by Mark Anderson, the CEO of Strategic News Service, a newsletter that many senior tech execs subscribe to. At this annual event, which I missed last year, Anderson makes predictions concerning what he thinks will be the dominant forces shaping the technology world in the coming year. And his predictions are always interesting.

Ahead of the dinner, Anderson stopped by my office to let me have a peek at his 10 predictions, and we talked them over a bit. All 10 are below, along with some comments from Anderson that emerged from our conversation.

Before diving into the predictions, Anderson tells me there is a grand theme that unifies them all: “Integrating everything.”

What does that mean? “It means a whole lot of stuff that needs to be integrated. We don’t need anything new at all. There’s so much work that needs to be done with the existing tool sets. Steve Jobs didn’t really invent anything at all. But he was great at integrating things into a product. There’s a lot more of that work to do. We have to do it in the phone world and the TV world and the health care world. We have lots of devices and lots of chips and lots of operating systems and lots of content. The bigger question is, how do human beings use it all efficiently?”

As an example, he cites the collaboration between Nuance, the speech software company, and IBM, bringing the Watson computer of “Jeopardy” fame into the area of health care. “For the first time, the idea of evidence-based medicine won’t just be in a magazine article,” Anderson says. “A doctor will be able to pick up his phone and describe four symptoms, and find out what the likely diagnosis is, what the indications are. It’s fantastic.”

So here are those 10 predictions, with additional comments from Anderson:

1. TV becomes the new center of gravity in the tech universe. All the other devices find their niches in the TV galaxy. Microsoft’s attempt to integrate Kinect into TV is a strong if qualified success. Smart phone-TV integration software becomes a new category. Pad-TV integration becomes common.

“Apple will hustle to launch the next version of Apple TV, and it will be a roaring success and be seen as Tim Cook’s first great product success. But what it really will be is Steve’s last product.”

2. 2012 will see tectonic shifts in phone markets. “Nokia will fail to come back, which is pretty clear to everyone except the people in Finland.” Samsung, Anderson says, will retain its spot as the new global leader in mobile phones by volume, and will keep this crown despite the debut of Microsoft’s Windows Phone 7.

Meanwhile, Anderson says, Google will lose control over the Android operating system, mainly because unlicensed versions of Android will multiply in type and in installed base, especially in Asian countries. “It’s already a balkanized environment. Now Google loses control of the technology entirely. China is already running an unlicensed version of Android, and I think there will be more of that.”

Finally, the smartphone will finally emerge as the dominant category of wireless phone. “Why would you have anything else? And why would sellers of content and services want you to?” he says. “It doesn’t matter if you’re in a rich country or a poor country. This stuff is cheap.”

3. Clouds are for consumers, and for start-ups. Even as a large number of big companies move pilot projects onto external clouds, it will become clear that the real trend is for enterprise to stay away from clouds in all key areas, for reasons of both security and reliability.

“The cloud guys hate this because they want to sell to enterprises,” Anderson says. “But the security issues are becoming really intense. If you’re a CIO, it’s a terrible environment, and you’re a target, for sure, especially if you’re a company with a lot of intellectual property. I’m not implying that things like SAAS (software as a service) aren’t a big trend. But no one is going to put their valuable IP on the cloud.”

4. Security splits the tech world in two, finally getting attention from CEOs. Companies with real IP start to realize they have to “go big or go home” with their security response, and their spending on protecting their “crown jewels” rises dramatically.

5. Siri stuns the world. Siri, on Apple’s iPhone 4S, has sounded the arrival of Internet personal assistants, and the world will spend this year marveling at what Siri and its rivals can and cannot do — and what they can learn to do.

“I think we’ll see a bunch of these things,” Anderson says. “Siri will get much better. It will learn how you learn. We’ve never seen people have long-term relationships with machines before, but it will be a long-term relationship, and she will remember everything, but make good use of it. She will know you learn better by seeing than hearing, or that it takes three times to tell you something. All those things that you have to program today should be learnable. None of that has been done yet. That creates a real friendship. And I think we’re going to start seeing personal assistants not just for everyday life, but for professions like medicine or car repair. Instead of just having Siri be everything, there will be many Siris for different contexts.”

6. We enter the amazing world of Dave and HAL, as voice recognition comes of age. From hospital to car, mobile to home, Kinect to Siri, exercise to play, work to entertainment, remote control to direct action, from Microsoft to Apple, from Tellme to Nuance — the time has come for computers and humans to talk to each other. With lots of funny stories, big bloopers and amazing breakthroughs, humanity at the end of 2012 will be talking to machines in a normal voice, and it will not seem unusual, nor be the cause of unending frustration.

“The voice-recognition part is almost trivial,” Anderson says. “The important part is context-sensitive understanding. It used to be that all the researchers at Carnegie Mellon used to think that all you needed was more computing horsepower to do better at voice. It turned out that was wrong. It was right for a little while, but the real problem is context. And so, if you can build up that database where you can search it contextually for what to expect, that is where you get all the mileage.”

7. E-readers prosper, but pads continue to dominate what Anderson calls the “carry-along” market. Pads and tablets will come down in price and get closer to prices of e-readers. Meanwhile, Anderson says, Amazon’s Fire will move upmarket and evolve into a full-fledged tablet.

“If you look at the specs on the Fire, it’s a tablet, but it’s hobbled,” Anderson says. “So I think that this is part of the whole strategy: Come in and sell at a low price, and then later unveil a more complete tablet. Apple will stay ahead, though. A lot of people are asking me if Amazon will catch Apple, and the answer is no. The way it’s configured right now, there’s no way the Fire will catch up with the iPad.”

8. The consumption world explodes. Get ready for new devices, new content, new bundles, new connection techniques, new distribution channels, new aggregators, new tablets, new phones, new players, new self-published authors, new garage bands, new consumption models riding on social networks. There is nothing but high energy in the content consumer market. People are now ready to spend subscription money, and the publisher response will be huge. “It’s going to be a huge melee of stuff,” Anderson says. “We’ll invent more stuff to consume, and it will be very hard to figure out who the players are from week to week, and how they’re doing. They may not even know themselves.”

9. Governments and corporations focus on intellectual property as though it were their most prized asset. It is. This new global understanding leads to a reevaluation regarding giving critical IP away for nothing versus protecting it. The age of what Anderson calls “IP naïveté” is over, and the question of proper IP valuation is here.

What is IP naïveté? “When Jeff Immelt stood on the steps of the White House the day after he was named jobs czar, and handed the plans for GE’s most important jet-engine project to Hu Jintao in order to get the permission to be allowed to bid on maybe selling engines to China — that’s IP naïveté,” Anderson says. “Thinking that’s not going to come back and show up for sale in Houston from some Chinese company in about six months is IP naïveté.”

During 2012, he says, companies and countries will start valuing their intellectual property not for its replacement value, but for figures that are magnitudes larger. State-sponsored IP theft will shift from being considered a nuisance and more along the lines of an act of aggression.

10. Amazon gets it all. Between outdoing Wal-Mart online, to beating the booksellers and delivering groceries, and making new inroads in video streaming, Amazon will prove that one company can indeed have it all. Strong Kindle and Fire sales will only be icing on the cake.

]]> http://allthingsd.com/20111208/2012-siri-is-a-stunner-amazon-is-amazin-and-security-gets-spendy/feed/ 0 http://allthingsd.com/20111207/facebook-wants-writers-and-famous-people-to-promote-its-new-subscribe-feature/ http://allthingsd.com/20111207/facebook-wants-writers-and-famous-people-to-promote-its-new-subscribe-feature/#comments Wed, 07 Dec 2011 18:15:24 +0000 Liz Gannes http://allthingsd.com/?p=151409 Facebook will “imminently” launch a plugin for reporters and public figures to ask their readers to subscribe on Facebook directly from their own Web sites, VP Joanna Shields said at LeWeb in Paris today. Once they’re subscribed to those people, users will automatically see their updates included in Facebook’s newsfeed.

The tool will be similar to the “Like” button plugin, which connects users to Facebook fan and brand pages from around the Web. It’s also close to Twitter’s follow button, and for that matter it could be an alternative to the standard Web format of RSS feeds.

Of course, the reporters and public figures actually have to write the updates they send to subscribers. That part is not necessarily automatic.

Until recently, Facebook had allowed users to create “Notes” (the Facebook version of blogs) automatically by importing posts from RSS feeds. It removed support for that feature last month.

(Image credit: Flickr user tlillis4)

Please see the disclosure about Facebook in my ethics statement.

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