The subscription model has a number of virtues, including spreading costs across more entities in the market, thereby lowering the cost for each in relative terms, while creating a relationship between the provider and the consumer that tends to align their interests. Other models — advertising, sponsorships, APCs — presume the consumer relationship at some level, but don’t reinforce it, or necessarily align closely with the interests of the consumer. Rather, they use that relationship to generate secondary revenues by leveraging the consumer relationship in some way. Without the primary consumer relationship, the value of the secondary revenue streams decreases — advertising isn’t seen, sponsors don’t get the recognition they seek, and authors don’t receive attention and citations. The subscription model not only expresses value in and of itself, but it drives secondary value by creating an audience that is viewed as more engaged and sustainable.
But does the subscription model alone make companies more valuable?
More people in formerly subscription-neutral to subscription-antagonistic business areas are beginning to believe so. With technology businesses maturing and the advertising market dominated by Google and Facebook, it’s not a surprise that the hot trend for many companies — or, shall we call it, the “remembering math” trend, or the “not wanting to get burned” trend — involves recurring revenues, which is code for subscriptions. Even Facebook is weighing the possibility of an ad-free subscription offering, partly to deal with its “crisis of public trust.” They see subscriptions as aligning themselves with their users, a shift from their current model where their users are the coal they burn to power their ad business.
With subscriptions, revenues switch from the fickle and consolidated producer-side (advertisers, corporate marketing departments, authors, and funders) to the more diverse and stable consumer side of the equation.
Like advertisers and marketers, funders aren’t forever. They typically have a time horizon before they shift priorities and approach, often a few years at most. The recent announcement that Wellcome Trust is re-evaluating its OA funding approach must have sent a chill through some APC-based publishers, perhaps manifesting as the word “RISK” in neon lights. If there are new approaches proffered by this leading light in APC spend, approaches others likely would follow, the market for contract review and publication services could change drastically. Similar things have happened around reprints, sponsorships, and advertising again and again.
From podcasts to e-newsletters to niche news and opinion sites, content startups these days are more boutique and less like unicorns — those magical startups expecting money to materialize out of thin air simply because they are unique. So it’s no surprise that recurring revenues are suddenly all the rage for sites catering to smaller and more focused audiences with specialized interests. Recurring revenues are harder to monopolize, are more robust, more reliable, and speak to a sturdier relationship with the sources of revenue (consumers).
This everything-old-is-new-again way of thinking about commercializing a content business is leading to some notable changes, with Google launching its new Subscription Tools and making these available to some large newspapers. It is also leading to more investment in content, with Amazon expected to spend $5 billion this year in original content in order to better support its Prime offering and deepen this subscription aspect of its business. Amazon recently raised the price of Prime, and because of the incredible value it offers and how Amazon keeps increasing this with content streaming of various sorts, most experts expect the price increase to work. (Amazon has more than 100 million Prime subscribers.)
The resurgence of the content subscription is well underway.
Scott Galloway, in a witty and provocative post, recently described the change in attitudes as pervasive, affecting where private equity, angel investors, and others are choosing to put their money. Rather than going to the bar to meet some hot new startup:
. . . the markets are telling firms if they don’t put a ring on it, and move to a recurring revenue model, they are going to end up alone living with cats. . . . once the markets realize you’re in a long-term, recurring revenue relationship with the consumer, the markets treat you differently. Similar to auto insurance firms that provide discounts to married people, the markets value recurring revenue firms at a multiple of revenues vs. EBITDA.
Galloway shares this handy little chart to show the price-to-sales ratios for firms that realize recurring revenues vs. those that have to live hand-to-mouth with non-recurring revenues:
SpringerNature’s prospectus for their imminent IPO contains numerous mentions of the strength of their subscription business. One strength is that their renewal rates are a healthy 97% for journals and 87% for e-books, nothing to sneeze at when it comes to solid, risk-limited recurring revenues. According to the prospectus, subscription revenues constitute 63% of the revenues in their research publications area, with the rest coming from advertising, reprints, and APCs (non-recurring revenue sources). They also note how non-recurring revenues could be a threat to their recurring revenues at multiple points in the prospectus, including this:
A trend towards “gold” open access models could decrease the quality and the depth of content available for our traditional Academic Research subscription publications and may negatively impact our revenues generated from traditional subscriptions. While a decline in traditional subscription-based revenues may be offset in part by APCs earned under “gold” open access, such APCs may not be sufficient to compensate for the loss in traditional Academic Research subscription revenues.
These potential trade-offs may be pivotal, as they would increase the overall risk profile of the business by shifting toward less reliable revenues while also undercutting the most reliable revenues.
The ultimate share price for the SpringerNature IPO will help calibrate the value of subscriptions in our market, as well as the market’s opinion of the threat posed by APCs as non-recurring revenue trade-offs. Given the 97% renewal rates for SpringerNature subscriptions currently, it’s hard to see APC revenues as much of a threat, even with recent dust-ups over licenses in Germany and elsewhere. We shall soon see if a business in our space built mainly on recurring revenues packs the kind of punch Galloway sees elsewhere.
Some APC-based publishers have made efforts to find recurring revenues, from PeerJ with its membership model and institutional model to PLOS with its years-long effort to create software it could sell as a service. Again, the benefits of recurring revenues are clear, but the path for some businesses to realize them may be blocked or out of reach because the businesses are fundamentally structured for non-recurring revenues. The failure of multiple print advertising-based publishers in the early 2000s are worth contemplating in this regard.
There’s more than math to suggest that the scholarly communication industry will have a thriving future with recurring revenues at the center of how we think about properly designed business models. There are diversity and community-based reasons, as well, captured nicely by the founder of Talking Points Memo, Josh Marshall, in a recent interview with DigiDay:
It’s unwise and extremely difficult for an independent publication to stay in existence without heavy reliance on subscription revenues that are based on a direct relationship with readers who have a commitment to the publication.
If there’s one thing most stakeholders agree upon in scholarly communications, it’s that having more participants in the publications space — from societies to university presses to boutique commercial presses — would be a good thing. (The debate of this idea is worthy; however, this is not the post for that particular exploration.) Marshall’s comments square with logic and history — the proliferation of small, thriving publishers coincided with the halcyon days of the subscription model. In our space, as the model of individual subscriptions gave way first to institutional subscriptions (which respond better to scale, so feed Big Deals and consolidation), and then to APCs (which work better in large-scale operations, which also feeds consolidation), these changes have left the short end of the stick in the hands of societies, university presses, and smaller commercial operations.
The proliferation of small, thriving publishers coincided with the halcyon days of the subscription model.
Yet from 2015 forward, subscriptions have thrived in the information space in general, from newspapers to podcasts to streaming services, as I wrote about recently. The trade publication, Associations Now, recently published an article speculating that now might be the time to move into subscriptions. Subscriptions reflect and work well within communities.
Broadly, we have a philosophical disconnect with the subscription model — we say we want more diversity in the market, to support society publishers and university presses, yet the high-profile business models we’re pursuing (APCs, in particular) only seem primed to shorten their longevity and limit their options. We talk the talk, then walk a completely different walk.
There is no such thing as “just another business model.” Business model choices summarize a lot of thinking, represent a lot of choices, and define a set of options. Facebook with a subscription model would be a completely different business from the one based on a targeted-advertising model. Business models are a form of governance, as I like to say. When you choose a business model, you choose what your company values, how it behaves, and what its incentives are. Given this evidence, business model choice may also determine how valuable your company appears to others.
(HT to Roger Schonfeld, for his very interesting Twitter thread on the SpringerNature IPO and other assistance with this post.)