All Commerce is Subscription Commerce

20 Feb 2022

Many of the biggest tech business stories of early 2022 demonstrate that subscription commerce is a top priority in 2022.

Not yet two months into 2022, there have already been more than a handful of big developments in online commerce, many of them involving subscriptions. But the subject hasn’t exactly been front and center. So let’s glance here at the subscription aspect of each story.

Microsoft-Activision

Microsoft’s $75 billion cash deal announced on January 17 to acquire (pending regulatory approval) the videogame company Activision Blizzard is 3x larger than any previous Microsoft acquisition.

According to the WSJ podcast, The Street, this deal is all about becoming the Netflix of video games. Microsoft has had a subscription gaming product, Gamepass which was introduced in 2017. Gamepass has 25 millions subscribers, a solid number, but not a very big percentage of the total gaming market. Technical challenges have prevented it from gaining wider acceptance among serious gamers who require low latency for instantaneous touch control, excellent graphics, and the like. Recently, Microsoft has been improving its Azure cloud infrastructure by adding game specific hardware/software to its data centers to improve gaming performance.

If the deal is approved by the FCC, Microsoft now will become the third biggest gaming publisher and will have a stronger stack of games to offer with the Gamepass subscription.

Netflix disappoints

Netflix suffered a 30% decline in its share value after announcing quarterly results on Jan 20 (the stock price has since recovered about 10% of its value). The share price setback reflected a severe decline in the rate of new subscriber growth which the company attributed to increased competition from other streaming services and Covid-related factors in some global markets. Netflix has held a huge first-mover advantage in streaming video which has allowed it to become one of the most important sources of original video content. But being the first-mover hasn’t prevented Hollywood studios, national networks and other players with their own content from developing compelling streaming offerings of their own. It has also become clear that, from a customer standpoint, there is a limit to the number of entertainment services to which a family will subscribe.

Amazon Prime Raises Its Cost

Amazon, one of Netflix’ rivals in the streaming wars, notched the largest ever one-day increase in market capitalization on February 4 after it announced strong Q2 results and an increase in the cost of its Amazon Prime subscription. The investing public was very pleased by the perception that the tech behemoth maintains pricing power over one of its stickiest and most popular services (which we discussed in aand earlier post). Prime is a blanket subscription which includes many Amazon services (free package delivery, video content, cloud storage, etc.) which may become a model for companies who are battling subscriber fatigue mentioned above.

Investors Force New Leadership for Peloton Interactive

Peloton Interactive sells exercise equipment and a subscription service which enable users to participate in live and on-demand fitness classes. The equipment and the subscription are both required in order to run the service. The company was one of the darlings of the pandemic: it hit a peak market cap of 40 billion in late 2020. After suffering a number of legal and PR blows, its share price declined through much of 2021 and, in early February, the company replaced its founder, John Foley, as CEO with Barry McCarthy, formerly CFO at Spotify and Netflix. News reports cited McCarthy’s leading qualification to become CEO as expertise at scaling massive subscription businesses, which include his previous employers. According to most analyses, Peloton’s missteps have had little to do with the subscription component of its business model and much more with the cost and logistics of supplying hardware to customers. And McCarthy indicated as much in his first substantial interview after taking on the new job.

Each of these stories merit closer examination and we will return to at least some of them here in the near future.