What Are They Thinking? Microsoft C.E.O. Satya Nadella Sees The Future and It’s … Subscriptions
On Monday, Microsoft released Office 2016, its update to the most-used set of basic workplace tools. That long-awaited preview carries with it actual news of a fundamental change in the strategy of one of the world’s wealthiest and most profitable companies. C.E.O. Satya Nadella says the company had decided on its growth business model of the future, a stunning concept that would cause customers to open their wallets and profits to flow to Microsoft forever more.
That innovation: subscription.
Yes, subscription, the business model all but given up for dead just a half decade ago. Subscription, that relic of a dead-tree-company business plan. It’s only been a few years since its reinvigoration, a seeming miracle of reinvention, led by Netflix, Amazon Prime, Hulu, Pandora and fellow digital entertainment companies. They discovered the power of subscription and harnessed it, producing this current level of customers:
· Netflix: 21 million
· Amazon Prime: “Tens of millions”*
· Spotify: 15 million
· Hulu: 9 million
· Pandora: 3.5 million
Those companies made mush of the fantasy that all “content” would be freed by Internet nymphs. They also disproved harebrained psychological theories of human entitlement and of consumer inability to differentiate between “good enough” and better stuff.
First published at Capital New York
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In 2011, The New York Times began to prove out the idea that news-prizing customers could be found for digital news as well as printed news. By October, the Times expects to have signed up one million digital-only subscribers, while offering higher priced print/digital All-Access to hundreds of thousands more. Before the Times’ innovation, it had only been the business news publications – led by The Financial Times and The Wall Street Journal – that had gone the digital subscription route.
Now more than 500 U.S. newspapers and hundreds across Canada and Europe have refashioned the old-fashioned print subscription into a digital or All-Access one. Most of the major magazine titles have adopted similar models.
Yet, that is all prologue. That’s a snapshot of the world from 2010 to 2015.
Satya Nadella has outlined the world from 2016-2020 in a series of recent interviews, in the run-up to Build 2015, its just-concluded, San Francisco-based developers conference.
“There’s a secular movement that’s happening … more to an annuity relationship as well as a subscription relationship. These are the long-term relationships we want to have with all customers,” Nadella said. “There will be an increasing emphasis on the lifetime value that we can deliver to customers,” he said.
The company that once was the most valuable in the world is in the midst of a huge transformation. It is moving from the notion of shrink-wrapped product to software-as-a-service, and in that transition, embracing one of publishers’ longest-standing, and recently revived, business models. In that transition, we see new applications for publishers. Certainly, Microsoft’s move is in part affirmation, but it’s more than that: it’s a further challenge to publishers themselves to build on a model they had a good hand in creating long ago.
To be certain, Microsoft’s transition positioning is uncertain. Though well supported by its cash reserves of $92 billion, Microsoft’s operating performance shows its wear and tear. While recent reported revenue moved up 6 percent from the year earlier, its quarterly profits were down almost 12 percent. Its expanded subscription strategy – which the company is applying to the Office suite, but will also apply to Windows software itself – means the adoption of free upgrade/more sampling strategy. Part and parcel of such strategies: short-term losses in revenue, and smaller margins early on.
Yet, Nadella says that the subscription-driven margins are already improving. The company forecasts related gross margins on that business to soon hit 44 percent, up from 15 percent last year. That would indicate it is newly mastering the art of subscription, and its pricing.
Already, in relatively few years, Microsoft has grown its subscription businesses to $6.3 billion. Within three years, it aims to triple that number, to a $20 billion yearly revenue rate . That’s a 40 percent annualized growth rate for subscriptions.
Look at the moving numbers, and you can see a legacy business in transition. The old boxed standalone Office dropped a full 41 percent in revenue as online Office 365 rolled out. How much of that did Office 365 recoup? About 27 percent of it. This is not a one-to-one transformation, as all others traversing from physical to digital have learned. Still Office 365, announced in the same 2010 in which The New York Times announced its digital subscription program, can count 12.4 million subscribers, now growing at 34 percent a year.
As we think about what publishers must consider in the next life of the subscription model, let’s number the multiple transitions in thinking Microsoft now makes.
· The movement away from owning things toward experiencing them. Equate: the shrink-wrapped Microsoft Office box and the printed paper and magazine. Equate: Office suite as a monthly subscription and news delivered continuously as a stream.
· The related, profound movement from selling products to selling services. Millennials, in particular, favor fast, easy access as compared to the frictions of buying, but these subtle, cultural changes now pervade other generations as well.
· The rise of “annuity relationships.” Sell a customer something once and you’ve got some money – and maybe more sales. Get their credit card, provide good utility and you’ve got recurring revenue. That’s the lifetime value Nadella speaks about. Think about the numerous recurring credit card commitments you’ve made, and how long they may linger long after you’ve committed to them.
· The notion that our access to a product isn’t tied to a specific device (or platform, in modern speak) but to us as buyers. We buy it; we get to use it anywhere. Equate: a Microsoft Office 365 license, which covers desktops, laptops, tablets and smartphones.
· The promise of updating on the fly. Cloud-based singular change vs. installed software. Equate: The need to no longer go to the expense of time and money to “update” software with the core value of news product: it’s always updated.
So, how do we apply these lessons back to the original subscription sellers, publishers?
Listen to the sum-up of Wall Street Journal reporter Shira Ovide on Microsoft’s move to subscription: “To make a subscription-reliant business model work, Microsoft will need a broader base of users for its Windows operating system. To get them, it has re-engineered Windows to run on mobile devices as well as the traditional laptops. Also, it intends to give away upgrades to Windows 10, which is due for release this summer, to some users.
“In Microsoft’s estimation, software subscriptions will lure users and keep them hooked. Then, over time, it can then sell them further subscriptions or other products, such as mobile apps, ultimately bringing in more revenue per customer.”
Sound familiar to anyone in the news world? We can pull out the key words: “mobile,” “freemium,” “sample”, “upgrade,” greater “ARPU” (or average revenue per user).
To be sure, Microsoft differs greatly, in many ways, from the traditional publishing industries. Yet, the fate of digital disruption forces convergence on business-model thinking in ways we never would have expected. It’s stunning how much digital business models from Microsoft to Verizon to Spotify to The New York Times have converged. Where do we stand in 2015? We’ve proven people will pay for digital stuff, at the right balance of quality and price. All companies just need more payers.
So how much do newspaper companies have to broaden their base? The numbers are surprising. That base-broadening can happen two ways. It sell existing subscribers new products; it’s always easier for any business to upgrade a customer than find a new one. Or, publishers can find new customers.
Let’s do some math, first going the upgrade route.
U.S. newspapers can claim about 42.5 million paying readers. Let’s say that 35 million or so of them are subscribers, a number that is probably low as single-copy sales evaporate. If, on average, each of those 35 million subscribers paid an extra $40 a year for a subscription product, the U.S. newspaper industry would gain about $1.4 billion a year in added revenue. $1.4 billion may not seem like a big number in the age of Microsoft, Apple and Google, but that sum would turn the industry as a whole from a written-off clueless laggard into a growth industry. (“The Newspaper Industry’s $1.4 Billion Money Hole”).
Upselling or upgrading current subscribers offers a worthy goal. The problem: publishers have as much as doubled subscription prices in the last four years, the vast majority cutting the product simultaneously. Consequently, we get to the question of what can be offered to both existing subscribers and non-subscribers.
Of course, the question is: What are the 2016-2020 services for which people will pay “news companies”? Strip away all the change of the last 25 years, and what do almost all news companies still offer their readers: Headlines, and subheads. No surprise, the group of people willing to pay for those has largely come from those who were willing to pay for newspapers.
Today’s question: What is the job to be done for consumers of news and information today? What, given the digital promise right in front of us, could those news and information services be? By 2025, I have no doubt that we’ll look back at the feebleness of 2015 offerings and laugh. Some companies will have combined human and technology ingenuity, creating arrays of worth-paying-for products of knowledge and utility.
Today, we find only pieces of the future, with a few tries (NYT Now, now free, to The Economist’s China offering) at new niche paid subscriptions. In terms of product that could offer a gateway to new subscription money, we see crumb trails forming
The Journal’s new redesign embeds stock quote information in relevant stories. Imagine, though, a link within a Journal business that opens a smart window on a company, its strategies, results, competitors and contextual Journal news, anticipating the follow-on questions a paying reader likely would have.
Imagine the next generation of explainer sites, a further level of analysis and completeness that recent upstarts like the New York Times’ Upshot, Vox and FiveThirtyEight could build towards. Consider what the combination of Amazon’s industry-leading recommendation engine could mean to the presentation of news from a Washington Post, creating a new model for the global press.
Consumers will pay for new subscriptions – but first they have to be offered new value.
Then, there are the business-to-business marketplaces across the country. Newspapers used to benefit from a part of this market – a transactional part through classifieds and an editorial part in the their local business sections. Budget cuts have largely demolished that local business coverage, leaving audience – and B2B money – to others. Microsoft’s subscription push centers on business-like users, of course. Consider that as many as 30 million Americans spend at least part of their time working at home. What can national and local news media offer them?
The challenge is both one of imagination and intellect – and of spirit.
To the publishing comparison, perhaps most important is Satya Nadella’s reinvention of a legacy company that over recent years couldn’t escape its creature-from-another-time image. Nadella’s strategy and the new openness of Microsoft products leads some analysts to talk about a turnaround and about Saint Satya, “the man who rescued Microsoft.”
For publishers, though, it’s an object lesson: Turnaround may seem almost impossible, until it isn’t.