There are about 2.5 billion smartphones in the world, each offering the ability to stream video on demand. Internet television is replacing traditional tv and television on mobile is accelerating that trend.
The internet has done more than just move television online; it has fundamentally changed our relationship with the things we used to buy.
People who want to listen to music are now likely to subscribe to Spotify.
There are two broad types of subscription companies – digital subscription businesses that most people are familiar with and those who deliver physical products to our door.
Netflix and Spotify now have more than 230 million paying members between them.
Subscriptions promise convenience and low cost.
Netflix and YouTube are so big they account of 25% of global internet traffic.
The success of Netflix lies in their ability to deliver exactly what people want.
Netflix is expected to spend $15 billion on content in 2019 – equivalent to the total annual budget of the BBC and Sky Broadcasting combined.
The more content Netflix can offer the lower its rate of churn – people cancelling their subscriptions.
Netflix invests heavily in monitoring the behaviour of people on its site, working out what they like and tying them ever more closely into its service.
The rise of subscription businesses coincides with another trend across sectors, the growing importance of data.
Whoever owns the relationship with the customer owns the value of that relationship.
The point of a subscription is that you can have a relationship with someone who is constantly refining what you offer them and tailoring your service to make it more appealing.
From a financial perspective there are a few important measures to enable you to understand how investible a subscription business might be.
The first is how much it costs to acquire a customer – the Customer Acquisition Cost (CAC).
The second is how long a subscriber can be expected to stay with you – their lifetime value (LTV).
Combining these two metrics effectively tells you how much a customer is worth to a business.