New York marketing professor Scott Galloway is widely known for his bestseller 'the four', in which he decodes the secret DNA of Amazon, Apple, Facebook and Google. When Galloway talks about new trends, analysts and stock market players prick up their ears. Galloway considers the current shift towards subscription-driven services to be "the biggest economic change of the last 20 years".
The current coronavirus crisis is ruthlessly revealing how quickly entire industries can be paralyzed and the associated companies can get into financial difficulties at breakneck speed and see their sales markets plummet in the short term. Companies with a low level of digitalization and no direct access to end customers via digital channels that are purely involved in product sales will have to completely rethink their approach in the future. And not just with regard to the currently discussed question of a different globalization or supply chain strategy.

Corona - catalyst of the subscription economy

Thomas Rappold is a financial and stock market expert, author (Silicon Valley Investing) and founder of numerous Internet start-ups.

© Thomas Rappold

We are still in the midst of the turmoil caused by the coronavirus. But as long-term investors, we should take a bold look into the future and ask ourselves whether the coronavirus will trigger a cultural change and who the winners of the tidal shift will be. The global financial crisis of 2008/2009 led to a great deal of innovation in the digital payments space by companies such as PayPal, Square and IPO candidate Stripe. The blockchain idea also emerged in the midst of and as a result of the financial crisis to create alternative and trustworthy forms of transferring money, goods and valuables. The term 'FinTech' was born; investors have pumped more than 100 billion dollars into this booming market over the past ten years. The coronavirus could have a similarly disruptive impact on the world of work.

Remote work and cloud computing

It is a start that tech companies as well as traditional companies are switching to remote working on a large scale. The first beneficiaries of this wave are video conferencing companies such as Zoom or the cloud storage providers Dropbox and Box as well as the messaging specialist Slack. New communication standards are required that can replace traditional email. Combinations of collaborative tools such as video conferencing and project management in new augmented and virtual reality environments are coming.
Other beneficiaries of this change are infrastructure-as-a-service companies such as Alphabet and Microsoft with their respective cloud services.

Digital Industry 4.0 subscription and value-added services

The 'Solactive Subscription Economy Index' is the world's first financial index on the topic of service subscriptions and has been successfully on the market since February. It includes a total of 25 leading companies from the four industry segments Infrastructure-as-a-Service (IaaS), such as cloud data centers and data center infrastructure, Software-as-a-Service (SaaS), subscription management (billing) providers and X-as-a-Service, i.e. providers of services on demand.

© Rappold

Even more conservative German companies have now learned the lesson. In a recent newspaper interview, Volkswagen CEO Brandstätter summed up the lessons learned: "Overnight, digital communication has become part of everyday life. If you like, the coronavirus pandemic has given us a real digitalization boost ". This boost must now be used to develop digital subscription solutions for Industry 4.0 value-added services.
Digital services for the maintenance, operation and optimization of Industry 4.0 value chains offer enormous opportunities. Now is the time to turn the ideas developed in the laboratory into market-ready products. The opportunities for the German mechanical and plant engineering industry are excellent. The new 'Umati' standard also comes at the right time. It was announced by VDMA and VDW as the "global language of production" for good reason, as it offers the opportunity to create a consistent standardized communication platform across different machines and plants, robots and systems and thus implement solutions from the store floor to the cloud.

"The service subscription is becoming the central building block of the Industry 4.0 digital economy"

The use of OPC UA as the standard for data exchange is logical and consistent. 'Umati' must develop into the Industry 4.0 programming language and, building on this, German industry must quickly develop innovative Industry 4.0 software modules that can be sold via subscriptions. This is not just about tapping into new sales. Rather, it is about having a digital interface to the customer and recognizing their needs at an early stage.

The example of Disney - a digression

Why is it so important for a media company like Disney to launch its own streaming service on the market, having previously always been content with its role as a content supplier? Because while content is important, the real measure in the Subscription Economy game is the number of subscriber relationships. And in this dimension, Apple is at least a decade ahead of Disney. Disney's Chairman of the Board Bob Iger basically admitted this a few years ago when he said, "It's one thing to consider ourselves as fortunate as we are to have Disney, ABC, ESPN, Pixar, Marvel, Star Wars and Lucasfilm. But in today's world, it's almost not enough to own all those things if you don't have access to your customer, who is giving you incredible data because of technology, to give the customer a more customized and personalized experience that can be better monetized."
The German industry needs to ask itself the same questions as Disney and find answers. Disney has succeeded in doing so - after just a few months, the company already has more than 50 million streaming subscribers.

Key financial figures speak for the subscription economy

Companies in the subscription economy that are characterized by above-average margins are of interest to investors in several ways. Take Apple, for example: Apple achieves an above-average margin of just under 40% with its iPhones. iTunes and the App Store, on the other hand, achieve margins of just under 70%. In the meantime, iTunes and the App Store could become a veritable Fortune 500 company in their own right. Consequently, the valuation and perception of Apple as a hardware manufacturer has risen in recent years to become an integrated service provider. Warren Buffett justified his billion-dollar investment in Apple by saying that he sees Apple as a new type of consumer goods company with a distinctive digital ecosystem and no longer as a pure hardware company. In economically uncertain times like these, the issue of predictability becomes more important. Companies based on subscription models are more crisis-proof. SAP, Germany's flagship software company and also represented in the Solactive Subscription Economy Index, now generates around two thirds of its revenue from recurring sales.

The revenue growth figures speak an even clearer language. Between 2012 and 2019, the revenue of subscription companies grew five times faster than that of S&P 500 companies and US retailers. In coronavirus times like today, this trend will intensify, as customers are absolutely dependent on online mail order. Bill Gates, founder of Microsoft and technology pioneer, once put it like this: people, and investors in particular, overestimate technology in the short term, but usually massively underestimate it in the long term. And Gates knows what he is talking about: his CEO Satya Nadella reinvented Microsoft; with Windows 365 and the Azure Cloud, Microsoft is considered a role model for the transformation of a long-established company into a subscription company. Gates, as one of Microsoft's main shareholders, benefited enormously from this: the share price has increased around fourfold since Nadella initiated the successful transformation in 2014.