At a secret meeting that it held for its developers last year, Apple preached the benefits of subscription revenue models with app creators. The meeting was held in April 2017 but was first reported by Business Insider in August 2018.

Last year, the subscription model was barely on the app developer radar:

(Source: App Annie via Statista)

Only 17% of mobile app developers polled last year were focusing on a recurring revenue model. Since then, Apple has been pushing developers to give subscription a try. Just this month, Apple made its new pro-subscription strategy public with a video it posted on its developer site highlighting the successes of several software companies. As reported at MacRumors.com, one developer in the video says this:

• “If you’re a subscription business, your incentives are actually perfectly aligned with your customers, because they need to continue to get value out of the product in order to keep subscribing, which means that you have to continue making the app better,” said Calm developer Tyler Sheaffer.

There is a lot of room for Apple to move up in the rankings.

(Source: Apps Run The World, via Statista)

In 2016, Apple was not even on the list. The company is working hard now to change that. I’ve written about software as a service from a traditional, business-to-business perspective. But the idea of subscribing to software has already moved into the consumer arena, and now one of the most important personal electronics makers is stepping up its game.

APPLE

In its July earnings call, Apple said that it has sold 300 million subscriptions — to third party apps as well as to its own offerings. Along with other indications, the signs point to a new focus on recurring revenue. According to Jonny Evans at Computerworld:

• Apple has a larger vision around subscription. The company has been migrating much of its business toward subscription-based recurring income for years. This reflects a fundamental shift within the company: It likes selling hardware, but it wanted to build a more robust business around more predictable recurring income. Apple’s services business is a big part of that push: Revenue in that segment climbed 31 percent year over year to hit $9.5 billion in Q3 2018. (That’s up $3.6 billion since Q3 2017, which is pretty good growth.)

Andrew O’Hara at AppleInsider.com points out that app developers have continuing expenses, so the subscription model is a viable way to cover those expenses and keep their apps working correctly.

• Subscriptions present constant revenue for developers, who often have to maintain servers and other backend processes to keep their wares running smoothly. While some turn their nose up to subscription policies, recurring payments is clearly working for a large number of developers.

However, Apple’s desire to transition customers toward subscriptions extends beyond urging developers to offer apps that way. The company is planning to roll out subscription services for video entertainment and magazine and news content, according to Tim Peterson at Digiday:

• The number of subscriptions that Apple sells may balloon next year when it will reportedly roll out new subscription services. Bloomberg has reported that Apple plans to roll out a Netflix-style subscription service in the Apple News app following the company’s acquisition of digital magazine subscription service Texture earlier this year. And The Information has reported that Apple plans to roll out an all-in-one subscription service that would bundle video, music and news content, similar to Amazon’s Prime subscription service.

Apple already has a large and growing subscriber base for its Apple Music service:

(Source: Apple, Forbes, via Statista)

In addition, Apple offers a hardware subscription service: a new iPhone every year, per Todd Haselton at CNBC:

• The iPhone Upgrade Program is a lot like financing a car. You don’t really own your device. You instead pay down the cost of the phone over the span of 24 months. The cost for a new 64GB iPhone Xr is $37.41 per month (separate from your monthly carrier bill), while a fully loaded 512GB iPhone Xs Max is $64.50. It helps make buying what might otherwise be a $750 to $1,499 phone a lot less painful on your wallet and it’s a familiar subscription payment model.

Apple, which already has subscribers to its cloud services and its hardware, is planning to roll out new streaming options and is urging app developers to jump on board. But what about other big name suppliers of SaaS products to consumers? Consider Microsoft and Adobe.

MICROSOFT

Microsoft realized several years ago that it needed a cloud-based subscription option for its bread-and-butter office suite. The solution, Office 365, has seen dramatic growth, as this graph of revenue streams for the company shows:

(Source: Morgan Stanley; Microsoft; rhipe, via Statista)

Microsoft’s revenue from cloud services rose from 11% to 30% from 2015 to 2018. That’s a clear demonstration that the Office 365 service is growing in popularity. What’s more, Microsoft is appealing to everyday consumers (not businesses) with a new initiative.

Starting Oct. 2, Microsoft is adding to the value of Office 365 by increasing the number of instances that can be open at one time. Per TWCN Tech News, users will be able to install Office 365 on any number of machines, and they can use the software on up to five machines concurrently. This is a consumer expansion only, and it means more users on more machines with no cost increase.

ADOBE

Adobe has also shown strong subscriber growth over the course of this decade. Five years from now, it is projected to reach 20 million subscriptions to its Creative Cloud service:

(Source: Adobe, Trefis.com, via Statista)

According to Adobe CMO Ann Lewnes, interviewed in Forbes, the company moved to a cloud-based subscription model as a way of smoothing out its revenue stream.

• Adobe’s innovative engineers were developing new product features all the time but had to wait 18 months – the cadence of Adobe’s launch cycles at the time – to release them to the world. As a result, the company saw spikes in revenue every 18 months, but a less predictable revenue stream in interim periods. These factors contributed to Adobe’s decision to transform its Creative Suite business from a boxed-licensed software model to a monthly cloud-based subscription model, culminating in the launch of Adobe Creative Cloud.

Brian Stoffel at The Motley Fool saw that move as a lifeline for Adobe, whose sales had been flagging at the time of the Great Recession. But the turnaround was not immediate,

• “because subscription-based revenue takes time to accrue, sales gains were realized slowly. But eventually, it became very clear that the company was on to something. Subscription revenue has boomed — reaching $6.1 billion and accounting for 84% of all sales in 2017. Just as important, annual recurring revenue — the kind that is very predictable — was $10.5 billion last year, up 31% from 2016. Transitioning to SaaS has been the company’s savior.”

THE CONTRARY CASE

Is there a downside to the idea of paying for apps by subscription? One common complaint is that the average consumer’s monthly subscription bill is growing as more and more companies move to recurring revenue models. In a poll by Waterstone, 2,500 Americans were asked to guess the amount they spend on digital subscriptions, and then to compare that to their actual budget. The results: a supermajority of 84% of respondents underestimated how much they spend on digital subscriptions.

(Source: Waterstone Group)

Ben Lovejoy at 9to5Mac.com, citing this research, is a skeptic regarding the trend toward subscription models for apps. He worries that consumers will end up paying more than they should.

• Small subscriptions add up – one of the reasons that I feel reluctant to pay subscriptions for apps, even where the sums are small. I totally get the argument that it gives developers a more predictable, and some would say fairer, revenue stream – but it is this idea of easily finding that our total spend is significantly greater than we would ever have imagined.

The solution, I suggest, is to ensure that your subscription service, whatever it is, offers real and continuing value, and that it is easy to cancel. To give Apple credit, the tech behemoth is saying just that to its developers.

Insider Take

From next to nowhere, Apple is playing catch-up and growing its subscriber base by leaps and bounds. It is pursuing a multi-prong strategy — encouraging app developers, expanding its cloud services, and exploring hardware subscriptions are all now a priority. Other firms, like Adobe and Microsoft, have demonstrated that consumers are willing to jump on board. Apple wants a slice of that pie, too.