Apple and the Rise of the Subscription Economy

Apple (s aapl) this week introduced App Store subscriptions, and though people disagree on the fairness of the company’s 30 percent take of all revenue resulting from subscription sales, the feature is here to stay. Might its introduction signal a subtle shift towards a new paradigm for paying for mobile content and apps?

At least one person thinks so. Tien Tzuo, Zuora founder and CEO, and former CMO at Salesforce, suggested to me that by introducing in-app subscriptions to the App Store, Apple is joining a general trend toward a subscription-based economy. A subscription economy basically means that instead of a single lump sum payment, you pay a smaller, repeating fee for continued access to goods or services.

Examples of subscription-based economies can be found in just about every industry. Software-as-a-service (SaaS) is a prime example in the digital world, including accounting services like Freshbooks or project management tools like Basecamp. Dropbox provides subscription-based cloud-storage, as does Apple’s own MobileMe, and media companies like Rhapsody and Netflix are trying to move subscription-based music and video access into the mainstream. You can even subscribe to cars, via rental-sharing companies like Autoshare and Zipcar.

The benefits of paying by subscription are guaranteed continued support through the life of a product, and freedom from quickly outdated software or hardware in a rapidly shifting marketplace. If I buy Photoshop CS5, for example, that’s the version I’m stuck with until I cough up the money to replace it with a new one. If I become a Freshbooks subscriber, I always have access to the most recent version, and I don’t have to worry about the company dropping support for my product until it shuts off the lights for good.

The current App Store economy, while it may appear robust and healthy, actually has some serious problems. For many developers, a continued revenue flow depends on ever-expanding growth, since their apps are priced low and designed as one-time purchases, and customers have come to expect lengthy, free update tails for said apps. If they aren’t selling to new customers, there’s no income to cover the costs of ongoing support and iteration. Tzuo sums up the problems inherent in such a model quite nicely:

The relationship between people and businesses, and the products and services they use, is no longer a one-time event. In fact, why should get developers just get paid 99 cents, versus $5/year to continue to reinvest in their app?

Adopting a subscription model would give devs a bit of breathing room, and provide a truly sustainable model for apps. You could do much better with niche apps, selling to a small, targeted audience, and still have an income stream once you’ve reached market saturation.

While much of the early focus around in-app subscriptions has been around the publishing industry, Apple clearly wants developers in other areas to consider implementing the system. It sent out an email to developer account holders just yesterday announcing the new subscription features, using language clearly aimed at a general audience. And why not? If developers can entice iOS users to embrace recurring payments, Apple wins since it stands to receive more in app revenue.

Consumers also stand to gain, since a subscription model would help developers focus more on delivering a user experience that only gets better with time, instead of quickly becoming stale. They can reap the reward of investing in a service over the long term instead of buying a throwaway app for $0.99 that will get deleted after one day of use, or when something shinier and faster comes along.

A subscription-based app economy could also be hugely useful if Apple genuinely intends to create a cloud-based iPhone, as recent rumors suggest. Kevin pointed out one way Apple could keep onboard storage requirements down for such a device: selling apps as subscription services, with limited on-device lifespans. It’s probably more likely that Apple would use subscriptions to encourage developers to keep in-app rich media content stored off the device, accessible on demand via the cloud depending on a user’s membership level.

Of course, in addition to its many potential benefits, there are barriers and downsides to an App Store subscription economy, too. The first, and biggest hurdle, is developer criticism that Apple is asking for too much with its 30 percent share of all revenue. I think we’ll find, though, that if devs were content to hand over that much of their one-time sales, they’ll probably agree to do it with recurring revenue, too, so long the model catches on with consumers.

The second is that App Store customers are used to one-time payments, an abundance of free apps, and even free feature updates and app enhancements throughout the life of a product. Convincing them that paying repeatedly for a product or service is actually preferable won’t be easy, especially if that product or service is locked to a specific device (or set of devices). Apple will have to foster partnerships with some of the App Store’s most popular developers to convince users to come along for the ride, and developers will have to get creative with what they can offer in exchange for subscription payments to make such commitments irresistibly attractive.

In the end, the barriers blocking the wide adoption of a subscription-based App Store economy are significant, but they aren’t insurmountable. Freemium, a similar concept, is already a huge success in the App Store, and subscription-purchasing models have demonstrated their value in many other areas. All that remains now is for a few brave App Store pioneers to demonstrate that same value exists in App Store subscriptions, too.

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