The SaaS Trap
Today ATT reported that Direct TV Now, it’s over the top streaming television service, lost 14% of its subscriber base in one quarter. Despite an attractive assortment of channels vs other streaming services, a poorly implemented technology change that alienated customers and lackluster marketing led to poor results.
Recurring revenue business models have become fashionable in recent years with many companies attempting to develop or convert parts of their business to ones that have recurring revenue business models. DirectTV Now’s notable stumbles highlights the truth of subscription businesses. They’re retail businesses, not a fix-all elixir. Pricing, assortment, innovation, and quality are important ongoing factors when the customer can cancel and move to a better service at any time. A company shifting from license to SaaS when switching costs were high or there were few competitive SaaS offerings, traded in 2 dollars today, for 1 dollar a year for the next three, with a high probability to extend that into the future. In exchange, their revenue was earned more ratably, their business easier to forecast and plan, and the pressure to continuously innovate to compel license holders to upgrade was alleviated. Today, switching costs are meaningfully lower in most use cases, the landscape is competitive, and traditional concerns dominate. This is true both in the consumer and enterprise arenas in White Brook’s view.
Applying this to Apple, a company we follow and may care about, but not part of our investable universe, as iPhone growth flattens and the investment case increasingly relies on services revenue, we’d urge investors to evaluate the individual products and the ability for the company to provide advantage through the assortment of services. We find that most analysis instead takes a top down view and assumes it’s a best in class provider. Amazon Marketplace’s success is primarily due to assortment, and that may be enough, but in services, less can be taken as given today than could be as short as 2 or 3 years ago.
As always thanks for your time - stay warm out there,
Basil