THE BLOG
01/08/2014 12:15 pm ET Updated Mar 10, 2014

The Rise of the Subscription Economy

ASSOCIATED PRESS

The last time you looked at your credit card statement, how much of what you had spent the previous month was on recurring services like your cable and cell phone bills and how much was on goods? If you are like most consumers, the former more and more dominates your bill.

A profound shift in consumers' spending habits, in which goods are repackaged as services, is well underway and has the potential to fundamentally reshape the rhythm of the American economy. The rise of the subscription economy raises profound questions for the impact it will have on economy.

A prominent example of the trend for consumers and businesses alike has been computer software. Products that were once bought (or downloaded) for a fixed price are now bought as a perpetual regular subscription. Little data exists on the size of the aggregate "subscription economy," but we do know that as a percentage of total American household consumption, goods have decreased by 10 percent over the past two decades while services have increased. When consumer spending accounts for two-thirds of American GDP, any change in its underlying dynamics demands greater understanding. Zuora, a subscription billing company, estimated that 15 million companies in the U.S. and Europe are already using or could embrace a subscription model.

Software is not the only example of this trend towards the subscription economy. We have seen a dramatic transition in how much of media, including songs and movies, are consumed. No longer do many Americans directly buy an album or song or movie -- they simply acquire the right to a library of songs controlled by Spotify or Netflix and paid for by a monthly subscription.

Increasingly, thanks to companies like Amazon, even goods like groceries promise to be consumed more like subscriptions. One can now arrange for recurring monthly deliveries of cereals or diapers. Superficially, some of the current changes appear only to be a matter of convenience (and are still technically pre-scheduled consumption of goods), but not for long. The next step in online groceries could very well be reorganizing consumption around "meal plans" in which a fixed weekly or monthly price ensures a regular delivery of groceries for a regular or rotating menu of meals. It is at that point that the consumption shifts from the direct purchase of specific goods to a service that provides a basket of items on your behalf.

What will happen to the economy and production when more and more of our consumption is bundled and controlled through services instead of directly purchased by consumers themselves? One of the important benefits is efficiency. If I can rent a Zipcar only when I need one instead of buying my own car outright, that frees a significant amount of purchasing power for other things.

Yet, one of the appeals of subscriptions to corporations is that they are betting on high rates of inertia, that is, you being too lazy to cancel the subscription. That could imply increased stability as more and more production decisions are tied to recurring orders with high degrees of predictability. Confidence about future revenue streams would also make investment decisions by industry comparatively more certain, another positive. Some of the efficiency gains from a subscription economy could be offset by reductions in consumer bargaining power that distort the structure of the economy. Just like cable companies have long been able to methodically raise prices, sectors of the economy that are easily convertible to subscription models could soon take advantage of consumers' inertia to extract undue rents.

But the obscuring of demand for goods by service-based consumption could also conceivably have negative impacts. First, bundling more and more consumption into services could create what is effectively an "on-off" switch for the economy. If consumers can instantly "unsubscribe" from services tied to baskets of real world production, a mass cancellation caused by a sharp, but otherwise temporary shock to consumer confidence could compound itself into a more severe economic downturn.

The transition to a subscription economy will also likely have substantial impacts on compensation, as many artists are now witnessing on the fractions of a cent per stream they receive through Spotify.

Innovation would also be impacted. When the gatekeepers who manage subscriptions drive consumption, it makes it harder for small firms to bring competing products to market because consumer spending on a particular type good is already locked up. When more and more of consumers' money is pre-spent, how much money will be left to buy new products previously unthought of?

For many industries, the rise of the subscription economy may complement or altogether replace the planned obsolescence that drives recurring consumption of many durable goods. Some goods, like electronics, will be better recycled than others and other goods may be resold in cheaper markets abroad.

An important place to start analyzing the industrial-subscription model could be in cars. In pricing electric cars, some companies are exploring a model in which consumers buy a car, but "rent" the replaceable battery. As Zipcar, Uber and talk of fleets of driverless taxi services abound, the automotive industry threatens to be further disrupted by the shift to a subscription economy as consumers become increasingly able to separate the "right to drive" from ownership of the vehicle itself.

The rise of the subscription economy will fundamentally reshape the relationship between industry, owners of intellectual property, and consumers. Its disruptiveness will rival that of the financialization of the industrial economy, but on a far more compressed time horizon. The rise of the subscription economy brings with it important unanswered questions for the future of the American economy and economics itself.