Today, the subscription economy now covers everything from virtual spin classes to clothing, and even pet food. The business model has exploded because it offers recurring revenue streams and long-term customer relationships. 10 million people signed up for Disney+ within 24 hours of its November debut, giving some illustration of this model. Yet, ironically for a model built on guaranteeing stable long-term revenues, the subscription model may be set for dramatic drop-offs in revenues and customers. A perfect storm of circumstances means some are predicting we are nearing a ‘peak subscription’ cliff edge after which the model will become unsustainable for many businesses.
Many subscription service providers are caught in a catch-22 situation. Some TV streaming services are not charging enough in subscription fees to cover the investments they have made, yet if they raise them they will lose subscribers. The industry is also a victim of its own success, as despite the growing plethora of subscription services, there are only so many that people can afford to sign up to. Not only that, the expensive nature of subscriptions means that customer recruitment and retention is difficult; half of subscribers to e-commerce services, for example, cancel within six months.
The cost of subscriptions also represents a barrier to billions of people, shrinking the potential market for these services. Many industries are missing out on the ‘low-hanging fruit’ of smaller, shorter term transactions which could give them access to a larger and more loyal customer base.
Enter, ‘microtransactions’. There is evidence that giving people the option to pay tiny sums, ‘microtransactions’, as little as a fraction of a penny, for individual services, such as a newspaper article or a song, can cumulatively offer a rich revenue stream. The ‘freemium’ method is already tried and tested in the mobile games industry. Free-to-play mobile games generated $88 billion through other services such as microtransactions in one year alone. Mini-transactions also form a potential ‘gateway’ to a bigger subscription market by offering initial ‘taster’ services to a wider audience.
Slow transaction speeds and high transaction fees have proven a barrier to making ‘microtransactions’ viable as a lucrative revenue model across industries. Even VISA, the fastest system, can only process 24,000 transactions per second. However, a recent blockchain research breakthrough from IOHK researchers and other partners from the company’s blockchain research lab at the Universities from Edinburgh, is set to challenge the subscription economy and enable a new payment model.
Research simulations show that Ouroboros Hydra, a planned enhancement of the Cardano blockchain’s underpinning protocol, could allow blockchains to handle millions of minor or major transactions on cell phones, outpacing conventional payment systems used by current subscription services. Unlike conventional blockchains, the Cardano blockchain’s transaction speeds get faster as the number of users increases.
This high-speed, high volume blockchain could therefore allow new industries to emulate the mobile gaming industry’s ‘freemium’ model by allowing users to pay for extras to their basic service. With revenue models based on subscriptions and digital advertising nearing a cliff-edge, customers will be able to pay in cryptocurrency rather than traditional fiat currency – and at speeds sufficient to eliminate most transaction fees. ‘Micropayments’ offer a legitimate alternative to the subscription economy.
For individuals, ‘microtransactions’ will open up opportunities which would have previously been unaffordable. Online consumers could initially pay per article, song or film rather than a larger amount per month, for example. By opening up opportunities for those who may otherwise be unable to afford them, companies would open up a bigger mass market for the industry. The faster and cheaper transactions promised by Hydra are commercially viable. ‘Microtransactions’ can also act as a way to ‘on-board’ people as longer-term customers, as well as providing an alternative revenue stream to subscription. ‘Microtransactions’ could also form a lucrative new business model of their own, with companies building online services around the purchase of ‘virtual’ mini experiential items just as the mobile gaming industry based an entire business model around micro-purchases of in-game items rather than entire games.
The potential is even bigger. Hydra could enhance the Cardano blockchain’s protocol to enable blockchain to scale to meet the needs of the world’s global financial systems, removing barriers to the adoption of blockchain by banks and facilitating instant international transfers between banks without fees. Hydra has potential to enable millions in the developing world to access previously inaccessible financial services, by remotely paying for vital services like healthcare and utilities. In this way, Hydra is a truly decentralised, people-centric banking system, which forms the future of financial services.
Charles Hoskinson, founder and CEO of Input Output Hong Kong (IOHK), in conversation with James Bowater. Charles has a long history of cryptography; he was the founding chairman of the Bitcoin Foundation’s education committee and established the Cryptocurrency Research Group in 2013. Charles also founded Cardano, the third-generation cryptocurrency that launched in September 2017. More information on Cardano can be found at https://iohk.io/projects/cardano/.