Subscription Is Coming

Subscription business often make good business sense to both the service provider and the consumer. For the service provider it enables them to build a sustainable and predictable revenue stream where the peaks and troughs of fads and the unpredictability of demand is cushioned by the width and depth of offer. They still have to manage down the exposure to churn, but have the opportunity to build customer loyalty and relationship. For the consumer it offers the obvious one stop shop and protection from change in what today is often dynamically changing markets.

Media, technology, software, communications are some of the sectors now either moving towards or heavily entrenched in subscription business models.

Today we have the new battles between BskyB and BT, where the latter threw a new gauntlet down with their ‘free’ new sport channel. BskyB have now responded with unlimited broadband for anyone signing up to its Sky Sports channels. This means that a new Sky customer can now pick up broadband for as little as £5 a month on top of their line rental. It is clear that this cross selling and subsidy offer is just starting and will not just effect these two but everyone else who offers any competing service.

We now have some clear adversaries in the various markets. In music we have Spotify locked with Pandora with Apple and Google trying to muscle in. In films we have Lovefilm vying with Netflix with the battle now spilling over into production and competing with Sky. The world of software which was built on selling perpetual licences is now rapidly repositioning itself to annual licences and is being driven by the likes of Microsoft’s Office 365 and Adobe’s Creative suite. 

But what about books, newsprint and magazines?

Learned and Academic journals have long successfully worked within an institutional subscription model, which is now under a different threat from the open access movement. Newsprint and magazines have had mixed success with subscriptions. Where the material can be sourced from an alternative free feed it has struggled, but where the material is highly valued, authoritative and is a 'must have' subscriptions have had success. 

Some have tried book subscriptions and the many failed book clubs are a warning to many, whilst others such as Oyster believe that subscriptions will work for ebooks. The challenge is that apart from heavy book readers, consumers don’t read enough books to justify subscriptions and those heavy book buyers aren’t the problem. We believe that our new Read Petite venture is different and that short form work is perfectly suited to a subscription model.

It’s interesting that some of the largest technology players are looking hard at subscription businesses. Intel is reported to be looking to create a US cable service that would sell a bundle of television channels to subscribers over the Internet. However the existing players are not for rolling over led by Time Warner Cable and other cable and satellite distributors. The distributors are pressuring the cable channels, with whom they have lucrative long-term contracts, not to sign new contracts, which in turn is threatening to bring in the DOJ antitrust investigators. It is certain that the likes of Apple, Microsoft and Sony are watching from the wings.

What is certain is that cross media consolidation will happen. You will be able to subscribe to a service and receive; broadband, tv, film, music, games, software, mobile and digital reading. Devices won’t matter as everything has to be device agnostic. It is not a case of if, but when and who will dominate the market with offers you can’t refuse. To prepare for this opportunity we have to understand how ‘stuff’ gets licenced and how creators get rewarded. 

We should not simply say ‘no’: we have to instead engage and make it work.

Tax Avoidance Can Be Morally Taxing

What started off as questions about individual’s offshore investments has swiftly moved onto corporate use of global tax bolt holes in order to avoid tax. Tax-friendly countries aren't new and international companies have been exploiting them for many years. Even the use of Luxemburg by the likes of Google, Yahoo and Amazon has been know for a long time. We wrote about the variance in VAT rates and Luxemburg loophole in late 2011 and its not as if any MP didn't know about it, as it is heavily embroiled in the whole question of VAT and EU tax standardisation. The US Sales tax debate has also been ongoing and has been well documented for years. So why has it been raised now and where is it going?

Following the appearance of Google, Starbucks and Amazon executives before a committee of UK MPs last week, UK BUSINESS Secretary Vince Cable,has now urged authorities to clamp down on the “completely unacceptable” corporate tax avoidance and called for international cooperation over any reforms. To some that is like him suddenly having a revelation when caught with his pants down and it is somewhat ironic that he calls for others to reform when he himself is in fact the ‘UK Business Secretary’.

If we look at the companies under the current spotlight we see Starbucks, which is thought to have paid just £8.6m in corporation tax since 1999, despite last year sales of £400m. Their movement of liabilities across their total business is what most would expect, but the result is now morally unacceptable to others who may not share the same ability and believe that they are being unduly penalised. The coffee cup is no better for Caffe Nero, whose parent company is based in that heavily populated and coffee shop haven, the Isle of Man. Last year they made a profit of nearly £40 million, but paid no corporation tax in the UK. Caffe Nero is not breaking the law, but are “taking advantage of the rules in place in relation to ‘capital allowances, deferred losses and interest payments’.

Another tax avoidance which has now been addressed allowed broadcaster BSkyB to mix VAT and non VAT services within the same subscription. They had been saving an estimated £30 to £40 million a year in VAT by charging satellite customers £2.20 a month for the Sky magazine, which was zero-rated for VAT. This allowed them to avoid VAT of around £3 to £4 per subscriber, which given Sky's 10 million subscribers provides revenues not to be ignored. In 2005 UK courts had ruled that cable companies were allowed to deduct VAT on "cable guide" magazines, if the customers received a product from a separate company and at a fair price. However in 2005 Sky relaunched BSkyB Publications and took production of Sky magazine in-house and also began distributing Sky Sports and Movies magazines. BSkyB Publications' accounts claimed that the majority of the income from the magazine was recycled back to Sky TV. They described it as payments for "customer data" and "support services". In 2010, the Treasury announced among a number of anti-tax avoidance measures, legislation against VAT "supply-splitting" and in 2011 BSkyB announced it would be ceasing publication of Sky Movies and Sports magazines and downsizing Sky magazine.

The question is whether the authorities will go back to BSkyB and reclaim the monies apparently due?

Apple and Google are based in Ireland and enjoy their low corporation tax benefit. Google uses Ireland for revenues that end up being costed to Bermuda where its intellectual property is registered. We then come to Amazon who like its smaller rival Kobo, have their European headquarters in Luxembourg. It begs the question if any big multinational has their European financial base in the UK? 

The Guardian claims that Amazon generated sales of more than £3.3bn via its UK website last year but paid no corporation tax on any of the profits from that income and the Security and Exchange Commission show that in the past three years, although Amazon generated sales of over £7.6bn in the UK, they paid no corporation tax on these.

However the Amazon issue is not just about the corporation tax but also about is the uneven playing field and market advantage that the 3% VAT rate of Luxemburg gives it against the 20% rate of the UK. The challenge does not just effect the UK , but any country in the EU that has a VAT rate higher than Luxemburg. Amazon effectively does not pass on this windfall benefit to the publishers, who have to cover the whole 20% VAT in their pricing negotiations with Amazon and effectively pockets 17%. This obviously gives them a clear margin benefit over their UK domestic rivals who have to pay the 20%. The EU is moving, albeit slowly, to close down this loophole but it is more than just a tax loophole but how Amazon buys and sells and makes 17% without getting out of bed!

Amazon also has challenges with its highly successful third-party Marketplace, where the VAT status of its resellers can lead to misleading prices. Depending on the reseller's VAT status, products sold on Marketplace can be listed either with or without the tax added. Some resellers don't supply the VAT receipts, that prohibits these small businesses from claiming VAT. This doesn't impact small ticket items, but can heavily impact a small company buying expensive PCs and other VAT-able goods. The current situation means non-VAT registered companies can make their items look more attractive by keeping prices below larger competitors and in effect create a false market.

However, tax avoidance is now becoming a high risk activity as the media draws the spotlight on the issues and the companies involved now face damaging their public reputations. For government ministers and civil servants to act surprised at the revelations and point fingers at each other, is perhaps indicative of the often ungoverned society we often now find ourselves. We often find ourselves in a world where the likes of twitter and Facebook can draw more attention to issues and we wait until that logic and moral tipping point. The stance and comments from the likes of John Lewis’s MD, Andy Street, and the UK Booksellers Association’s tax and lobbying messages start to raise awareness to the issues. The press has certainly raised the issue of tax avoidance, but perhaps the only real moral test is if the consumer says ‘no’ to the likes of Amazon, Caffe Nero, Starbucks. Imagine a one month ‘say no’ campaign and the impact and message that would send to shareholders of the companies.

Perhaps the greatest challenge is to harness the public opinion and convert it into concerted action. A few posters isn’t going to do it. Lots of bad press can often be weathered, but stopping the cash-flow really can send the message home. Perhaps we have to wait until after Christmas and we have bought all our presents from them and drunk their coffee to keep warm!  

Media on Demand Takes Another Step Forward

The way we all consume and pay for media is changing radically and moving from, pay to own, to subscribe for on demand. This is no longer about music, film, games, TV,information and books , but about all digital media and how we find it, access it and pay for it.

The film on demand wars just got a lot more interesting in the UK with the news that Movie and TV streaming service Netflix has launched in the UK and Ireland. It is claimed that Netflix has been the single biggest driver of internet traffic in the US and has over 20 million online subscribers in 47 countries.

Online rival and Amazon owned Lovefilm, recently surpassed two million subscribers and both it and Netflix now line up against Sky Movies,Sky Atlantic, Virgin Media, YouTube and retailers such as Tesco’s Blinkbix for the online market.

Netflix has only launched its online service in the UK and in doing so has pledged to break BSkyB's stranglehold on the movie market. The service will allow users to stream film and TV content on devices including tablets, smartphones, games consoles and internet TVs and all priced at just £5.99 a month. Not to be undone Amazon's LoveFilm, has announced a new "streaming-only" tariff at £4.99 a month. Netflix hopes that its personalisation technology and an integration with Facebook, which allows people to share what they are watching with friends on the social network, will also provide it with competitive edge.

Netflix has also announced a number of new TV and film deals with partners that include Channel 4, Disney, ITV, Sony, 20th Century Fox and All3Media. These deals are mainly for the second rights window as opposed to BSkyB’s which has prime rights deals with the six major Hollywood studios which enable it to air films in the first pay window. When Netflix launched in Canada the company had no "pay one" deals.

Netflix has also announce deals with the likes of the BBC, Miramax, Lionsgate, MGM which will give it access to titles such as Pulp Fiction, Kick-Ass, Top Gear and Doctor Who. Lovefilm has agreements with partners including ITV, BBC, Warner Bros, Entertainment One, Sony and Studio Canal for titles that include the Twilight Saga, Tinker, Tailor, Soldier, Spy and The Social Network.

So the UK now has three determined online streaming service providers who are not only going to aggressively compete on price but also on content. We see the growth and demand for Spotifty's music on demand, Wii's expansion to media console and recognise that as media continues to converge, platforms become important and usage migrates to on-demand we ask why many many still see books as different?