Do hardware businesses need a subscription fix?

Do hardware businesses need a subscription fix? A lot of hardware companies are now carving out a new path for themselves with subscription models. So, why has recurring revenue become so compelling for hardware businesses?

The year 2019 will probably be remembered for Apple’s big pivot from a hardware-first business to a services business. Even Facebook-owned Virtual Reality (VR) device manufacturer Oculus is now changing its strategy towards enterprises with subscriptions. This underlines a growing trend in the hardware industry – the increasing adoption of recurring revenue models that guarantee payments from customers every month.
 
A similar journey has been taken by robot maker Sphero. The company raised money from investors with the sole intention of making robots, but many investors questioned the company on what more it could offer to customers beyond selling robots from one customer to the next. Sphero found the answer in the subscription model and pivoted to education as their main focus, opening up a completely new market for them. The company’s tools are now being used in more than 40,000 schools across the globe.

Subscriptions – The answer to the hardware industry’s unique challenges

Hardware is an extremely challenging industry. You only need to look at some of the archives of websites like Kickstarter where many start-ups launch with the promise of the next game-changing device but ultimately stutter and fail owing to a combination of factors. However, the smart ones are surviving by offering additional value to customers, similar to what Sphero has done with its robots.
 
Apple is the best example in mind. The Cupertino-giant dominated the hardware industry through its iPods, iPhones and iPads for the better part of the last decade. However, as other companies have caught up with Apple’s hardware standards, the company has found it increasingly difficult to sell their devices. Last year, Apple raised quite a few eyebrows when it decided to stop reporting unit sales for iPhones, Mac and iPads - a key metric used by many analysts to determine the health of the company. In fact, iPhone sales in the last three months of 2018 plunged 15% compared with the previous year, despite the launch of three new phones.
 
Contrast that with its services segment which is looking in great shape, underlined by its second quarter earnings report where Apple reported $11.5 billion revenue from its services business, up 17% from the same quarter last year. 
 
Other companies which have taken a similar approach include Keurig and Nespresso who have created gadgets that rely on pods and require regular purchases. Health start-up Peloton has also launched an interesting plan where users are requiredto sign up for a content subscription to get the most out of their hardware. Wearable device manufacturers including Boltt and WHOOP have also gone down the same route.
 
Hardware innovation is extremely hard, and even the early movers are losing their advantage as their nimble peers catch up on the latest innovation. We have observed the slowing down of hardware innovation in the mobile space during our annual visits to MWC Barcelona. Most phone companies are only doing incremental improvements and there is a dearth of truly innovative ideas in the space (unless you think foldable screens are more than just a gimmick). The same has been the trend with laptops and other traditional consumer devices as well.

Subscriptions, on the other hand, enable hardware makers to offer continuous value to customers and monetise their services effectively. While it is difficult for the layman to differentiate one hardware device in the same category from another, the services built around them can be a competitive differentiator. For instance, when it comes to subscriptions available with fitness wearables, consumers are more likely to flock to device manufactures with better trainers, fitness programs and customer support instead of just a device. In essence, subscriptions allow hardware device manufacturers to go in for a quality play, instead of competing in the quantity play!