The B2C SaaS Landscape and the Bundle Wars

90% of the top grossing apps rely on Consumer subscriptions, or B2C SaaS. As competition for subscriptions intensifies, is the next battle going to be the ‘bundle wars’?

September 21, 2020

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“Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.”

Jim Barksdale

The tech industry is obsessed with the consumer subscription model, or B2C SaaS. Netflix, Amazon Prime, Spotify, Peloton, are just a few examples of services that millions of people in the Western world subscribe to. In fact, 90% of the top grossing apps are subscription based across all categories: education, fitness, dating, music, wellness, personal finance, etc. Many startups are hoping to be the next name on that list.

In this post, I dig into the consumer subscription landscape, and make the case that bundling is upon us, as initiated by Apple, which may place downward pressure on the area.

According to a new report by investment bank GP Bullhound, the Consumer Subscription Software (CSS) market is expected to be worth $150 billion a year by 2022. Covid-19 and lockdowns increased the proliferation of consumer subscription models in daily life as consumers looked for shopping, entertainment, fitness and gaming. These new habits are likely to continue in the medium-to-long term, according to a recent McKinsey survey of consumer sentiment in the US.

Freemium, premium and Apple

The landscape of consumer subscription startups is growing:

Many of the consumer subscription apps adopt a freemium model to lower their CAC. In this model, a basic level is given for free (think Youtube, Spotify or Twitch), but premium features (or the removal of ads) require a paid subscription. This gives the consumer a chance to try the product before they decide to purchase.

When users convert to paid customers on iOS, Apple currently takes a 30% cut from the first subscription and 15% of any renewal. The recent legal battles between Epic Games and Apple on this practice, highlights the tension between the Consumer Subscription apps and the platforms they rely on for distribution. Will more apps rebel against the giants?

More recently, I’ve seen a number of companies skip the free tier altogether. They segment their customers even before a trial, directly to a paid subscription tier. This is now becoming more common in the productivity/work related apps – rather than selling to the enterprise, they rely on individual users putting down their credit card. That’s how Slack got started.

Examples include –

• Roam Research – the note taking app that recently raised a seed round at $200M valuation
• Superhuman – the email productivity tool
• Masterclass – video classes from subject matter experts

You also see it in DTC subscriptions like Hims, self care products for men, or in fitness with Freeletics, which offers personalised training plans.

For these businesses to be successful, focusing on engagement and mitigating churn is more important than top line growth and high spend on user acquisition.

Apple One and the ‘Bundle Wars’

Last week Apple announced Apple One, a new consumer subscription bundle, which includes music, cloud gaming, storage, Apple TV, Apple News, and Apple Fitness (the latter coming officially only in October).

We’re use to speaking about the streaming wars (as previously covered on this blog), but as Evan Shapiro, a veteran media exec, put it on a Linkedin post, Apple One marks the beginning of the ‘Bundle Wars’. As competition for subscribers increases, companies will try to create moats by packaging their offering with multiple services and/or exclusive content.

The subscription bundle simplifies things for the consumer (“one easy subscription”) and is a better deal than subscribing to any two individual services. In addition, it helps Apple take potential market share from other services like Spotify (music) or Disney+ (streaming) or Peloton (fitness).

The next most likely companies to launch subscription bundles are Google and Amazon. They already have individual services for each of the core pieces offered by Apple and the consumer reach to make a dent. The rest, like Disney+ and Spotify, might try to catch up by acquiring or launching their own bundles. Don’t be surprised if you see Disney and Spotify launching games services or Microsoft launching a music service – after all, they nearly acquired Tiktok…

Subscription fatigue?

Churn in Consumer SaaS is expected to be higher than traditional Enterprise SaaS models and LTV vs. CAC is a metric to watch. The question is – how many overlapping subscriptions will consumers be willing to pay for over time?

As competition increases, services become commoditised, and while the user interface and features might be different, does it really matter to the consumer if they are listening to the same song on Spotify, Google Music, Apple Music or Amazon Music? perhaps not enough to pay for two subs at the same time.

To win over the competition the large players are building moats in the form of exclusive content such as Spotify’s $100M podcast deal with Joe Rogan (which company employees are now scrutinising), Netflix’s expensive deal with Harry and Megan or Google’s gaming deal with Ubisoft for its cloud gaming platform, Stadia.

No matter which one of the giants wins, new startups face big hurdles to get into the mix. “I’ll try everything once”, the saying goes. But to build a successful B2C SaaS business, startups need to deliver real value to keep consumers to stay engaged and subscribed. If you’re starting a new consumer subscription service in entertainment, gaming, esports or productivity, please don’t hesitate to reach out to us at Remagine Ventures.

UPDATE: highly recommend Ben Thompson’s 2020 Bundles post on Stratechery. If you follow tech news, since I hit ‘publish’ on this post, Microsoft bought ZeniMax, a gaming studio, for $7.5 billion in cash, and Echelon Fitness launched a $500 workout bike and called it Prime Bike to take on Peloton (Amazon later denied and took the product off its website). Quibi announced it might be considering a sale, and so it seems like more bundling is upon us.