Nico Wittenborn - The Trillion-Dollar Subscription App Opportunity

David Barnard
October 30, 2020
52
 MIN
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In This Episode

We’re at an interesting point in the evolution of the subscription app ecosystem. Mass adoption of smartphones, consumers’ increasing willingness to pay for digital services, and a better business model — Personal SaaS — are all coming together to create a huge opportunity for mobile-first subscription app developers. Just how big is this opportunity?

This week, David and Jacob sat down with app investor Nico Wittenborn to find out. Nico is the founder of Adjacent, a new investment fund focused on mobile-first subscription companies. Prior to founding Adjacent, Nico worked at Point Nine Capital in Berlin and Insight Partners in NYC. Nico’s investments include Calm, Revolut, Oura, and Reflectly.

(Full disclosure: Nico is so bullish on the future of subscription apps, he recently invested in RevenueCat!)

In this episode, you’ll hear about:

  • The growing potential for B2C and B2B SaaS on mobile
  • Tips on pricing your product at every stage of your business
  • Challenges for app developers in the Apple ecosystem
  • The future of subscription bundles

Follow Us

David Barnard: https://twitter.com/drbarnard

Jacob Eiting: https://twitter.com/jeiting

Nico Wittenborn: https://twitter.com/ncsh

Here’s the Outline of Our Interview with Nico

[1:47] How Nico got started with the consumer app ecosystem and SaaS investing.


[4:10] The formula for a breakout SaaS business: engaged users.


[5:00] Stickiness, engagement, and churn: B2B SaaS vs. consumer app businesses.


[6:23] Consumer app stickiness and engagement; Lightricks.


[6:56] Identifying nascent markets before they become mainstream; meditation apps (Headspace & Calm).


[8:25] The growing potential for business SaaS on mobile; mileage log apps (Trip Cubby & MileIQ).


[14:00] The lines between consumer and business use cases are getting blurry.


[16:41] Tiered subscription pricing and freemium game dynamics; Tinder.


[18:40] Build and price your app for your true fans — the dedicated 30% of your users who don’t churn.


[19:51] We’re in the early stages of figuring out subscription app pricing; Salesforce.


[21:30] Freemium apps and subscription upsells; Tinder, XBOX Game Pass, Calm, Blinkist.


[23:08] Users are increasingly willing to pay more for subscriptions that provide real value (Netflix subscription prices have increased 10-15% over the last 5 years).


[24:46] Pricing your subscription app: balancing adoption, data collection, and user price sensitivity.


[27:27] Price anchoring and subscription bundling; Apple Fitness+ vs. Peleton.


[30:53] Prediction: In 3 years, Apple will generate more profits from their services than from their products.


[31:45] Challenges for developers using the Apple developer platform; Apple’s app acquisitions and competition (Dark Sky).


[32:33] Does Apple have a monopoly?


[34:11] Apple Music is closing in on Spotify.


[34:22] Apple’s advantages over 3rd-party app developers and anticompetitive practices; Epic Games Fortnite ban.


[39:13] Is Apple a “benevolent dictator?” (David doesn’t think so!)


[39:55] Increased mobile spending and subscription fatigue.


[40:41] 2 reasons for the rise in consumer subscription app spending: 1) Younger generations are more willing to pay for digital goods, 2) The Covid-19 pandemic has shifted user spending toward digital entertainment and mobile apps.


[43:43] Subscription app market size: high penetration + a business model that works + user willingness to pay = huge opportunity for subscription app developers.


[43:58] Non-gaming, in-app, mobile-first subscription business could become a $1 Trillion opportunity in 10 years.


[45:11] Subscription app services enhance real-life experiences for consumers; Flighty app.


[48:26] Sophistication of today’s apps and technology; Oura ring.


[50:00] For all its faults, the Apple Developer Platform enables entrepreneurs to build million-dollar businesses.


[51:08] Connect with Nico on Twitter @ncsh.

Episode Transcript

Hey, you're listening to the sub club podcast, a show dedicated to the best practices for building and growing subscription app businesses. We'll share insider secrets from the top subscription apps on the app stores. Let's get into the show. Welcome to the sub club podcast. I'm David Bernard and joining me is my colleague Jacob IDing.

Hello. And today our guest is Nico Whitten born. Hey Nico. Hey, David Nica is a founder of adjacent a new fund focused on mobile first subscription companies. Prior to that, Nico worked at 0.9 capital in Berlin and insight partners in New York city. His investments include calm Revolut, aura revenue, Kat, and reflectively.

Oh man. You know the guys that are revenue cat. Yeah. They're not doing that. We're off to a good start, everybody. It's good. No, we need it. We need some cold water once in a while. I mean, give it to me straight. This should be like an open intervention. Uh, David's always joking and calling me boss, man. But finally, I've got somebody that I can call boss man on here.

So let me have it. No, I'm I'm, I'm, I'm excited. I'm excited to talk. I think I'll give, I'll give like a more, a little more color to the intro, which is Nico just joined. Just started working with us as an investor at revenue cap. I met Nico. I don't know what a few months ago after you just pestered me a certain pay until I would take your call.

But, but, but, but I, I was impressed because I think this industry of. Consumer first subscriptions. It's finally getting some attention, especially from like capital sources, like venture, but, but also just not just, not just, it's not entering just because investors are interested now. It's actually interesting because the business model is maturing.

The markets are maturing. I think you're one of the early investors to see that, which is kind of a shared philosophy with us. So like, yeah. How did, how did you, like, how did you end up sort of in this niche? Like what drew you to subscriptions. Um, yeah, it's an interesting, um, start if I may say so myself, but, um, it really starts in high school.

Um, when I was just fascinated by the iPhone, couldn't afford one, ended up buying it and then just kind of following the evolution of the ecosystem and also at the same time being very lucky and, um, falling into an opportunity to, while I was studying. And do an internship with a small funds. That was really the first institutional fund coming out of Berlin.

And what they focus on the names 0.9 capital and what they focused on was really SAS investing. So we did a lot of investing in companies that were now high margin, recurring revenues, and had a global scale and, but selling enterprise software to two companies. And at one point I started combining kind of my passion for mobile and personal experience with just being a, I guess, early user of all of these apps with this business model of subscriptions that we.

We're really deep into it with 0.9. And then that was kind of around the same time that Spotify and Netflix, Amazon prime and so on were educating people that it was okay to pay a subscription fee for a digital product. And so I, I really got interested when I saw the likes of Headspace and calm and some others, and start using that business model and, and really bringing this kind of SAS business model of high margin, recurring revenues.

Um, at a global scale to the consumer, um, to the consumer market. Um, and so I was very lucky to invest in with, with  and the team that to Revolut, um, towards the end of my time there, and then, which would insight in, into column and a couple of others. And I think. That experience of just being in that, you know, first, a second wave of consumer companies and seeing them actually do very well.

I think that just kind of made me more aware that you can build very significant businesses in these verticals. And I think a lot of investors just. Don't mode it. Yeah. What do you think, like when you're evaluating a comp? Cause I, I I've know. I've worked with a lot of companies similar to ones you've invested in and, um, I do not have a magic formula for picking and like telling her what's going on and I'm sure no investor does.

And, and, and yeah. And I would have to, my, my intuition is that it's somewhat, somewhat more difficult to evaluate a consumer product and even a subscription product. That's going to be breakout successful versus one that may, maybe, maybe isn't one of you. I mean, you don't have to give away your secrets.

Right. But how does it differ? Like when you're evaluating like a high margin, like SAS, B2B, SAS company versus like somebody who's selling to end. Yeah. So I think that there's certainly big differences, right? Between size and consumer and. Um, one of the biggest is that the SAS business is typically a lot stickier.

So you keep your customers around. You have relatively high retention and for consumer, because you're monetizing on the consumer level and it's, you know, everyday people, then you, you just, you certainly see a lot higher churn on. So I think the kind of core of my investment thesis is to invest in products that show, um, a very long-term sticky cohort of users.

That you can eventually stack. Right. And so, and I think the insight that I had after a while of working with these companies was even though you're one churn can be relatively high, as long as you have a very term sticky cohort, even if it's just a third of the users of 40% of the users, if they end up getting to a habitual, use that in the end of the day, it doesn't churn anymore.

You can start stacking those cords and build a very significant business. Right. And so I think why a lot of investors look at these companies and see, okay, you're one trans 50%. That means after year two, nobody's there anymore. I look at it as, okay, you're 50%, but then what steps they record in year two, three, four, that just really sticks around and stay slept forever.

And so that's, I think the kind of key insight and the key thing that I'm trying to look for, even at an early stages. Do you have a really engaged user cohort that, that has the characteristics of one that would stick around for forever. One of the really interesting things to me is that. In the consumer space, it's, it's actually a lot harder to figure out like what really is sticky.

Like I would have never guessed that light tricks could build a billion dollar business on like selfie editing and things like that. So it's, it's interesting. And I mean, I guess it's not that hard to predict. I mean, you need to look at like what people are actually using on their devices, especially in math.

Also also generational questions, right? Like, like we're just not going to be cited to that stuff as well. I think it's an important point. Like one. Okay. How do you define sticky? And I think it's different for every category, but at the end of the day, it always comes down to engagement. And so how, how, how do people use the product?

Not like day 30, but month six, seven, eight, right? Like once it's not anymore, the app that you download and you play with. Is there still a use case six months out, 12 months out, 18 months out. And I think that's that's, you can always see that in engagement. You always have a really good idea of like, you know, will that customer still be around in a few months from now?

And the answer is yes. If they're very active towards the Outerminds cohort often times. Um, and the second part was, and that's maybe also an interesting learning is, and I think this was true for Revolut is true for comm. It's true for some of the others that I've now invested in with Jason, but I'm trying to also understand like a vertical or market that, that is overall supported by a relatively big macro shift.

So it's something relatively nascent today that could become a mainstream continually in the future. Right. So. But Headspace and calm started meditation wasn't as magical as it was today. Even though it, you know, you might think it was always clear, but they were part of this, of this mission of making it mainstream.

And I think they succeeded and I think it was. A positive mission for a lot of people that started meditating only with these apps. And so that's a lot. What I think about is like, how do you, how do you figure out what the categories that are not super competitive yet? And that could become very big and meaningful in the next five to 10 years, which is my investment horizon.

What do you think? And speaking of five to 10 years, this is something I feel like I completely miss this. And I kicked myself to this day. What do you think about the, the growing potential for, for business SAS on mobile? So we've been talking more about like consumer subscriptions, but the very first app I launched on the app store was called trip cubby.

And it was a mileage log that tracks your mileage for taxes and reimbursements. And I, you know, very like indie developer, it was a paid app for like four years, four or five years eventually. Oh, I had a, like a free version and a paid version, the free version pushed to the paid version. And I just had that very Indy mindset.

There were a few times in there, like I thought about like trying to build something bigger. Well then gosh, like, Five years in this, this other app comes in. And, um, uh, gosh, I don't even remember the name but mile IQ. Thank you. Yeah. Say like one of the most successful, probably the only success story I could think of in this category.

Right? Exactly. So you have this like, So you have this company that comes along in that very consumer mobile space, but there's like a mobile use case for business. They're able to charge very high subscription rates. They probably have incredible retention. They got bought by Microsoft. Yeah. So have you thought about, and, and have you dabbled at all in this kind of, and what do you think the future potential is even of this like, kind of as, as business.

As people use their, their mobile devices, more and more for business, which we already do. We're like on email and Slack and things on our phones. Um, so as business goes more and more like, do you, are you investing in, in thinking about these opportunities and like business mobile side? Yeah. So I actually, um, while I was at 0.9, I, or we had a head, a head of focus on, on all those sides as well, where we would invest in things that.

I use a mobile devices, but sold, um, by the enterprise playbook. So like think of gardening services and so on, right. That that would use software. Yeah. Um, and, and wouldn't have a computer where they did their work. Um, another company goes Spacek and that we then also invest in with insight, which, which is doing a mobile data collection software for, for different distribution companies.

And so I definitely think that there is going to be more. Of this. And I kind of like, and I think about this a lot and I kind of see two dimensions that are interesting there. At least one of them is pricing, as you said, right? Like it's the real, it's the real go to market here. The same as, as for consumer?

Probably not. Right. So it's probably not just going to be a subscription on the app store, but there's going to be another approach. And what we've seen there is that, um, there is companies that reach scale with a consumer offering. And then are able to, to develop a B2B offering on the backs of that.

Right? So th they build up a brand and then they start doing enterprise contracts for like perks or as a benefit for companies. And so they start actually doing multimillion dollar deals, all of a sudden as an extension of the consumer line. Right. So that's one, that's maybe not exactly what you were referring to, but I think it's getting blurry, right?

Like the companies get big and then they start going enterprise contracts. And at the same time, I do think that, especially now with everything that's going on in the world and, and the acceleration of remote work and all of that, there's going to be more and more business software on mobile. And I think that, like, the way I think about it is like, there has to be a different mode of distribution for that.

So what I'm like, I'm, for example, one of the things that wouldn't surprise me, if we end up with a business app store or something that looks a little bit more like, you know, oriented around the business use case and the consumer use case. And that could be Apple themselves. It could be external, probably more Apple themselves, the way the work world works today.

But I do think we will see it. I do think that it makes a lot of sense. I think there's a lot of potential, I think because of the Apple's lock in to the ecosystem, it's kind of on them to roll it out in an efficient way. And I think we haven't seen that yet. Yeah. I mean, I think that when I think about this problem, David that's my biggest open question is there's just so much friction with the buying process right now.

Like you either have either it's like a provisioning problem about like, Oh, how do I sell a contract into a company that then becomes a mobile device, a mobile usage versus like, The, the sort of bottoms up path where somebody bring your own device. Right. Which is sort of like my like cue, actually. It was probably a lot of people who just bought it as a personal expense to help them try.

And, and these are also, also, I want to qualify when you say businesses, right? Because it's like, it can be a business use case, but these are probably like sole proprietorships, like small. Like independent people. And I think that's one of the areas where yeah, like Nico you're mentioning is like the app stores really oriented around this like consumer casual lifestyle use case.

Right. Um, and it doesn't really support, like how. It's not easy to expend something as an in-app purchase. Right? Exactly. And we could figure out that problem if we could crack that. And I think Apple could, yeah. I think there could be a big, a big opportunity there for Apple to really like double down on this SMB upward motion.

And, and, and, but yeah, they, this is one of those cases where I think the, the, the particular constructs in Apple's total control is potentially like hindering the market. Right in the sense that there's no, there should be a smooth continuum and it's not there. One thing I would like to edit, what I see now, which is interesting is even if companies started as consumer, um, oftentimes.

Because of this trend that we're also seeing towards solo entrepreneurship and kind of, you know, like individual passion business or a power seller business. A lot of the tools, um, end up being used by prosumers and showing characteristics that look a lot closer to SAS and to a consumer business. All right.

So I just did it that an investment in a company that. It is in the photo space. And in that case, we actually look very deeply at the cohorts and you have half of the business, that's kind of, you know, consumers and they're using it. Like you would probably use a face two in which is, you know, like every now and then.

And then at one point at churn, And then the other half of the business is actually power sellers that sell products on Shopify or, or one of the refurbish marketplaces. And they see, they see like double the engagement and double the retention for those users. Right. So I think that's an interesting trend that also goes into this, you know, consumer slash.

Enterprise or business use case where I think it's just getting a little more blurry and, and it's not working the way it should on, on, on, on the app store as, as we've discussed. But there's certainly a lot of potential to, to enable that more for both enterprise and captive small business use cases.

Yeah, this is something probably worth exploring for revenue as well. Just openly thinking about product stuff is like, how do we, how do we skate ahead a little bit? And help companies like do this? Because, because I do think there's, we've certainly talked to a lot. I've talked to a lot of people building apps that are, that live on this, like.

Boundary, and I don't have good advice for them based on like, just the way things are on the app store and like, and how easy it is to get caught up. Like, we look at what happened with, Hey, we look at what happened with, uh, uh, there's some other recent examples of like apps, just like falling a little bit of foul of the, of the guidance and it's a huge distraction and stuff.

And so I think a lot of companies are just nervous about it in general. Like I talked to a founder last year who I think I was trying to sell them on revenue cap, but they were like, they, they were like, no, like we just don't want to do it just cause we're afraid. Like they probably could have made money, like going, you know, cause it's distribution, right?

Like that's the upside. If you have a view of a B2B company that has a mobile presence, right. The only thing the app store is going to give to you is like a little bit of extra distribution. Um, but like, they didn't just didn't think it was worth the risk. Right. If like bringing in, it's not even the 30%, right.

It's like, it's like bringing in the risk of compliance and getting rejected and other stuff. And then of course all the like management. Like Edwin's, you have to deal with these multiple payment sources. Now, uh, recently I did a deep dive on, on Tinder, which was, which was really fun by the way, as a 41 year old happily married man installed Tinder.

Oh yeah. I created a fake account. I talked to my wife. You want to clear it? That's the one you want to clear up front, right? I was very clear. Um, but anyway, so I did a deep dive on Tinder and, and what was really fascinating to me is how well that they're how well they're executing on the tiered subscription.

So they have two levels of subscription and then they have the in-app purchase where they have that kind of freemium game dynamic, where people can spend as much as they want. So you're. Well, it's especially fascinating. And I I'm, I'm not a huge fan of like the manipulative free to play games that like trap you into spending thousands of thousands of dollars.

But what's cool about Tinder is that I do think there's a point where like, The people who are super engaged are willing to pay more like Taylor Swift does this with her albums. Like she has like these, you know, massive drops where it's like hundreds of dollars for all the special additions and all this kind of stuff and physical products.

And, you know, artists are doing this more and more. So how do you, how do you think about that in the. Mobile consumer subscription space, where like you have these like deep fans who are getting more value or willing to pay more. You have business use cases where they're probably willing to pay more. So, so like that photo investment you were talking about where like half of the users are like super engaged using it for business, they probably are willing to pay more than these consumer.

People. And then you have the layer on top of that. Like, like how do you capture even more of that, that, that, that true fans, like, I think so it's a really interesting question. And, um, a very, I think, important one for the future of this business model, because if you think about it, like on a high, on a high level, you basically have like a subset of the users that becomes really engaged and sticks with the product for a very long time, the better the product.

The higher the cohort, but it's still usually like, you know, like maybe half, like even for the big streaming players, it's, it's not even 80, 90%, I think over a year. And so like, if you think about the average consumer subscription company that let's say keeps like 30 plus percent of the users long term, you basically pricing the product.

So that it's an average of those 30% of long-term users and the 70% of turnout. Right. And so the price that you're charging at the end of the day, it's completely off for both verticals. And for both segment segments, right? Like you have the segment that gets a lot more valuable than six with it forever.

You have the second that maybe tries it for one year, maybe for a few months, maybe like whatever time period, and then turns out and it doesn't get the value out of it, or maybe only for short time, but I didn't. So at the end of the day, I think we're still at the very endings of really understanding how to price these things.

Right. And, um, if you look at SAS, like the investing world, where I came from. When Salesforce lounge, it was a very simple one, one price per seat or user type of thing. Right. And nowadays it's very complex. And a lot of the value is actually driven by, by, by additional software that you then like into your, your base.

And so I think like I, there will be, there will be a lot more price discrimination in the future where you extract more value out of the users that really get a lot of it out of your product and stick for a long time. And probably you will make it. Cheaper or easier to actually come into the product and try it for a while.

I'd because you want to have the final, big enough or target well enough so that you get as many people in this core user group that sticks for a long time and then price it to, to their willingness of pay and not to the average user or the ones that turn out initially. Right. So I always had the sentence when I invest in these businesses of like, okay, can we maybe just ignore the 70% that are not really important for us?

Understand what 30% and figure out how we can target more of those and find them, and then build the business around those. And it's hard, but I think, um, will be key in the future. I mean, it's, it's, it depends on your time horizons too. Right. And cashflow considerations. Right. You could ignore that 70% if you're not worried about the like payback periods, an acquisition.

Yeah. You can make it for the longterm that, you know, you do get into those cohorts. I'm thinking in terms of like this revenue expansion, this like land and expand. And I have to admit, I can't think of off the top of my head, a ton of consumer apps that have done it, that I can name that. I mean, it sounds like Tinder has something set up, but they're very sophisticated.

Um, Killing it on that Xbox, the Xbox game pass subscriptions, coming to mind, they have like this, like monthly, you pay, you get like 50 games and they keep like adding little upsells to it. So it's like, I don't know what the prices are, but it's like $10 a month. They'll be like, Hey, do you want Xbox game pass ultimate for an extra bowl.

Right. And so now you like get a little bit of extra and the, and the benefit is like, you are. Mostly, you know, if you wait until you have this, like large until the majority of your revenues coming from existing users, right. Or you built up that, like long-term use case user base, um, you know, if you can, you know, upsell to that base, like that's a big expansion based, right.

Which is the Salesforce argument. So like, yeah. I wouldn't be surprised if we see more of that, especially as it's going to be kind of an interesting dynamic to see like, what is, what becomes the bigger lever for the subscription companies. And it looks like. I mean, I don't know. Did I call him? I imagine I've seen calm move into like more web and more like meat.

Like they've definitely like the app store doesn't seem like their focus, like it may be used to be. Um, actually I think they started on the web and it's possible. They had a web version first. They were very, I mean, it was like 2011 or something when Alex started, uh, you know, it'd be interesting to see what.

Developers start to focus on SDGs or basis, get really big. Do they, do they try to go down this like expansion route? Or do we just, you know, do we just keep riding the wave? Yeah. It's I mean, we can follow the very long, but I'll just make a few last points from my side is one. We do see this expansion.

Like if you look at Netflix, for example, and their pricing on average have increased like 10, 15% over the last five years or so. Right. And this is. Once just increasing the base prices too. It's like HD family plan and that right. But they're starting to get more money out of the users and two, which is also important.

Like our willingness to pay for these things is increasing, right? Like the, if you look at the company, I don't know the column, but also blinkers. Like they all started at like 20, 30 bucks a year. They're now charging 80 90. Right. And probably there is some room to grow. And, um, the last thing there is like, it's not only about what do I pay for subscription, but it's also.

What is the, like, as you mentioned, but the game has like, w what, what can I put together here in terms of in-app purchases, subscriptions, maybe a commission, or like affiliate fees or some other revenue streams, right. That altogether form this bundle of an exception value. Right. And so I've seen companies try very interesting things, like first offer it in a purchase.

And then from there, give the engaged users a subscription, right. And vice versa, like have a subscription, but then once you hit a certain limit, you still have to. Add additional capacity to the product or unlock new features. And so I think that's all like, you know, I don't know, like I think we're very early, I think.

If you look into gaming and dating, they're usually the pioneers in this trying to really understand that from a data side, but then slowly it slows into the rest of the, of the subscription market. And, um, I'm excited to see what people will come up with. Excuse me, the phonics, most apps, this isn't something you should worry about, right?

Like if you're talking to here, if you're thinking about building your first subscription app, just at a, at a one month trial on a yearly subscription and just call it a day like this that's simple. Don't over-complicate it in the early days. But, but at some point you will hit like, you know, sort of, sort of some, some like large problems of large numbers, and you'll have to think about the it's a good problem.

I think aspects of these problem are really important to think about though. We're in a, in a, in another podcast. I don't know what order they're going to come out in, but we were talking about babbling goods and like being able to price much higher and not see revenue decrease as you just keep increasing the price increasing in price.

And I think in some market segments kind of to your earlier point, like the 30% of users who are going to be your longtime users, Are probably a lot less price sensitive than a lot of the people who are just going to cancel the free trial. And so if you're optimizing for free trial, if you're optimizing for that, that, that immediate return on ad spend, then your pricing is going to look really different.

But if you're, if you are looking to the long run, you might be able to price a lot higher than you would have originally would think because you're actually. Pricing against those people who really find that deeper value out of it versus pricing against the, the kind of mass market that that's just going to drop.

Anyway, a lot of competing things here, which is that though, that if you, I mean, you mentioned it earlier, Nico, about if your price is too high or whatever, like you need to have those core users at some point, right? Like if you have this like insanely high product you want, you know, there's a, there's a, there's a downside to like fewer customers.

Chart paying more. Right. Which is that at some point you lose data. Yeah. No, no, for sure. And I think like, to your point, like, it really depends where you are in the journey, right? Like if you start, I always say launch super simple. I'd have a yearly plan. Maybe you have the monthly to anchor. And just go and learn, right?

But as you mature your business, and as you get to a scale where, you know, you have real data and you have real resources to spend and steer the business, you want to understand these things, right? Because they can have a meaningful, meaningful impact on your business. You could throw your business 50% without changing anything, but the pricing that's, that's the crazy thing.

Right? And the beginning, it doesn't matter because you're learning and you're first finding product market fit and all these things. But I think, you know, it's, it's interesting too, to keep that in mind for when you're reaching the next level. Yeah. And speaking of pricing, I did want to, um, and this is not even our notes or anything, but, um, yesterday we were talking on Twitter about price anchoring.

And then again, in a previous product cast, Jacob and I were talking about kind of the S curve of consumer adoption of being willing to pay for subscriptions and how we're like so early in the S curve of consumers starting to spend and shifting that spending from other consumer expenditures. So what I find.

Interesting. And just in this last week, when Apple announced their fitness plus and their Apple one bundle, I kind of wonder if they're not resetting some pricing expectations by giving fitness plus for 10 bucks a month. When you know you in a very sophisticated opera, you know, offering. But by Apple, when Peloton is charging 40 bucks a month for, for their, uh, if you have the device, if you have the bike and they're charging 20 bucks a month, if you don't.

And so like I already was seeing some tweets about like, well, Peloton seems really expensive now, 20 bucks a month for the app experience, when you can get apples, very polished experience that, you know, and they don't even have to worry about, um, The reality is that the rest of, of consumer subscription app companies have to think about and worry about like they can dump a billion dollars into it and let it fail and not have to deal with the same realities that the rest of this subscription app economy.

So curious to know your thoughts, um, and about how, how that could potentially impact kind of price expectations, and, and, um, and the, the future of this. I mean, it's obviously very hard to tell the future and, um, nigga, that's what you get paid to do. Come on. I see the future and I, I don't think that Apple has proven so far that they've created.

Jeez subscription bundles and really impacted the trajectory of other businesses are like, I don't think that news that's really has had any impact on New York times once we journal and others, at least not that I know. And so I don't like the way I look at this as more as a kind of a way for, uh, for Apple to increase their services revenue and to upsell users from iCloud.

So basically price discrimination, what we just talked about. This is what in my eyes Apple is doing with their Iteld user base. Like how do we get them to actually pay more in high margin, subscription revenues? And that implements a lot of sense. I think for any developments that could of course be somewhat scary, but I think we have to see what comes out of the product, right?

Like how good is it? How do people actually pick it up? Um, I, I do think that, and I don't, I really don't know, like, I think yes, for some people then it, it sets the right. It sets different expectations. Um, but I think there's actually very few, at least from my understanding Epps, that charge more than 10 bucks a month in this fitness space.

So maybe it's like a one-to-one comparison. Then the question becomes, can Apple actually build a better experience than, than a company like telecom that's focused on us and has like this brand awareness and positioning and a whole bunch of smart people just working on this one problem. I don't know.

Um, the, the bigger issue that ICO, what really interests me here is like, I, my, my big perspective or one of my beliefs is that in three years, ish, Apple will actually drive more profits from, from the services, uh, level of, of the P and L than from the product. Are they, are they not, they're already on like, just margin contribution?

No. The margin contribution is retinol 40%. But like, I, I expected, like I did a small analysis, like back of the envelope and it's like, if they keep growing, roughly in this case, like in three years, there'll be more than 50% of the profits from service offering. And of course services offering is, you know, their own services cloud and so on, but it's also the app store and my belief, they don't say that, but I think we all would agree that episode's probably the majority of that today.

At least I think. And so to detention that I don't understand. Oh, well, I'm not sure if they have a proper strategy or what it is is like, why do we want to piss off your developer ecosystem like that? If it is becoming your biggest profit driver. Right. And so, and then there are smarter than me. Right. So I'm sure that they are thinking about this.

And so the question becomes like, what are they trying to do here? Is it. To squeeze others to do then at the end of the day, potentially start M and a and implement some of these services into their own offering. Right. Um, or is it, you know, they think it doesn't really impact them, but it just upsells their own user base.

Not sure, but it's, that was the big question that I had afterwards. It's just like, huh? Why are they doing it? And other religions. Profit oriented here. I'll do they have the longer term strategy that I just don't understand yet? Yeah. Are they trying to sell phones? Are they trying to sell fitness subscriptions?

Right? Like I'm not sure I know anymore. Yeah, exactly. And are they trying to build a platform that developers want to invest in? Are they trying to like. Just be the platform. Like, are they going to keep subsuming more and more categories? Like the, you know, they bought dark sky earlier this year and I have a weather app.

And so like, it dawned on me during the event and it was like weather plus or whatever. They're going to call it next year. Yeah. Is probably going to be part of a subscription by another pregnant off they are maybe. I mean, we'll see, they might, but they might offer danced weather experience. And so like, are they just going to go category by category?

Like, are we going to see like a, a photo editing pro feature next year? That's like part of a subscription bundle. I think for us as Apple misses a lot, like they have, they don't have a lot of like break even, I would say like music. I don't know how big music has gotten compared to like Spotify, but like, they haven't really just dominant.

That's what I, that's what I think we would actually get scared is like, let's say fitness is just a like absolute, amazing product. And like everybody's talking about it and it just like. Eats up the whole market. Like that would be, that would that's when I would get concerned. Like, but like you're saying like news plus was kind of not a big deal.

I have a feeling the same thing could be the case here. It's scary. Right? Like you just don't know, like they, and they have all these advantages on acquisition and distribution and pricing and all this stuff. That's just. You know? Yeah. Like what, what, what what's the they're making I have to guess. Like, I have to agree with you that they're making way more money off of us as a collective than they are going to make on any one of these.

Probably maybe with the exception of music. Yeah. And the music is a good example though, because they are closing in on Spotify. I don't remember the exact numbers, but they're closing in on Spotify because. There did a fall, but what's kind of scary to me and for, and really honestly frustrating as, as a developer is their app as Apple moves into these spaces because they don't compete on the same time.

Yeah. It makes like when you're the platform default, like you, you win business on being the platform default over buying good. So like all the product people. I have heard from about Spotify versus Apple music. Like I've never used Spotify. I probably should. And just, you know, screw you Apple. Like I'm not going to do your, but I, I subscribed to music because it was like, that's the platform thing.

It has all the integrations it's easier, but all the product people I've heard say Spotify is so much better. So much of their recommendations. It's a better app. And so Apple's like actively creating a worst. Experience on their platform by not letting these innovative apps be like, if Spotify was like the music app and had better integrations at a system level, that's better for consumers than Apple putting out this crappier product, but winning by being the default and then winning because they get to operate in a way that the third party developers in our platform, don't like they don't operate in the same realities of user acquisition because they're the, they're the, they're the.

Installed into the iOS. They don't compete with the same realities as far as paying the 30%, if they're on the platform. So it's like, they can be in the platform. This is what's going to get them. I have to this, I swear. This is like Epic is like, okay. Yeah. Wow. Like you're just blamed by everyone. Else's I don't care.

But if, but if Apple released like their own like Island battler and was competing, then, you know, like, which.

then I would think Tim Sweeney's a little less whiny and like actually like has a good point. Right? Right. Well, I mean, well, Apple arcade, right? So like Apple is kind of going into that space a little bit, also not a big hit, right? I mean, I don't know, but again, it's like platform default. Now it's in the bundle and like, So they're there.

It's just, I mean, we don't, it's probably not super relevant, so we should probably have this discussion, but it's, I mean, it's probably relevant to everybody, but it's just really hard to buy. Like I, and I don't know what it's going to happen, but I think if they, like, let's assume that hypothetical of, if they start really like, just going into all the verticals that make sense, right.

At one point. That will become anti-competitive as though it already is. So it's like, it'll just become more and more anti-competitive. I mean, they're, anti-competitive against Spotify with their deep integrations in the, at a system level that Spotify can't do their fitness plus is already going to be anti-competitive against a Peloton and other stuff because they have deeper integrations that they're not allowed.

And again, yeah. Even if they're not doing the deeper integrations, which, I mean, that's something I think that they just need to like internally be like, if we're going to Sherlock, we need to like, be really clean about making sure we're not like doing all this, you know, at least only do one or two small things that are like system level integrations that we don't get 30 part.

Yeah. Third-party developers, but even if you take that away and if they're party developers, everything else, it's, you know what I was talking about, they don't compete on the same dynamics for user acquisition, for paying the 30%. Everything is already in a competitive. So like they don't have to keep moving into other spaces to be anti-competitive they already are.

Right. I guess. Yeah. No, I, you have, you have a point? I think that's true. I think, I guess like if I had to think about it, I just haven't like, I guess it goes more towards Jacob's point that I'm at today. Like the things that I. That I invest in that I've worked with. They're just so much better in building the specific offering that they're bringing to the market.

That I'm just not so scared, but, but I might be wrong. Right. And it might be that they get better and better, but my, like, I always thought that. If they, at one point really want to become the platform that they will start buying, like, you know, dark skies. And like, I think that it's going to be more like, okay, like at one point they realize, okay, fitness.

Like if, if it's really the agenda to just drive more and more service revenues and not do that from the developing, but on all of the margin, I, I would think that they, at one point realized that they themselves are not the best at building it, so they should integrate the best and biggest ones and then offer that.

Right. But then that's something that like, again, bringing back the Salesforce example, that's been happening a lot of, um, enterprise SAS ecosystems, right? Where it's both the app exchange, which is the app store, but the lower cut, but then there's also a lot of businesses built on the backs of, of Salesforce on the foster compat form.

And so on that at the end of the day have been bought by Salesforce and integrated in their product offering. Right. And so, and it's a really loves company. And, you know, if you support the ecosystem, you buy some other products. Like then you'd not really, I think that you position yourself as a, as a four benevolent dictator.

And then if you do any of the other things, you know, does not position itself with developers. Anyways, there's a benevolent dictator. I think we hit on a particularly hot in there.

So, uh, we, we, we kind of have touched on this a few times, but I am curious to hear your thoughts on like where the consumer spend on mobile subscriptions is going to come from. So, you know, early on, there was kind of a lot of complaints of dev, you know, developers, movies, subscriptions, and subscription fatigue, I think is maybe an interesting kind of angle to take on this is like, at what point, you know, our consumers.

Do consumers have subscription fatigue. How do you think about subscription fatigue? And how do you think about like where this, the increase in mobile spending is going to come from in the consumer budget? Yeah, so I think there's two big and shifts happening that are, I guess, maybe three, even that are supporting this, the shift in spend.

And one of them is. That the younger generations are just much more willing to pay for these digital goods than our parents were. And so I think like, just by nature of that, the percentage of disposable income that is being shifted from physical goods and services. To digital will increase by magnitude because we just, our kids and the young generation just plays a lot more value on digital goods and also see the value and their willingness to pay.

It's just increasing. Right. So I think that's, that's one thing that, that just naturally. With time, we'll shift. A lot of spend. The second is right now and with the pandemic, which always has a lot of horrible consequences, but for our specific industry has been a boost really because people spend less on travel on gastronomy and on whatever new clothes to go out and see their friends.

Because they're at home and problem. And so, you know, and, and that's something that naturally, you know, allows them to spend more of their disposable income on, on entertainment or utilities or games on the phone. And then, yeah, I think those were the big two. The third one would be a mix of both, but I, I just, I think we're just like, if you think back, like that's what we always have to keep in mind is.

When, when the episode launched in 2008, everything was free, right? There was something that were 99 cents. And then let's take an example of sleep cycle. As a company, first came out as 99 cents. You can measure your sleep cycle. Sleep now is a big thing and there's launched subscriptions and they're doing significant revenue.

Very profitable as a company, right? It was, it used to be a company that would make 99 cents per download now per active user. They're making hundreds of bucks. If they stick with it for a long time, what has changed the app? Sure. They improve the app. But you know, at the end of the day it's doing the same thing.

It's really the willingness to pay for it. And the business model has actually been able to extract value from the users for what they're doing. And so we're still, you know, like a subscription was launched in 2011. It's 20, 20 it's nine years. That's a very short time. Right. And so if you look back like, as an example, I think that's a really interesting data point that was just, and Jason, I'm going to just have the stats for planning funny.

And one of the, you know, big talking points was we now hit public cloud of a trillion dollars when you look back like 10 years ago. So it was 50 million, you know, like from 50 million to a trillion. Now everybody talks about SAS. It's a hot thing. Everybody invests in it. Once I found the company. That all happened within the span of 10 years.

Right. And you know, the first class companies, insights of it in the nineties, focus on South investing, right? Like started, you know, maybe like 15, 20 years earlier. I didn't. So we're now at a point where you have a crazy high penetration, you have a business model that works. You have the willingness to pay.

You have the younger generation growing up with the, with the experience that, you know, it's okay to pay for, for digital goods. I think that's just like the, like I could see. And this is obviously the bookcase that I tell my investors and who knows if it will happen on that, but I could see a world in which this non-gaming.

In that mobile first subscription, um, business becomes a trillion dollar opportunity in 10 years, right. That we're, we're certainly have the momentum right now. And, and it's going to be interesting. And I think that's further, I'm belaboring the point maybe, but it's further supported by us getting increasingly aware of the consequences of advertising.

And what the business models of having to drive engagement versus actually aligning and being aligned with driving value for the user means for us as, as consumers, right? Whether it's increasing in anxiety, depression, manipulation, whatever it is. Right. And I think that's something that, that subscriptions can potentially also solve.

So I think a lot of the spend will also come from. You not being a free user of software that sells you as ad inventory, but you saying, I don't want that. I want to have something that's more aligned with my own interests and paying for it. Um, out of your pocket. Yeah. A light bulb really went off when you were saying that, uh, or early in, in that part of the conversation that.

Again, on another podcast, check up an hour of talking with the founder of a fitness app and talking about how, like you have a price comparison where like, you know, a gym membership is 60 bucks a month and then a training session is $60 an hour. And then this fantastic machine learning driven fitness app, that's going to help you optimize your workout is 60 bucks a year.

And so like the adding the value that you can add with that digital product, even to that real life experience is, is huge. And people are starting to like see that value and like make those price comparisons. And so like when you're talking about like, um, You know, not buying that next outfit or not going to dinner that one time it's like, you know, one fancy dinner is, you know, a hundred bucks will, are you going to then potentially like subscribe to that foodie app for a hundred bucks a year that like enhances that experience or like an outfit, you know, go buy that next, you know, a hundred dollar.

Uh, dress, or are you going to subscribe a hundred dollars a year to a, a photo app that you're taking photos of your fashion and sharing, um, socially, whatever, and then travel, like, you know, you're going to spend thousands and thousands and thousands of dollars on travel. Is there a flight? He is a great example of this.

Like it's a fantastic flight management app for 60 bucks a year. And so like for, for a 10th of what you're going to spend on an international flight, You enhance that experience of the flight because you have that real time information and push notifications and like, you know where you're going and can track all of that.

So yeah, the light bulb really went off for me just now of how these. Digital services for consumers are, are enhancing these real life experiences and adding value. And I think consumers are going to see, see how valuable those are more and more. And then what's incredible is it's a subscription monetization, aligns developers with.

Delivering the kind of value that is worth paying a subscription for like, you know, like what we saw early on with the 99 cent apps is like, you know, it was I beer, you know, you drink the little beer and you make a little gag and like it's a great app. That's worth 99 cents. That's it pioneer? Yeah. Let's be honest.

In 2000, that was like the best thing in 2009. Come on. For a buck or for four bucks, right? It's like a price of a cup coffee, but like now we're at a point where like the sophistication of apps and the value that they can deliver is so high. And then the subscription model unlocks the monetization that helps.

That may have sense. Exactly. And we're going to just see more and more great apps built on top of enhancing real life experiences, creating new digital experiences. Gosh, I'm even more of a bowl. Just say, I'm done jazz right now. You got to do a company in this space. Yeah, I think I'm thinking about next something.

Yeah. I think it's a really good way of framing it. And I think, you know, time kind of works in our favor here because. And one, this generational shift to this willingness to pay that comes along with it. And three also the quality of the technology itself, right? Like what we can do with an app. Also, this is also interesting with a combination with an app and physical product, you know, Peloton, aura, and there's other companies that yeah, exactly.

Like it's just, there's it'll get better and better. The product experience will get better. We will have more. Surface layers. Digital seventh layer is also overlaid over like physical products that just enhance the experience. As you said, not just for real life experience, like travel or vacation, but also for, you know, wearing a ring or, you know, having, having the spike at home to work out.

And so I think we're at the beginning and I think it's just going to be more and more of our disposable income. You know, certainly at one point people will have too much of it and maybe that's why people are trying to bundle it. Right. So the question is like, what's the most efficient way of actually distributing it at one point, but we'll learn, we'll see.

Yeah, I I'm even excited about the niches that you can't predict. Right? That's I think one of my most exciting aspects of this whole market is that I think it's gonna, it drives a really good way for innovation to reach markets and niches that never would have been funded or, or, or built software for before.

And I think that's, and I, I don't know how many of them are billion dollar businesses. Probably not a ton, but they don't need to be. Right. Uh, and so driving a ton of value for consumers and improving the world. So yeah. And for the entrepreneurs, right? Like, and to Apple's credit, like that's like would a very small team today, which I love about these companies also is it's oftentimes like, you know, two, three, four, five founders or employees and founders that are building a company that's driving millions of revenue.

If they, if they work on the right thing. Right. And they get the distribution just by plugging into the app store. And as much as we hate Apple for some of the developer policies, They have built that billion plus user base right internationally. Then you can just plug it into and you monetize from day one.

Now you have the business model. You don't have a business model risk anymore because you just charge a subscription. And you are an independent entrepreneur with two people that can build a very, very healthy cashflow business and maybe a very big VC funded business. And if so, then speak to me. Of course, it's amazing what it does for, for entrepreneurship.

I think, well, this is a great place to wrap up. The, the excitement go out and build those niches, go out and build these businesses and improve them. And then email nico@nico.com or whatever your pitch. So actually, you know, a lot of the people, well who are listening to this podcast, you know, w we probably are going to have quite a few people who already have successful subscription businesses, but, um, that are already funded, but there's probably going to be a lot listening who are aspiring, who have decent.

Uh, uh, unique dynamics, but aren't having invested, haven't like built out user acquisition. So are you, are you accepting pitches? How do people, Nico Combinator put your application in what's the, and then what's the best way to reach out to you and, and, uh, follow you on Twitter and that sort of thing.

Yeah, exactly. Um, so I'm, first of all, always looking for new investments. I love working with entrepreneurs and especially at the early stages and my hope. And, you know, to align the expectations is that we build a business together that become very meaningful, right? So I do want to be an investment in the comms and the revolution of the next generation.

And hopefully there'll be even bigger successes, even though those stories are still. Now being written, but I think the best way to reach out to me is just shoot an email. My email is on my website, that jason.com, it's also very easy to get, and you can also find me on Twitter and with my real name and Jason, and I'm always happy to talk.

I think just important. . Want to build something meaningful, not a lifestyle business, which is completely fine, but it's just not my business. Right. And it should be something that is somewhat uniquely positioned in its category and has the potential to reach that, that scale. And also, you know, the founder's willingness to do so, but I'm always, always happy to chat.

I like to learn about the space I learned most of all from talking to entrepreneurs and people like you guys. That are very close in the ecosystem. So, you know, I'm not hard to reach. Well, this was fascinating. We'll have to have you back on. Um, and I mean, we, we only, gosh, got not even halfway through our notes.

So, um, this is, this is fine. And we'll, we'll have you back on some time. Sounds good to make sure you never miss an episode, subscribe to the show in your favorite podcast player. Thanks so much for listening until next time.