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The Evolution Of The Rent Seeker

Rise Of The Rent Seeker : A Critical Analysis Of The Subscription Economy

Anne Kreuger is an incredible woman, in a world of economists, in a time when men held all the important jobs, she was Chief Economist to the World Bank, then a Director of the International Monetary Fund and is now a Senior Research Professor of International Economics at John Hopkins.

What I admire most about Anne is that before she accomplished any of this, she coined the term ‘rent seeking’ and published a now classic paper on the subject, cocking a snook at rent seekers in the political arena, surely making herself enemies in the process, but still going on to greatness.

Anne is living proof that with brains and courage, a woman can climb high, even if they happen to be one of the very few woman in the room. I have never met Anne Kreuger, but I think she would like me because I am a classic entrepreneur in that I am a profit seeker, rather than a rent seeker.

In economics a profit seeker is clearly defined as a person who seeks to make money by engaging in a series of mutually beneficial transactions.

What Is A Rent Seeker?

A rent seeker is clearly defined as a person who profiteers by redistributing wealth among different groups without creating new additional wealth.

Rent seeking is extracting value, without giving any real value back.

The example Anne chose to highlight rent seeking was the import license, she took a long hard look at those people who try to obtain benefits for themselves rent seeking in the political arena and published her findings.

In this article, the example I am choosing is what the articulate rent seeker likes to call the ‘subscription economy’, a deceitful term in my book.

When discussing the subscription economy it is very easy to hear the word ‘subscription’ and form a positive association, because for a very long time subscriptions were a good thing and something we happily subscribed to.

The subscription model was first pioneered by magazines, for as long as you subscribed, the magazine kept on arriving. But before long they were joined by others as the subscription model spread to other industries, where offering a subscription to your service naturally made sense to customers.

We traditionally subscribed to something because it saved us money over the long term, also because it was convenient and saved us time.

So when you hear the term ‘subscription economy’, you may quite naturally form a positive association, but make no mistake, the subscription economy has absolutely nothing to do with your National Geographic subscription.

The subscription economy is all about getting customers hooked on forever payments, to generate recurring revenue from a place where it would not naturally occur, to the detriment of the customer over the long term.

The guy selling you on the subscription economy model is actually a wolf in sheep’s clothing, a rent seeker in everything but name and the correct definition of the subscription economy is actually ‘rent seeking economy’.

Why Is Rent Seeking Bad?

What we now see in the tech space is not a traditional kind of rent seeking, (manipulating the political system for benefits), instead we are seeing software vendors manipulate another mechanism, the billing/payment process, to convert their customers into ‘subscriptions’ instead.

Increasingly, mature software vendors who have run out of innovation runway turn to rent seeking, increasingly we are are told that the subscriptions will soon be everywhere and there is a real problem with that.

Since Anne Kreuger first explained how rent seeking had a negative effect on an economic ecosystem back in 1974, we have had a long time to study the subject and the consensus amongst economists is that rent seeking is generally a bad thing and indicative of corruption within an ecosystem.

In a speech to the National Association for Business Economics, Nobel prize winning economist Angus Deaton said “It is not OK is for rent-seekers to get rich,” he thinks rent seeking is destroying capitalism for good reasons.

In his article The Rent Seeking Is Too Damn High, Chief Economics writer Ben Cassleman describes rent seeking as “gaming the system to make more money than you’ve earned” and this may seem familiar if you have seen a vendor switch from a perpetual licence model to a subscription model.

The problem is that we have known since the Roman days that not only is rent seeking is bad for a creative ecosystem, it stifles innovation.

The historian Rostovtvzeff wrote:

The reforms of Diocletian and Constantine made all productive activity impossible. The reason is not that there were no more large fortunes, but the foundation of their build-up was now no longer creative energy, or the discovery and bring into use new sources of wealth, or the improvement and development of husbandry, industry and commerce. It was, on the contrary, the cunning exploitation of a privileged position used to despoil people.

Rent seeking is bad because it hurts innovation and innovation drives growth, which drives the economy, creating jobs in the process.

It isn’t small businesses that drive job growth, it’s new businesses, and in particular the small subset of new businesses that rapidly grow into big companies, technology startups in other words.

Why Is Rent Seeking Bad For The Tech Space?

Rent seeking in the technology space diminishes the incentive software vendors have to innovate and then use those innovations to generate revenue, which in turn incentivizes the technology space to stagnate.

Rent seeking in the tech space diminishes the incentive to improve features because cutting down to a skeleton team of maintenance developers and moving to a subscription revenue means that the revenue you make is almost pure profit and there will always be investors pushing for that.

Software vendors who rent seek with a subscription model put pressure on their competitors, forcing them to adapt and indirectly imposing the rent seeking model on others who think they must adopt the subscription model in order to stay competitive and survive. Almost a self fulfilling prophecy.

This is how rent seeking spreads to infect an ecosystem.

In a healthy ecosystem, people get rich by creating things that people want, but in a dysfunctional ecosystem the participants acquire wealth via rent seeking.

In his excellent article Points Of Control : Rents, Jim Stogdill says the following of the technology space and I am only copypasting this because I could simply not have written this myself in a better way.

“At the very beginning, innovation was the only source of rent in in the tech industry. In a perfectly functioning Schumpeterian system, that’s where all rents would come from, but rents from innovation are ephemeral and they are quickly eroded by competition. Companies get paid enough to keep doing the cool things we want them to do, but they have to keep innovating if they want to own a yacht suitable as a platform for mooning.”

This is the eternal problem with the mature software space, how do you keep on innovating around a piece of software once you have built its core features and nailed its functionality? How do you keep reinventing the wheel?

Tough questions to answer, so tough that rent seeking seems the easier option to a lot of vendors, sometimes because those rent seekers at the Subscription Psycho Academy have been whispering into your ear.

There is a thin line between profit seeking and rent seeking, it can sometimes be hard to tell the two apart, something the ‘subscription economy’ capitalizes on.

It can be really hard to distinguish between rent seeking and profit seeking, especially if your software vendor has been schooled in pitching the subscription model by subscription economy professionals.

If you really want to drill down deeper into this subject, I recommend that you check out Devin Helton’s article Great Problems : An Epidemic Of Rent Seeking, he has a really good handle on rent seekers in the tech space.

How The Subscription Economy Hurts Its Customers

You may have already heard little white lies that go along the lines of “customers have been asking us for more flexible payment models” or “we believe that the subscription model offers significantly more value”.

In reality of course, no customer is asking if they can pay rent and the subscription model is probably not going to deliver more value, but the rent seekers know that they need to hook you with small monthly payments.

Humans naturally tend to focus on the short term and ignore the long term to their detriment, meaning that rent seekers who hook you on very small payments know that they can charge you multiples for a piece of software that you would have previously bought on a perpetual license.

It’s worth considering what a subscription would be worth as a fixed cost to a software customer. Lets say you wanted to invest a fixed amount of money to earn enough interest to pay for a software subscription that you want.

For example, a rate of 5% interest $1 a month is worth a fixed cost of $240.

So an Adobe subscription of $10 a month is worth a fixed cost of $2400, or 1Passwords $3 a month is worth a fixed cost of $720, making 1Password about 100 times more expensive than it used to be on a perpetual license.

This is the problem with paying rent seekers over the long term, compared to buying something, paying rent is always much more expensive.

Rent Seekers Weaken Customers Ownership Rights

It can seem outrageous to rent software to a customer much that they thought they had already bought the software, so this is why some vendors weaken or break their customers ownership rights over the software.

The weakening of ownership rights its key to rent seeking, because you cannot seek rents on an asset from a customer who already owns it.

I am not really sure why we do not call this theft, possibly because people think that digital goods are not like physical goods in some way, but whatever way you look at it, invalidating ownership rights without the explicit consent of the rights owner is a form of theft.

In the case of Adobe weaking ownership rights, they took away expensive software that customers had bought by automatically cancelling their perpetual licenses if they signed up for a free trial of the subscription service, provoking extremely vocal and bitter public screaming.

But of course it was essential to the rent seeking model that previous customers ownership rights were totally broken, so that they could then go on to charge the customer a subscription for using the same software.

Naturally of course, none of us are going to pay a rent seeker money for ever if we can avoid it, even if it is a tax deductible business expense that unfairly shifts the cost of the now expensive software onto the tax payer.

Not only did the taxpayer have to cover the cost of bailing the financial sector out, we now have to cover the cost of subscription software because organizations are increasingly renting software and writing it off on taxes.

Indirectly, the subscription economy is heavily subsidised by the tax payer, which is the only reason its profitable in the first place, because if the customer had to swallow the cost of neverending payments they wouldn't.

If something cannot go on forever, it will stop.
Herbert Stein (1916–1999), “Herb Stein’s Law”

At some point you are either going to be unable to pay the subscription, or you are going to wake up and realize that it makes no sense to keep sending your vendor money, at which point your access to software is shut off and you realize how badly you have been burned by X years of payments.

What To Do

Many of us lament the rent seeking world, but despite its destructive nature, rent seeking is legal unless it involves clear bribery or corruption.

We do not have to let rent seekers have their way with us, while they pretend that their ‘subscription model’ is a positive part of our ecosystem.

The best advice I can give those of you who cannot swallow rent seeking or technology executives who think they have had a subscription epiphany, is to go and find one of their startup competitors and give them a try.

Startups are the real source of innovation in the tech space, they are a real source of jobs in our economy, they should be protected from rent seekers at all costs if our ecosystem is to maintain its collective creative edge.

If we embrace the subscription economy, we will end up an industry full of rent seekers, devoid of innovation and underpinned by an increasingly discontent customer base. Nobody wants that.

Check out my other article Subscription Psycho.

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