It’s Time to Short Subscriptions and Go Long on Lightning*
Subscriptions are obsolete and unfair. Lightning is the solution.
*This is not investment advice. It’s life advice.
A standard Netflix subscription costs $13.99/month. The Netflix catalog includes the 2015 mini-series Sinatra: All or Nothing at All as well as the 2015 Dream Concert, “The world’s biggest K-pop festival.” I’m sure both of those titles are riveting entertainment and that each is a pivotal moment in cinematic musical history.
But is it fair to assume that the overlap between the viewerships of those two titles is effectively zero? Isn’t it a statistical certainty that virtually nobody who’s interested in watching Ol’ Blue Eyes is also going to want to see SHINee perform live? Then why is each paying for the other’s content, which neither is ever going to watch?
Netflix has also amassed around 5800 titles in its impressive catalog. A subscriber who watches a movie every single day would need nearly 11 years to get through the 4010 films. And that’s excluding the thousands of TV episodes.
Viewing habits vary, of course. Younger people tend to watch less, and older people tend to watch more. Subscription prices, though, hardly vary at all. Everyone uses subscription services like Netflix, Spotify, and the Wall Street Journal differently, but almost everybody pays the same. With coarse, one-size-fits-all pricing, light users subsidize heavy users.
The point is that subscriptions force users to pay for stuff they’re never going to use. And users on the left side of the usage distribution wind up subsidizing users on the right side. Imagine a restaurant that charged everyone the same price regardless of whether they ordered a tomato soup or a gold-plated steak, and half of the guests are asked to pay for the other half’s drinks and desserts.
That’s the subscription model. It’s unfair and obsolete. Lightning could be the subscription slayer.
In order to understand how Lightning is going to bury subscriptions and why this is the best thing since ad blockers, let’s take a closer look at where subscriptions came from, how they became so popular, and what features of the Lightning network render them obsolete.
A 16th-Century Hangover
The 16th century was the Big Bang for the subscription payment model for two reasons. First, that’s when Pope Gregory XIII reconfigured the older Julian calendar to give us the days, months, and years that virtually all of us continue to use. Those months are still the subscription’s standard payment units.
Second, Europeans were sailing around the world, “discovering” fascinating people and places. As a result, new information about the shape of the world was coming in regularly, and many people were willing to pay cartographers a regular fee for them to keep up with new discoveries and provide updated maps on a regular basis. It was like Substack for early modern geography nerds. And thus the first modern subscription services were born.
The tech world adopted subscription pricing fairly early, with mainframe computing time available on a monthly basis in the 1960s. The model has expanded to the point where subscribers often suffer sticker shock when they realize how much their monthly payments across numerous services eat away from their income.
Current subscription services are natural evolutions from their ancestors. We can split them into two basic categories:
- Media subscriptions, including stuff like Netflix, Spotify, the New York Times, and Apple Podcasts
- Software as a service (SaaS), including stuff like Microsoft 365, Zoom, Dropbox, and Adobe.
In light of the subscription model’s new ubiquity, it would be fair to assume that it benefits everyone. If it disadvantaged either consumers or vendors, they’d stop using it, right? That’s true … to a point. Subscriptions do provide some benefits to both sides. The problem is that those benefits are very asymmetric. The house always wins.
Subscriptions yield a host of benefits to providers. Specifically, they:
- give providers a steady, regular income stream
- allow providers to bundle their junk together with high-demand products (I’m looking at you, Horse Shark), boosting the average revenue per unit
- increase sales by inducing customers to pay even for intervals they don’t want or can’t use
- lock customers inside their walled garden, which reduces CAC and raises ACLV
- induce customers to front the expense of providing the service.
That last point is perhaps not obvious, and it’s rarely mentioned, but it’s very important. Utilities, like water and electricity providers, typically charge on a monthly or even annual basis, and between the time when they provide the service and the time when the customer actually pays, the providers are on the hook for all the costs. In addition to water or electricity, they’re also effectively providing customers with a short-term, zero-interest loan.
Subscription services reverse this relationship by getting customers to front the costs, effectively taking short-term, zero-interest loans from their users to finance the service. You’re welcome Microsoft, Amazon, Google, Spotify…
Of course, users can also benefit from subscriptions. A fixed monthly payment is simply more convenient for repeat purchases. Subscriptions can spread the cost of an expensive purchase over several intervals. And if the provider doesn’t lock customers in technologically, a subscription can actually increase users’ flexibility by reducing the amount of sunk costs per interval. It’s easier to switch from Spotify to Tidal than to switch an entire music collection from vinyl to CDs (and then back to vinyl).
Those advantages, however, are seriously outweighed by the disadvantages from a user’s perspective, including:
- having to pay upfront for variable usage
- the sum of cumulative payments is likely to exceed even an expensive one-off purchase
- technological lock-in (try transferring your Pages documents on iCloud to Google Docs on G-Suite and then to Word documents on your Microsoft OneDrive)
- compromised privacy through transparent usage patterns
- having to subsidize low-value content and products (I’m looking at you, Emily in Paris)
- having to subsidize high-volume users (but thanks to all of you who are subsidizing my favorite subscriptions!).
What’s keeping subscriptions alive
If subscriptions are a zombie business model, stumbling unconsciously from the 16th-century into the future, what’s keeping them alive — or at least undead?
The simple answer is technological lag. Think about it: subscriptions tend to charge by the month for services that are provided in much smaller intervals. We listen to music and watch videos by minutes and seconds, not by the month. We consume bandwidth and storage space by the byte, not by the month. We use bank accounts and apps by the operation, not by the month.
Months persist as billing units because existing payment models include too many intermediaries that are too centralized and too expensive. If it costs Spotify, say, $0.01 to stream a song after compensating the artist, the accountant, and the janitor, but a single PayPal transaction costs a minimum of $0.30 plus 2.9%, Spotify has no choice. They must bundle the streams into a subscription, or the transaction costs for streaming a single song will be 30x higher than their cost of providing it.
The bottleneck that prevents providers from charging by usage particle — whether byte, second, message, song, or whatever — is the payment infrastructure. Payment intermediaries are outdated, sluggish, and expensive; they squeeze the providers with outsized fees; the providers pass the expense on to the users by bundling 43 200 billing-particle minutes into one artificial billing-unit month, regardless of how many of those minutes were actually used. That’s the con.
Lightning can end the duplicitous subscription payment model. As a matter of fact, we’re already doing it. Here’s how.
The Alternative: Pay-as-you-use
Just as paying for software, music, and video on a subscription basis seemed odd after actually having bought and owned individual copies, subscriptions are becoming so normal that it can be hard to imagine an alternative, especially since the alternative is pretty revolutionary.
Instead of paying a flat monthly rate for usage, why don’t we just pay for what we use? Why not pay by the song or the minutes listened? Why not pay by the minutes viewed? Why not pay for cloud services in bytes stored per second? Why not pay for software in minutes of use per terminal?
I know, the existing payment structure makes that sound as realistic as gaining superpowers from a mosquito bite, but imagine a fantasy world in which customers and vendors could interact at virtually no charge, with virtually no delay, and without intermediaries. Pay-as-you-use is possible in that disintermediated world.
Now realize that this fantasy world already exists. That’s Lightning. That’s precisely how our podcast player works: creators list their own content, users can find it easily and stream payment back to the creators second by second. No one is locked into a long-term contract. No is paying for anything they’re not using. No one is subsidizing anyone else’s listening. And no one has to kick 30% back to Anchor in addition to 0.5–0.8% back to Stripe for basically just existing.
Instead of paying for access to a service on a monthly basis, as if it were some kind of exclusive privilege, the pay-as-you-use model charges only for what users actually consume and compensates vendors directly. It’s just like the utility model, except pay-as-you-use doesn’t meter consumption; it tracks consumption in real time. Vendors don’t have to extend interest-free loans until their customers pay for the last interval; vendors collect users’ payment as they’re using the service.
Whereas the subscription model seeks to maximize customer lifetime value for the providers and the amount that the payment providers can skim from everybody else’s business, the pay-as-you-use model maximizes fairness. Sure, the billions that the users and providers stand to gain are a loss for the payment processors, but maybe we can send them a consolatory fruit basket or something.
Podcasts are just the beginning. In theory, pay-as-you-use can work for any form of consumption measured in time: concerts, cover charges for clubs, gaming, public/private transportation, software, professional services, and even amusement parks — basically anything that doesn’t have a natural unit, like an ice cream sundae, or a package.
The benefits of pay-as-you-use extend beyond just basic fairness. Real-time payments over Lightning are also private, working without the user data existing payment processors amass on their users and sell to third parties. But they still let vendors and creators track aggregate usage data to see which songs on the playlist are the hits, which gags in the movie got the biggest laughs, and which features in the app are the most useful. As a result, they can also modulate the price of their services more efficiently, perhaps charging more for rush-hour bus trips than during off-hours and less for concert attendance while the warm-up band is playing.
Disintermediate All the Things!!
It might seem like disintermediation is our answer for everything, and y’know, that’s about right. Disintermediation does make everything better. It makes interaction faster, cheaper, more private, and more fair. Speed, economy, privacy, and fairness are all good things. We wish we had more of all of them, and disintermediating with Lightning gives us more.
When you get used to the idea of pay-as-you-use, subscription models start to seem laughably primitive, like using smoke signals instead of mobile messaging. Whatever. The intermediated, centralized, fiat model seemed like a good idea at the time. It doesn’t matter that we got suckered into an unfair, inefficient payment infrastructure. What matters is that we grow, evolve, implement the alternative, which is obviously superior, and get on with our new and improved lives.