The Subscription Economy: An Investors Update

In this episode of Industry Focus: Wildcard, Jason Moser chats with Rory Carron, head analyst of MyWallSt, about the subscription-based business model and some interesting companies operating in that economy. They discuss the pros and cons of the subscription economy, some companies to keep your eye on, a few to avoid and much more.

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This video was recorded on December 2, 2020.

Jason Moser: It's Wednesday, December 2nd. I'm your host Jason Moser. On this week's Wildcard Wednesday show we're digging into the subscription economy. We'll talk about the markets and the companies within those markets investors should keep their eyes on, and maybe one or two that you shouldn't.

Joining me this week is Head Analyst with MyWallSt, where their aim is to help you own your financial future through investing, you can learn more about them at MyWallSt.com, and you can follow him on Twitter @rorycarron, that's right, it's Rory Carron. Rory, great to have you back.

Rory Carron: Oh, thank you so much for having me back.

Moser: [laughs] Yeah, man! Well, you know, it sounds like we've got a fun discussion teed up for this week here. We've been talking over the past couple of weeks about the subscription economy, about all of these different services that have really come to the forefront of not only our lives as consumers, but really [laughs] our lives as investors too. You know, we've seen through the years, there were a handful of subscription businesses out there that were automatic for a lot of folks. I mean, thinking things like Costco or Netflix (NFLX -0.51%), and then as the secret got out, more companies started pursuing subscriptions. And now it really does seem like our lives [laughs] very much center around these subscriptions that we keep.

Let's talk about some of the big picture, sort of, takeaways from this market. Who do you feel like are the trendsetters in this market and what are some of the metrics that really dictate how this shakes out for investors?

Carron: Yeah, we talked about this last time I was on, we were talking about Apple in particular. You know, Apple has made a real move toward a subscription-based model. You know, they always had this large affluent customer base, but for years they were depending on those customers to make those repeat purchases, you know, and the big question was always, how long is the upgrade cycle, how many phones can they bang out every couple of years to get people keep making that purchase?

And you go back to Apple in 2015, this is a company that had, literally, the most profitable product ever, at least, and the most valuable brand in the world. And they were trading at, like, 2.5X sales, about 11X earnings. Those are crazy low figures for the company that we saw was Apple, you know, the prestige that that business had. You fast-forward to today, and Apple is trading at 7.5X sales and 36X earnings, and you know, what changed in that timeframe? There's two things, really, specific to Apple. No. 1 was they got into wearables, and now they're the largest watchmaker in the world by a factor of four.

And so, their wearable business, which includes AirPods and Beats, that company generated $20 billion in 2019, [laughs] that's more revenue than McDonald's, more revenue than Netflix. And you know, if it was a stand-alone business, it would be one of the 20 most valuable companies in the world, just Apple wearables.

The second thing that they did was they invested really heavily in the recurring revenue model. So, everything from the iCloud to Music, Fitness, they've got the Arcade coming out, they've got Apple TV. And so, they bundle it all together and suddenly Apple is no longer one of these software-enabled hardware businesses, which is what it was for decades, suddenly it's being priced like a software business. And now you can get the phone as part of subscription, you know, the iPhone Upgrade Program is a big thing now, where you don't have to worry about when you're going to buy that next iPhone, it's just you pay a monthly fee and you get a new one every time a new one comes out, and then you can add in this bundle, and you know you've created a whole new category there, you know, [laughs] you've created Apple-as-a-Service; and I won't use the acronym but. [laughs]

Moser: [laughs] Well, yeah, I guess that's a good ... I almost said it. [laughs] Yeah, I mean, that's a good point though. I mean if you think about it, this really has become that ultimate razor-and-blade business, right. When we talk about that razor-and-blade business model where you're selling that big piece of hardware or equipment, and then the recurring sales that come from it. I mean, the iPhone really is that razor and the blades just keep on selling any which way they want to package them.

Carron: Absolutely. And then like, you know, another big player is Amazon (AMZN -1.14%), obviously. Amazon leveraging its operational excellence in transactional space into the most successful subscription service ever conceived. You know, it's amazing that a company is able to say to people, you know, give us $100/year in order to purchase exclusively from our site. You know, that is their sales pitch. [laughs] And people absolutely love it. 82% of U.S. households now have a Prime subscription. That's more households that decorate a Christmas tree in the U.S., you know?

And I just got finished reading Scott Galloway's new book Post Corona. Yeah, he talks about the shift quite a lot. And he kind of talks about modern business, kind of, bifurcating into two different models. He uses the example of iOS and Android. So, the iOS model is something that you build and you sell it for more than cost and you get like a premium product. Whereas the Android model, is you sell something below-cost or sometimes you even give it away for free, and you sell the consumer data to your actual customers, which is the advertiser, you know. It's the old, you know, if it's free then you're the product, kind of thing.

And that model is becoming much more dangerous these days, because the sheer amount of data that is out there. You know, back in the Mad Men days, they could tell what kind of person you were, based on whether you read The New York Times or the National Enquirer, but they don't know everything about you. [laughs] You know, now they know everything about you. They know what time you wake up in the morning, they know what you have for dinner. [laughs] And so, you know that's the kind of -- so, there's a move, I think, away from that model of us being the product to us being the consumer and buying that better product and paying up for that better product.

And you know, it's not an easy business, it sounds easy, you know, it sounds easy to get people in the door and to get them to keep paying you, but you know, you and me are both in subscription businesses, you know, it's not that simple. Obviously, in terms of the metrics you want to look for new sales, new subscriber growth is important, that's the demand that you're generating out there, that's selling your value. But that's only the start of things, you know, then you have to get into retention, and this is where you demonstrate that value on a consistent basis. So, retention is obviously very important, churn is very important. And if you can find it, ARPU, or Average Revenue Per User, is a great metric to look at. You know, especially if you can see a business increasing ARPU over time; that's a sign that the company has pricing power, that's a sign that they're possibly able to upgrade people to premium packages. And you know, there's certain things of ARPU you have to be awareful of, it's typically much higher in North America and Europe than in less developed markets, but if you can get a breakdown of that and see where that's trending, that's always kind of a good metric to look for in terms of how to value subscription business or how to look subscription business for the long-term.

Moser: Yeah, that retention, I think, is really -- that to me is, that's probably the bigger challenge, I think. It obviously costs a lot more to get customers in the door. Customer acquisition costs are typically a lot higher. And then maintaining that relationship over time can be really lucrative, but you have to really provide a compelling offering at a compelling price point. That retention in some markets, I think, are easier than others.

And so, I think that's kind of a nice segue into actually talking about some of these markets. And the first one that you wanted to shine a light on is one that we all have some exposure to in one way or another, it's in the media, right? I mean, this has become just a phenomenal market for subscriptions given how we're getting all of our entertainment these days, how we're getting all of our media.

Carron: Yeah, I mean, look, media subscriptions have been around for decades, you know, you had magazine subscriptions, newspaper subscriptions. Columbia Record Club, don't know if you remember that one. Obviously, the cable was a media subscription that most American households would have interacted with. So, it was natural that these are, kind of, the first models that were looked at in the digital age, and Netflix as, obviously, being the prime example.

And in terms of measuring Netflix -- I have to give them bonus points for just how transparent they are in terms of their reporting figures. Now, they do really break out their model very well. It's a, kind of, you know, we've built a better mousetrap, so we will explain it to you, [laughs] rather than a lot of companies that don't. And you know, ARPU-wise, they bring in about $13/user in places like America and Canada. $11 in Europe. $7.50 in Latin America. $9 in Asia Pacific. And that ARPU is constantly, kind of, creeping up. Latin America looks like it's declining, but on a neutral currency basis, it's actually growing.

And as a business, you know, we've seen in some markets they've hit saturation. But they still forecast about 6 million members for the coming quarter, that's 20% year-over-year growth; that's not to be scoffed at with a company this size. And Netflix is just a fantastic offering. You know, you break Netflix down, for every $1 you spend with Netflix every month, you're getting about $1 billion worth of content, [laughs] and it can be watched at your leisure from the comfort of your couch, ad-free. That's a great, great model. Obviously being looked at by a lot of other players at the moment, Amazon, Apple, the smaller players, you know. And I think the way I see this area going, is there will be multiple subscriptions, we're never going to have one big player that just dominates the entire market, what you'll probably have is one kind of anchor subscription that every household has, you know, whether it's Netflix or Amazon, the ones that are offering, kind of, the most broad range in terms of the content that's there. And then you'll have the kind of more niche ones, you'll have Disney for the kids, you might have an ESPN one for sports, and then further down, you might be particular programs that you like that you go to HBO for or maybe you'll go to Peacock for. And all these companies are different kinds of models that they're looking at, but I do think Netflix is the top dog and will remain so.

I think a lot of the smaller players may end up just selling back to Netflix when they figure out that they can't really compete, they can't amortize their costs across their subscriber base the way Netflix can. So, Netflix is always going to be in a lead position in that.

Spotify (SPOT -1.49%) is another media subscription darling. They're interesting because they've got a mix, you know, they've got the premium subscription, but they've also got a free ad-supported platform. And with Spotify, we can actually see the big divergence in terms of subscription versus advertising. They've got 144 million subscribers, 185 million ad-supported monthly active users, but they make about $1.7 billion off their subscription business each quarter.

Moser: Yeah, I was going to say, I mean, that's the driver of that business, isn't it?

Carron: Oh, it's like, it's €1 in ARPU per advertising MAU [Monthly Active Users] versus €12.5, it's 12.5X when it comes to, you know, pushing people over to that transcription model. And Spotify, it's been making a lot of interesting news recently, because a big problem it's always had was, it lacked that control over costs, you know, they always had to pay those royalty payments. And they're trying some interesting things, they're trying to wrestle control of those costs back. I've seen recently, they started offering an actual smaller cut to right-holders in exchange for placements. And they're also moving hard into podcasting. And I think Ben Thompson of Stratechery had some really interesting ideas of how they could do that, how they're going to drive people to not necessarily signing up to those premium models for podcasts, but just getting people to use that platform. Because then they could create like a centralized podcasting advertising unit within Spotify that will kind of be similar to, kind of, Google Ads. So, that's a really interesting move that they're making, and they're doing it in a clever way with their various exclusive deals, and they really are capturing a huge share of that podcast market ...

Moser: It feels to me like that Spotify -- I'm a Spotify subscriber, we have the family plan in our house. And we all love it. I feel like if you're going to take away one subscription, you can say, you can either keep Netflix or keep Spotify. I think we would [laughs] probably end up keeping Spotify actually. Now, that's probably because, even if we got rid of Netflix, we have a million other ways to stream video, but really, I mean, Spotify is just the clear leader in that music space. Apple Music notwithstanding, Apple Music is a wonderful offering, it's obviously got its own user base, but Spotify really does eclipse it.

Carron: Totally. And the problem with Spotify, and we talk about problems, you just mentioned the other big one, which is Apple, and their kind of stranglehold over the platform, i.e., iOS, which is taking that 30% off them. But Spotify, again, you're talking just about a brilliant product offering, you think about what was before, [laughs] you know, that you'd pay $15, $20 for a physical disc that had maybe 20 songs on it, and would get scratched within a couple of weeks, so you're never able to play it again. Versus every song that's ever been recorded in the world at your disposal on multiple devices whenever you want it for $10/month, incredible ... [laughs]

Moser: It is. You know, I've seen a chart, and I've shown this to members before. But it goes all the way back I think to 2000, maybe even a little bit earlier, but it shows the evolution of the music space and how it went from purely physical ownership of the music, whether it was a cassette tape or a CD, to slowly, but surely, and now here in 2020, I mean, digital music and streaming is absolutely the only endgame here. I mean, physical ownership of the music seems to be just a dwindling priority for consumers.

Carron: Yeah. And it's fans in love with the, kind of, retro-ness with the vinyls and things like that, but for mass consumers, it's all digital now. And the music industries have to adapt to that, and it's gone from being someone who sells music, to someone who promotes music, and promotes live entertainment more than selling those CDs, which is obviously made much harder by the recent pandemic, but they'll figure it out.

And I think a lot of the music industry is worried about Spotify. They're the ones in control of distribution, now that's a very powerful place to be in. So, watch that space. I'm quite bullish on Spotify, even though they have quite a lot of problems in terms of their cost and how they get those rights paid for.

And one of the other ones I find interesting is The New York Times. We're talking about way more old-school now, [laughs] but I remember seeing David Gardner recommend The New York Times stock about four years ago, and I thought he cracked, you know, I thought what is he doing? Like, this was a company that was just hemorrhaging subscribers, you know, advertising dollars were going down the toilet. Look where it is now, it's grown about fivefold in that timeframe. They successfully moved to a subscription model, they leveraged those differentiated assets that they have, that no one else can replicate. 2017 was the first time they generated more subscription revenue than advertising revenue and they just haven't looked back.

And what's amazing is the ARPU is huge. You know, they don't break it down, and it fluctuates a lot based on promotion. But do you think if someone is paying $15 every four weeks, that's generating only $200/year, and I think they have more pricing power than maybe any of the companies, because they could easily up that to $18, $20, and I don't think they'd get a huge amount of churn. It's just a brilliant, brilliant product.

They've got 7 million subscribers at the moment; their digital subscriptions are growing 45% year-over-year. So, it's a really remarkable turnaround story, at the old gray lady. And then, one of the more interesting ones is Roku. Roku is a stock I've always really liked, it's not a subscription business in itself, but by becoming the, kind of, platform where all the video streamers are going to, it can create an area where people can manage all those subscriptions, in particular. You know, you think about a household with multiple different subscriptions, they want to be able to watch them all from one place, and more importantly, they want to be able to cancel some and subscribe to others in an easy way, have it all billed through one function. So, Roku is kind of the streaming service that's tying them all together or the platform that's tying them all together. So, that's another one I really like in, kind of, the media space, that's more of a kind of pick-and-shovel than Netflix or Amazon in terms of actually delivering the content.

Moser: Yeah, it's the enable, right, that's the gatekeeper. [laughs] It gives us the luxury to be able to go in there and subscribe, and that's a very powerful position to be in, particularly, as people move away from that relationship with the cable company and having to have that cable box. I mean, now you don't need that. And I tell you, it's a beautiful thing, because once you've been able to cut the cord, so to speak, and not have to deal with the cable company, you can choose the technology that goes in your living room and it just makes for a far better customer experience, and clearly Roku is on to something there.

Carron: Not many people know as well, that used to be a Netflix product, it was spun out of Netflix. And so, it was going to be a Netflix Box at one point, but ...

Moser: Yeah, I remember those days. Man! That was so long ago. [laughs] And look at both companies now today, just successfully navigating such a competitive space on their own in two different ways, but obviously ways that are working.

Second market here, and this may seem a little bit counterintuitive, I guess, I don't know, but it has really sprung up here these past couple of years is in retail. Talk about some of the subscription offerings in retail these days.

Carron: Yeah, we already talk about Prime, that's the obvious one everyone thinks about. And as I said, 82% of households have it, I don't know why 82% of anyone would do anything other than that, [laughs] we're now trying to find that level of agreement on anything in this world, and ...

Moser: It's darn impossible. [laughs]

Carron: Yeah, and Prime is just a brilliant flywheel for that business. Prime users spent 2.5X as much on Amazon a year as non-Prime users, and that grows every single year. So, that's like the gold standard when it comes to retail subscription. And we just started seeing it here in Ireland where it hadn't really got the same benefits as it would have had in the U.S., because obviously, we're not, you know, we haven't got that level of infrastructure over here yet, but I see more and more people in the U.K. and Ireland with Prime subscriptions. Now it seems like a no-brainer. And what else can they do with it, you know, like, it's infinite, isn't it? Like, there's nothing they can't do with it, and there's nothing that you would be surprised doing with it.

And "Prime Health" is going to be a very interesting offering. I could imagine Amazon offering a free COVID-19 test to every Prime member, you know, delivered to your door, collect it, brought you, and we'll email you the results, that's not outside the imagination of someone like Jeff Bezos. And now that they've gotten full into healthcare with PillPack, I'm just so excited to see where Prime is going to go in future years.

Moser: That's an amazing driver.

Carron: Yes, just amazing. And no one could have ever predicted it [laughs] as well. It's one of those things that just completely broke every model, isn't it, when it came to Amazon? You know, Costco as well, it's had that membership program for years. They just used to price that every year with very little kickback, and now obviously it's -- I don't know why it's taken so long, but Walmart is getting into the space, and that's going to be very interesting to see what they're offering at the moment. It's free delivery, $0.05/gallon of fuel, and a, kind of, scan as you go through your phone functionality. But again, there's so much optionality with that business, what happens when they bring in the whole pets business, you know? I know you are a Chewy fan. I think Walmart+ are going to aim at that pretty heavily. So, they're the kind of the big retailers that are getting into it.

Looking further down at, kind of, more niche stuff, you know, Stitch Fix (SFIX -1.79%) is a company we've been keeping quite an eye on. They've got 3.8 million members. They're trying to kind of move into a subscription business, trying to get people to become much more recurring members of that club. I think that's hard, it's a harder sell, definitely, then just the overall retail subscription package, isn't it? Because there's so much more, you think about what kind of clothing, and people have their own styles and their own tastes.

And people buy clothes at, kind of, various times in their lives, you know, sometimes it's kind of retail therapy more than anything. Just getting the box, is that what people really want? Are they going to miss going into the store, trying things on and the experience?

And the other one is Trunk Club, which is owned by Nordstrom. And that's actually, I think, an even more interesting play, because unlike Stitch Fix, they actually just have the stock sitting there, you know, they can just take whatever they need off the shelf and send it out to you, they don't need to be buying it in like Stitch Fix and hoping that the stylist get it right every time.

So, they're two kinds of the retail business I'm keeping an eye on. Always interested to see what Nordstrom is going to do, because they have been absolutely pummeled during this COVID-19 thing, and there's just so much going for that business in terms of operational excellence, and the retail that they're sitting on in terms of the brand. So, if they can pivot into some form of subscription business, whether it's through Trunk Club or whether it's through Nordstrom Rack, I think that could be a business that could see a nice turnaround coming out of this pandemic.

Moser: Yeah, I've always felt -- I mean, fashion retail to me, that's a much more, sort of, niche offering that it's not going to be that big massive market opportunity, it's going to be pockets of varying tastes here and there. It's always struck me as a nice offering as opposed to something like a pureplay. I think that was always why I've always been on the fence with Stitch Fix, because I understand the concept, I like the model, I like the idea, I've always kind of wondered about the staying power, the sustainability of it versus something like a Nordstrom where, you know, they're just basically leveraging something that they've already got, it's adding something more to what they already have. So, probably a little bit easier to do and maybe not as the success or however they measure success, just isn't as crucial as something like a Stitch Fix, which is, I would say is more of a pureplay, wouldn't you?

Carron: Yeah. Yeah, you have to -- I think with a lot of these subscription businesses, what you can find is, it's the companies that aren't reliant on -- especially, when it comes to delivering boxes and things like that. And if it's something that you can do as a side gig, great. [laughs] If you're completely relying on those boxes. And particularly with Stitch Fix's model, which is, you know, it's anticipating returns all the time, because you're never going to get it 100% right, right? [laughs] So, that's a hard sell to make. And that requires more costs than maybe some of the more digital subscription business that you're thinking of.

Moser: Yup, absolutely. Well, let's take a look at the third market here, but this is one that would line up very well with our Monday Financials show. And yeah, actually I know there's a company in here that you want to speak to, that we talked a little bit about recently on the Financial show here, but insurance, something everybody needs, whether it's for your home, or for your car, or for your health, or whatever else, but we're seeing more and more businesses jumping into this market with, sort of, a different take on how their business models work ultimately.

Carron: Yeah, the first time I came across this, it's a funny one, isn't it, but the first time I came across is when we looked into a business called Trupanion, and that was maybe four or five years ago, we looked to this business. And what we liked about Trupanion was that we saw that pet insurance was a really underserved market in the U.S. I think 1% of pets in the U.S. were insured whereas in places like Scandinavia, for example, 25% of all pets were insured.

So, this didn't really make sense to us, because Americans love their pets, don't they? [laughs] I mean, they are big into their pets. And vet bills are expensive, so, you know, why weren't Americans taking pet insurance? That was a question that we looked out for a while. And it seemed to be just a marketing problem, it just seemed to be that it just wasn't sold right.

And so, Trupanion was this company that was really repackaging insurance. First of all, it was a monthly subscription and they were selling it through vet's offices and online. And now, a few years later, they have 0.5 million pets on a subscription service that's generating $60 per month per pet on average, and they have a 98% retention rate. So, that was one of the subscription businesses that we just really liked, we were like, this is a great, great business.

And it went flat for a couple of years, it's had a big bump over the last couple of months. And so, that was our first, kind of, look at a company taking the insurance premium model. Look, there's no difference, you call it premium or call it subscription, but one seems to sell a lot better, and ... [laughs]

Moser: Well, yeah. Well, and you see it, I just got our automobile insurance renewal email the other day from Progressive, and you get the opportunity to pay for it -- we pay for it every six months, and you can either pay for the six months upfront or you can stretch that out over six monthly payments. You're going to pay a little bit more for that monthly payment option as opposed to paying it all at once, but ultimately, that's what that is, that's a subscription business.

Carron: Yeah. And the other company I want to talk about, I think this is the one you were referencing, is Lemonade which, one of the things we looked at quite a lot is the uberized consumer, so by that I mean this was a term that was coined by I think Zillow CEO, back when they launched Zillow Offers, he talked about this uberized consumer who was willing to pay up or take less in terms of monetary benefits for convenience. So, just the convenience of being able to do something over your phone or over the internet, not having to fill out forms, not having to talk to agents, he talked about that uberized consumer. And Lemonade was a business we thought was really interesting, in that they were really going after this particular consumer for insurance, which is something that young people don't like, [laughs] they don't want to, it's got a bad rep. And because it's one of those things, it's just a chore, and you're paying upfront for something that you may never see the benefit of.

So, Lemonade was this business following this model. Again, turning it from a premium to a subscription model, they're focusing on renter's insurance, home insurance, and more recently, pet insurance, but it's all done through mobile, there's AI bots involved, they've got over a million customers at the moment, mostly under 35, mostly first-time buyers. And the business model is, you get those people when they're young, when they're paying renter's insurance, they turn into homeowners and they're going to be paying a higher premium, you lock them into that brand, you make them feel part of a community. I think they give some money back as well for charitable donations.

And that's just a model I really like, I think it's really disruptive, and it's got that kind of cool innovation that everyone wants to be part of, [laughs] doesn't it?

Moser: Well, yeah, I think you keyed in on something, I think, that matters a lot, particularly for younger generations coming up, it's mission-driven companies, it's companies that stand for something more, right? I mean, you want to feel good about the companies that you're giving your money to. And I think that's always been a priority to some extent, but I think it's something that's becoming more and more of a focus, and I think companies are finding that that can be a really good retention tool. When you're proud of -- I mean, who's going to say I'm proud of my insurer, but if you look at a company like Lemonade, and that's kind of what they're trying to [laughs] do, which is to say hey, we want you to be proud of the fact that you get your insurance through us, because this is what we stand for and this is what we're doing.

Carron: Yeah. At the start, it seemed to me like a kind of a marketing gimmick, but the more I read into it, they have thought this through, they found that this means that people make fewer spurious claims or they don't claim as often. And they do feel kind of part of a community when they see, you know, it's only a very small amount, I think it was only over $1 million they donated last year to various charities, but it still makes them feel part of -- they're something bigger than just an insurance company.

Moser: No doubt. And certainly, with a market like insurance, [laughs] any chance you have to help the consumer feel just a little bit better about it, that's a big win for sure. So, let's take a look real quick, just before we start wrapping up here, because there are some IPOs coming out. And it's been just, we've seen a lot of news coming out with IPOs here recently. We've got a couple of companies that are on the horizon here that you've been looking at, and those subscription models have piqued your interest, huh?

Carron: Yeah, there's one that's still in the insurance area that I've only learned about a few weeks ago, it's being taken public through a SPAC [Special-Purpose Acquisition Company] with Mark Cuban and the king of SPACs, Chamath Palihapitiya, it's called Metromile. So, a really quick read-up on this company, so they're doing auto insurance, and what they're doing is charging a monthly flat fee, I think it's as low as $29/month. And then you pay $0.06 for every mile you drive. And they claim they can save drivers an average of over $700/year. So, that's still a very small business. I think it's only operating in eight states, but like, again, switching over from premium to subscription model, doing something a little different, so that's a very interesting business.

And the other, yeah, look how GEICO... [laughs] the other two that I have my eye on is, first of all Roblox, I think is one of the most interesting S-1s I've read in a long time. You know, there's been a movement into Gaming-as-a-Service as well, this whole "pay a subscription to play" a game. I think the CEO of King Digital a few years ago, the guys who make Candy Crush, found that they were able to increase revenues 35% just by removing advertising and moving everyone over to a pay-as-you-go subscription. So, Gaming-as-a-Service is very interesting. Roblox, the stat I heard on Roblox was 75% of children aged nine to 12 in the U.S. play Roblox.

Moser: That seems very believable. [laughs]

Carron: [laughs] Really? I mean, I'm not in America, I don't have kids, so I don't know, but that's outrageous. Again, what's a 75% cohort of anything? [laughs]

Moser: Yeah, that's special.

Carron: Yeah. So, they've got their internal currency Robux, [laughs] kind of, a sneaky little currency conversion trick where they sell it for, like, 1,000 Robux for $10 and then they convert it back at, like, 250 Robux something. [laughs]

Moser: It just makes me think, have you ever watched The Office, the American version of The Office with Schrute Bucks, [laughs] and Stanley Nickels?

Carron: That was great. So, Roblox is a company, they've got a subscription service where, you know, depending on what price you pay, you get cheaper Roblox. You get more of the currency for less, essentially. That's definitely an interesting one.

And then a strange one, because I'm not a big fan of the whole ride-hailing, food delivery gig worker companies, never recommended any of those businesses, but I did read the S-1 of DoorDash recently, and that's an interesting business. They don't' have a subscription business yet, one of the, kind of, things that they highlighted in that S-1 was this desire to get, kind of, a membership program where you can access local businesses with, kind of, the operational excellence of DoorDash behind that, delivering products to your door. So, that's one that I'm going to definitely keep an eye on. I would kind of separate it from the Uber Eats, Postmates kind of businesses, just because they seem to have that kind of ambition to get to a subscription program like that.

Moser: Yeah, that seems like a compelling differentiator there.

Carron: Yeah, I mean, they're an interesting business, that they've really got local locked up quite well in a way that I thought that was going to be a lot more market share for Uber Eats in that whole area, but no, they're owning that market at the moment.

Moser: Wow! Well, so we've talked about all of these great subscription businesses, these ideas, I mean clearly, some are better than others, what are some subscription businesses out there or a market in the subscription business area that you think investors should avoid?

Carron: Well, there's one really obvious one isn't there, that's Blue Apron. [laughs] That meal kit market was just one of those slow, slow car crashes or train wrecks more likely, that you just couldn't keep your eyes off. And there's a couple of things you have to keep an eye out for. I think when you talk about looking at subscription businesses, it's interesting to look at their cost, in particular. If you've got a company that has zero marginal costs, for example, that's a great subscription [laughs] business. If you've got a business where you've built it already, it doesn't matter whether 10 people use it or 10 million people use it, that's where you want to be at. So, those digital subscription businesses are great. Any company where you have to increase cost, or your cost scale with your users, that's something that you need to look out for. The meal delivery business is one that just never made sense, I didn't really see where they were aiming that product at all.

You said they were aiming at kind of, upwardly mobile people who had no food in their fridge. I never met those people who didn't want to go [laughs] or who weren't eating out every night anyway. And so, there didn't seem to be any market for that. At one point the CEO said they were going to be in 99% of kitchens, crazy [laughs] he said that. And any of those businesses that are just offering, kind of, boxes of food with no real personalization, I would definitely steer clear off, that just doesn't seem to be a model that works at the moment. I'm sure someone will figure it out at some point, but for the moment, it just doesn't seem to appeal to anyone.

Moser: Okay. Well, we'll leave it at that. Rory, thanks so much for coming back and talking shop. Hope you have a great holiday season.

Carron: Yeah, you too, man!

Moser: Okay. Remember, you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at [email protected].

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

Thanks, as always, to Tim Sparks for putting the show together for us. For Rory Carron, I'm Jason Moser, thanks for listening, and we'll see you next week.