Why the future of hardware may come via subscription

I write a lot about how connected hardware ends up looking a lot more like software. For example, the companies making smart devices can turn them off with a software update. Or they can use those same over-the-air updates to add new features. And unlike traditional hardware, adding connectivity means adding a cloud back end and continuous software updates.

This leads to ongoing costs for connected products, and requires companies selling smart gadgets to figure out new business models. For many, add-on subscriptions have been the way to go. But we’re seeing a maturation of the subscription business model that doesn’t view connected hardware as the product. Rather, it pitches the hardware as a delivery mechanism for a subscription service.

That is a pretty subtle distinction, but it’s an important one. For example, in an interview with The New York Times, Peloton’s new CEO, Barry McCarthy, talked about plans to change up Peloton’s pricing models.

Currently, people buy the Peloton bike, which ranges from $1,495 to $2,495, and pay a $39 monthly membership fee that provides access to classes. This is a classic connected hardware subscription model, where the hardware is priced closer to or higher than competing “dumb” products and the company asks for a subscription to fund ongoing costs, whether for content or cloud storage.

But McCarthy, who was previously an executive at Netflix and Spotify, said he plans to play around “with the relationship between the monthly recurring revenue and the upfront cost to find some sweet spot in the consumer value proposition that gets people to buy into the user experience and affords you a really good margin.” And when asked if he’s thinking of selling the entire Peloton bike and service as a subscription, McCarthy said yes, and that it might cost $70 or $80 a month with the upfront cost being “dramatically lower.”

Whoop, the fitness wearable that recently raised $200 million, has a similar subscription plan. Whoop wraps the upfront cost of its activity tracker into its $39 monthly subscription. When customers sign up, they sign up for a subscription at $30 a month for a minimum of six months or $288 for an annual subscription. Both subscriptions include the price of the actual band. Language on Whoop’s site defends the membership model as a way to deliver a constant stream of new features and updates with a lower-cost way to try out advanced health tracking technology.

And as technology moves beyond hardware and into software and the experiences provided by artificial intelligence, this shift in selling a technology service comprised of sensor-laden hardware and software for a monthly fee makes more sense.

The language on the Whoop site enforces this concept, asking customers to join now, as opposed to buying now. The fitness world is a good place to test this idea, since many people can compare the cost to a monthly gym membership. But it’s not the only vertical pushing this concept. The Fi dog collar is a connected dog collar with GPS tracking built in. While the $149 collar can track a dog’s steps and provide access to a social network for dogs, the real value derives from the $99 annual subscription that provides GPS tracking.

Fi’s CEO, Jonathan Bensamoun, said that 93% of the customers who buy the collar buy the subscription, and after a few years if the collar fails, he’s happy to send them a free or deeply discounted collar because the value for the company is in the annual subscriptions. The hardware is simply a way to get dog owners into the Fi family.

We even see software companies trying to provide physical hardware as a mechanism to keep subscribers happy and make it easier to access their services. For example, Spotify is now selling a $90 device, called Car Thing, that easily mounts in a vehicle and can access a customer’s Spotify account. And this feels like the future of connected devices and the subscription economy.

A combination of a subscription tied tightly to a device and priced as a package deal is the likely future for high-end smart devices, especially those that promise to add regular feature updates. This also will affect the smart home. Right now, for example, people buy cameras and then choose whether or not to add a subscription to store videos in the cloud. My hunch is we’ll start seeing a package of devices offered under the umbrella of home security or energy efficiency that ties several gadgets into a plan offered by a company such as Google, ADT, or Comcast.

There are lots of options for companies that could package devices and services together, which is why we’re seeing a lot of M&A and partnerships around security, energy conservation and resilience, and aging in place. And for those of us who aren’t stoked to pay a monthly subscription for hardware, we might end up missing out on the benefits of smarter products and services.