Megatrends keep unfolding. Last year’s experience confirmed that the ‘great acceleration’ seen in 2020 for most of the trends on which we build our thematic strategies was not a temporary blip. On the contrary, while we initially foresaw some mean reversion in these trends, after the impressive surges seen during the onset of the pandemic, in areas such as ecommerce or mobile payments, that prediction proved too cautious.
Ongoing socioeconomic shifts may have slowed down as economies gradually reopened, but they largely remain in place as new habits persist beyond the stop-and-go recovery. For 2022, we expect these trends to continue to unfold at rapid pace, even as economies continue to recover from the initial Covid-19-related shock and the situation gradually normalizes. As we enter the new year, we outline two promising areas of focus for investors: the subscription economy and the metaverse.
The subscription economy refers to all the products and services people can think of made available through a subscription scheme, as opposed to traditional casual buying. It therefore often implies a shift from ownership to usership. Good examples are the popular music and video streaming services. But it can be virtually anything, from a box of fresh vegetables delivered weekly, to a car or a pair of blue jeans that may be renewed, and eventually recycled, on a regular basis.
Ultimately, the subscription economy is a way for companies to eventually build stronger and longer-lasting relationships with their clients. This involves putting customers first and tying them to their products and services in various ways, such as providing better value for price, enhanced flexibility and personalization, or improved customer experience relative to classic buy-and-own offerings.
Subscription-based business models are not new, having been around for many decades. However, they have experienced a tremendous boom in recent years
Subscription-based business models are not new, having been around for many decades. However, they have experienced a tremendous boom in recent years. While essentially having been limited to the media industry until only a couple of decades ago, they gradually expanded, first into a few niche areas, such as telecommunications, software and information technology services, and then into the wider economy (see Figure 1).
For investors, subscription businesses typically offer reduced uncertainty regarding revenue and profit generation in the long term, relative to more traditional business models. Moreover, these companies tend to generate a constant stream of data that can be used to improve service, raise customer satisfaction, and identify complementary business opportunities. This generally leads to relatively stable growth over time.
Admittedly, subscription businesses may not be appealing to all investors, as they incur customer acquisition costs – such as sales and marketing, or software development – upfront, while revenues are recognized over time. This combination leads to a misalignment of revenues and expenses, understating the true financial health of the company. However, as long-term investors able to look beyond short-term cashflow generation, we see this as an opportunity rather than a challenge.
Subscription businesses grew nearly six times faster than firms of the S&P 500 Index over the 2012-2020 period
Subscription businesses grew nearly six times faster than firms of the S&P 500 Index over the 2012-2020 period, driven by rising consumer demand for subscription services, according to Zuora, a subscription management platform.1 The Covid-19 pandemic further increased the gap. Many subscription businesses experienced a strong growth acceleration, as consumers moved from fixed towards variable costs, and companies focused on their core operations while outsourcing the rest.
In 2020, revenues of subscription businesses tracked by Zuora grew by 11.6%, while those of the companies in the S&P 500 Index declined by 1.6%. Admittedly, lockdowns and other safety measures taken in the first quarter initially seemed to slow subscription revenue growth. But when lockdowns returned in the last quarter, subscription revenue growth accelerated, suggesting that subscription companies had been able to adapt their offerings quickly.
We expect this trend to continue in the coming decades, essentially driven by the ongoing digitalization of the economy. According to recent estimates by UBS Wealth Management and Bernstein, the digital subscription economy is currently a USD 650 billion market and is set to more than double by 2025 reaching a market size of USD 1.5 trillion.2 This represents an impressive 18% compound average growth rate.
New technology now enables businesses from virtually all economic sectors to offer membership services to their customers. On the corporate side, rapidly falling costs of data storage and rising computing power have enabled businesses to offer consumers access to their services at a very low cost. Meanwhile, the ubiquity of online services has enabled consumers to be in touch with content, services and even other members at all times.
Another important tailwind for the coming years is the unavoidable generational transition, as millennials and generation-Zs3 tend to be keener on subscription and usership schemes than older cohorts.4 Consumer surveys suggest that, for younger generations, the promise of always getting the latest product, the lack of associated maintenance, as well environmental concerns often tend to player a larger role in the purchase decision making than traditional ownership considerations.
The metaverse became a popular buzzword in 2021, as key players in the technology arena announced important steps in this area. In particular, the public listing of gaming platform Roblox and the renaming of Facebook into Meta Platforms were key milestones. But beyond the current hype around this concept, we think it reflects a number of structural trends unfolding at the intersection of the internet-of-things, social media and mobile computing.
Indeed, the metaverse is much more than a fancy pair of virtual-reality goggles, or a new way to play online games. Broadly speaking, the metaverse refers to the many aspects of our digital lives and their interactions.5 It includes obvious elements, such as digital gaming worlds, or social media, for example. But it also has less obvious ones, such as digital financial services, remote working tools and applications, as well as all the daily digital services accessible online.
In many ways, the metaverse can be seen as the next step of the internet, where increased connectivity will further integrate digital and physical lives
In many ways, the metaverse can be seen as the next step of the internet, where increased connectivity will further integrate digital and physical lives. It is therefore not something predefined, but a constantly changing concept. This means that while it is difficult to envision precisely what the metaverse will look like ten years from now, developments in this area are ineluctable. A growing number of companies have been communicating around the metaverse.
Admittedly, the metaverse is still in its early stages and therefore requires a cautious approach from investors. However, we expect investments in this area to rise significantly over the coming years, as companies will position for increased computing needs – including hardware and software – and develop testing and learning capabilities on potential use cases for both corporate and retail customers.
Global consumers show appetite for services featuring metaverse-related characteristics. Social media platforms already boast billions of users across the world, that could eventually be drawn to the metaverse. Popular platforms such as Facebook, YouTube and WhatsApp, for example, boast billions of users across the globe. Moreover, many of these users already spend a very significant share of their time every day on digital media, mainly through their mobile devices (see Figure 2).
Bernstein analysts recently estimated that, although the timing and scope of metaverse-related developments remain uncertain, the combined annual run-rate of the most relevant markets is already USD 2 trillion and growing.6 Among the most obvious areas bound to benefit from the development of the metaverse over the coming years are digital ads, semiconductors, mobile phones and infrastructure software, for example.
But the impact will likely be much more broad-based, with many other, perhaps less obvious segments of the economy also set to benefit from the advent of the metaverse over the coming years. These include ecommerce, media, digital payments and even education, to name just a few. In a recent note to clients,7 Goldman Sachs analysts estimated the metaverse market opportunity could reach somewhere between USD 2.6 trillion and USD 12.5 trillion.
We therefore advocate a so-called ‘picks and shovels’ approach, investing selectively in companies that enable these developments
For investors, we think that while it is still early days and some caution is warranted, the metaverse’s promising prospects should not be overlooked. Admittedly, the number of investable companies directly involved in the advent of the metaverse remains relatively small. We therefore advocate a so-called ‘picks and shovels’ approach, investing selectively in companies that enable these developments. These include a wide array of companies, from social media platforms to chip makers.
1 Zuora, 3 March 2021, “Subscription business revenue grows-437% over nearly a decade as consumer buying preferences shift from ownership to usership”, press release.
2 Bernstein, 11 August 2021, “Sign me up! Why consumers are increasingly subscribing rather than buying”, client note.
3 While there is no official definition of what ‘boomer’, ‘millennial’ or ‘generation Z’ consumers are, the Pew Research Center describes them as follows: boomer = people born between 1946 and 1964; generation X = people born between 1965 and 1980, millennial = people born between 1981 and 1996; generation Z = people born between 1997 and 2012
4 See for example: Scuncio, J., 7 May 2019, “Millennial spending drives the growth of the subscription economy”, Zuora blog article.
5 The term metaverse was initially coined by Neal Stephenson in his 1992 novel Snow Crash, defining it essentially as a computer-generated universe.
6 Bernstein, 7 December 2021, “Bernstein enters the metaverse: A primer on what it is, the size of the prize, and why you should care”, client note.
7 Goldman Sachs, 10 December 2021, “Framing the Future of Web 3.0 - Metaverse Edition”, client note.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.