"Everything as a service" – where will the trend lead?

Frankfurt am Main, 20 March 2019 Rumour has it that Apple will announce a competitor platform to Netflix and Prime Video at its keynote on 25 March. Following the success of Apple Music, this would not only be a logical step for the group, but also an indication of a structural trend: "Everything as a service". What is meant here is the change away from the sale of simple products towards services. Frank Schwarz, fund manager of the MainFirst Global Equities Fund, is convinced that the business model "as a service" (aaS) could in future dominate across industries - and that investors can take advantage of this development.

The aaS business model has already revolutionized entire industries. According to the market research company Superdata, almost 74 percent of consumers in the United States now buy films and series via streaming subscriptions and the figure for music is 64 percent. Originally, the model originated in the IT sector, where software (Software as a Service: SaaS) and entire platforms (Platform as a Service: PaaS) started to be increasingly sold as services around the beginning of the 2000s. Well-known examples include Salesforce, Microsoft Azure and Adobe Systems. "The commercial advantages are impressively demonstrated by Adobe. The company has doubled its revenues to more than 9 billion euros since it switched its sales model to SaaS in mid-2013," says Schwarz. This business model was also quickly adopted outside of the IT sector - especially where digital goods are traded.

Lower costs for consumers, more stable revenues for companies

For the customer, aaS primarily offers cost advantages. On the one hand, a service eliminates the need for high initial investments, on the other hand, the product - whether software, database or media library - is continuously updated. "Thanks to PaaS, companies can now reduce their data center costs by up to 70 percent. This can be an existential advantage, especially for start-ups: Instead of having to raise millions of dollars, founders can realize their ideas with much more modest sums," says Schwarz. In addition, the provider guarantees the security and stability of the infrastructure of his service.

At the same time, service providers benefit in particular from more stable and cyclically resistant revenues. One reason for this is that the model creates stronger customer loyalty by creating a greater dependency on the service. "For example, a Spotify user who sorts his or her favourite songs into playlists by hand over a period of months will think twice before switching to the competition such as Apple’s iTunes," Schwarz illustrates. In addition, aaS has proven to be an effective tool in the fight against pirated copies, which music, film and software producers in particular have had to contend with. This is one of the reasons why video games for Sony and Microsoft consoles are now sold as aaS subscriptions. Consumers are increasingly acceptant of this.

The analogue world offers more and more services

However, Schwarz emphasizes that aaS can also be used successfully outside of digital products and entertainment media. "Among the up-and-coming companies in the residential space sector in metropolises, for office space or car sharing models, one can find such service providers as Uber and Lyft," says Schwarz. The fund manager also draws attention to WeWork, a company founded in 2010 that provides shared workplaces and is now the largest office property owner in New York and London. Similar to the idea of a sharing economy, according to Schwarz, it is the younger generation in particular that not only accepts the business model, but even prefers it to traditional products.

With his fund, which prefers companies with structural growth, Schwarz wants to invest in companies with this business model in the future as well. Today, around 20 percent of its portfolio companies already follow similar practices, including stocks such as Amazon, Adobe, Salesforce, Netflix and Spotify.