#technology | #privacy

Garmin's decision to launch Garmin Connect+ is the final sign, if we needed one, that the period of 'free' apps is over.

Historically, Garmin has positioned itself against 'subsidised hardware with a subscription' models, such as WHOOP, with a premium-priced hardware model. The software, we understood, came free.

The core complaint from Garmin's hitherto loyal customer base is 'betrayal'. Having watched Garmin pull some of its mapping services into a premium tier, the concern is that this is a slippery slope with the full potential of a (still) premium-priced smartwatch only obtainable with a subscription.

The adage ‘if you’re not paying for the product, you are the product' ought to be retired. Following the Apple model, Garmin now (1) sells premium-priced hardware, (2) sells, at least in my usage, a poor set of subscription services, and (3) collects significant amounts of private data.

If customers feel ‘betrayed’ that they bought hardware solely on the first of these premises, why should they doubt that the second will not eventually lead to the third?

The stock market has noticed. Since 2022, GRMN has doubled. Part of this reflects the (erroneous to me) belief that the Apple Watch represented an existential threat to Garmin's model. No one who has used these two devices can seriously see them in competition, especially at the high end of the market. The Apple Watch, Ultra or not, is little more than a convenient interface with iOS. For a start, it’s square. Most importantly, the battery life is awful. And the lack of on-the-fly mapping remains a significant drawback.

The problem for consumers, however, is that GRMN now trades at 27x earnings and yields little more than 1.5%. The PEG is close to 4x. That implies a significant acceleration in cash flow growth in an economy that has hardly been on its knees. This is not a company coming out of a recession. It’s peak multiples on high cyclically adjusted earnings.

To support valuations this high, management teams have a straightforward short-term lever: extract more from the existing subscriber base.

We can see this initially in Garmin's hardware strategy. Look at their niche outdoor handhelds. Why is there no integrated GPSMAP-Alpha series when this is technologically feasible? Most outdoor walkers need dog tracking, and don’t need multiple-day battery life. The answer is undoubtedly that it is better to sell two devices.

However, the rubber meets the road in high-margin recurring cash flows from subscription services. Hence, Garmin Connect+. The stock market appears convinced. Perhaps S7 E1 of Black Mirror, 'Common People', hits the nail on the head.

Private equity is onto this.

Take MyFitnessPal. Once largely free, it now has a Premium and a Premium+ tier. This is starting to sound like the trim levels in an Audi, with ‘Prestige’ yet to come. Francisco Partners bought MFP from Under Armour in 2020 for a stated “$345 million”, a deal lauded as 2021 “Health & Fitness deal of the year”.

In classic PE fashion, MFP has quietly expanded into the digital nutrition sector. In 2024, it bought a meal-planning startup called Intent as a prelude to introducing its Premium+ tier. The 200 million+ reported MFP users provide a large surface area for their owners to 'milk'. I assume they argue that adding extra services increases customer value.

Similar transactions can be seen elsewhere in the sector.

Most recently, Komoot, the German mapping app, was sold to Bending Spoons earlier this year. Komoot prided itself on its edgy independence. Bending Spoons, owners of other large 'surface area' digital subscriber businesses like Evernote and WeTransfer, cites Andre Agassi, Bradley Cooper, Eric Schmidt, John Burbank, and Xavier Niel among its investors.

As Spotify announces further price rises, it's clear that the pressure of returns, whether the ultimate owners are the stock market or private equity, is placing pressure on companies to yield up and 'milk' the customer base. SPOT has more than doubled since 2021 and risen almost 700% since the lows in 2002. It's another stock the market got all wrong because of Apple fears.

There isn’t anything nefarious going on here. It's simply the logical consequence of a bull market at play. Things could never be free forever.

But the stock market's high multiples, enjoyed and cheered by the average retail investor, have an uncanny capacity to haunt us like some return of the repressed. Capital needs a return. When the starting point is so high, the pressure to 'yield up' or 'milk' increases, and management teams are forced to make decisions not in the consumer’s best interests.

I imagine companies will get away with this for a time. From what can be determined, the strategy of Bending Spoons, namely taking high 'surface area' subscriber bases, stripping out costs, injecting AI, and yielding up, seems to me to be a species of financial genius. Subscribers like being part of a tribe. When Premium+ is dangled in front of you every time you click on that tab you can't use because you are only on Premium, it feels like the community is excluding you. It feels sub-optimal.

But there are surely limits to this. Consumers will only take so much. One of the problems with Garmin Connect+ is that it's not very good imo. Garmin Outdoors Maps+ is a bunch of additional map layers that must be navigated via Garmin's (imo awful) Explore app. Consumers will eventually be able to calibrate what additional services make the upgrade unnecessary relative to the investment in the platform. At the moment, they struggle to do this. But they will catch up.

As Sky, the pay-TV provider, found out in the UK, subscriber businesses ultimately require enormous investment in customer care. One of the promises of 'Premium' tiers is better customer service, a 'priority' in many cases. But does the investment in responsiveness actually match the promise? How well will this scale? I have serious doubts.

But the other limit is more concerning. This relates to consumer data and its usage.

I come back to Garmin's example. How long before health data becomes a target for 'milking'?

Apple is often chosen by privacy-focused people as the least-bad mobile OS option. But Apple collects an enormous amount of data; it just doesn't use it yet.

As we turn to our pension portfolios and note the astonishing returns over the last 10 years, we might consider to what extent we are still really to pay for this. By hook or by crook, the stock market will have this back.