Innovative businesses offering new services to the public — and whose growth is measured in subscribers — are confronted with tricky math and public and investor relations tied to a business model that will have radically different life stages.

In the satellite sector, early stage new service subscriber-based businesses — DirecTV, EchoStar and Sirius XM at different points — and broadband providers Hughes Network Systems and WildBlue more recently, propose new services to the public on a direct-to-retail basis and are faced with penetrating markets often already saturated. Their competitors are terrestrial providers to which the target market is used to paying monthly bills and receiving what initially seems like an equivalent service offering to the new service being proposed.

These new market entrants must expend enormous amounts of capital to build out their networks in the space and ground segments and market their services. The key marketing tasks in this early stage of development are to differentiate the service from terrestrial incumbent competition and to develop market awareness and buzz in an effort to attract early adopters of the service — the low-hanging fruit. This number may be as little as 1 percent of the potential market, but it is enormously influential on the rest. The capital expenditure per early subscriber is great, but the need to build subscribers in the early stage of existence is readily explicable. The provider will be telling a ‘growth/market share story’ to prospective investors.

Following this initial phase, the company continues in a growth phase, with costs per subscriber decreasing as buzz is achieved; network implementation costs expended and beginning to be amortized; and early adopters eager to try out the new service and incidentally aiding the company’s marketing to the next wave of adopters.

At some point, though, the effect stops, and cost per subscriber starts to rise again. Why? The low-hanging fruit — early adopters and their followers — have been picked. The market is substantially penetrated and mature, new subscribers are higher-hanging fruit — people basically content (or not fatally discontent or inert) with their existing competitor service. This is a labor and marketing intensive, high-cost, low-yield effort. For that reason, companies in this mature phase typically decrease their marketing expenditures and focus on the profitability of existing subscribers. Like a yellow star on the main sequence of the Hertzsprung-Russell diagram of stellar evolution, they can consume their existing fuel profitably for a long time without exterior renewal.

In consulting firm terms, they are cash cows. They are also be said to be in harvest mode. The company is no longer telling a growth story to its investors but a profit story. The company is more likely to be publicly held at a mature phase, of course, and given its message to investors, may face pressure to declare dividends.

However, this mature phase of subscription service faces a diminishing return dilemma, as the rate of decrease of cost per subscriber slows, then stops and finally starts to climb again. Why does it climb? Because all the low- and even mid-hanging fruit has been picked, the service faces price pressure and may be viewed increasingly as a commodity — with accompanying lower margins — and the only path to growth is offering new, expensive features to existing subscribers and actively pulling new subscribers away from competitor services, an expensive undertaking in marketing, promotions and new services. Profitability may increase as subscriber numbers flatten or even decrease.

A different problem confronts companies that have flipped into harvest mode before attaining profitability. In that case, the company is trying to tell a profit story to investors when, by rights, it should still be telling a growth story — and without the profits to show for it. Inevitably, it is speaking to investors who may be looking for dividends the company may not be able to pay, while being unable to attract investors seeking high growth opportunities. A company in this situation may gain subscribers while losing money, and nevertheless, generate free cash flow that may fool the markets for a time. The situation is the opposite of that of Microsoft, for example, which for years positioned itself as a growth company to investors while clearly in a saturated market, profitability phase.