Hybrid products consist of both physical and service components. The physical part has intrinsic value — like a car - while the service part complements the usage of the good — like an app for unlocking your car remotely, or summoning it from far away.

Hybrid Product = Intrinsic Good + Software Service

Most of us are familiar with this when we buy a smartphone and it comes with a free operating system. Another less obvious variant might be buying a portion of a house outright, and living in it while we slowly pay off the mortgage and interest.

But there is a new variant that is growing in popularity, and it makes my skin crawl. Companies that make hardware products are beginning to notice something as they build out software ecosystems to keep up with digital trends: that the freemium model can be applied to literally anything.

These include:

  • BMW making you pay a subscription for heated seats.

  • Smartfridges that keep basic features like temperature behind paywall.

  • Apple throttling battery to slow down devices and encourage iCloud upgrades.

  • Consoles ‘regional locking’ to prevent users from playing games purchased in other regions to force rebuys.

I’ve made a longer list below.

In trying to pinpoint down what it is that makes me uncomfortable about these ‘added services’, I realise there is a very fine line between what seems okay, and what doesn’t.

Buy a Ring doorbell, and you get a generic base doorbell. Buy their subscription, and they store the videos for you in the cloud, letting you watch them later. Unnecessary for most, but a cool feature for those who can afford it.

Amazon also gave us a website in 1998 with where you could buy virtually anything, and we happily paid delivery. Fifteen years later and they’ve made ‘free at the point of use’ delivery so commonplace that it is now part of the base service for most. Prime membership makes standard delivery look cripplingly expensive.

These feel okay because these services, although software-based, actually are a service. Why? Perhaps because these services, logically, cost them money to run, so we pay extra.

Another example is ChatGPT Plus, a service that has appeared out of the blue that I now happily pay for each month. Using GPT feels as effortless as a Google Search, despite being many times more expensive to run. Even still, offer me a model as good as GPT-4, and I feel obligated to pay, despite having ChatGPT and Google for free.

But what about other variants? Airlines introduced a freemium model for luggage in 2008, pleasantly allowing passengers to pay for luggage, rather than let them use the free space in the hold. But this price discrimination allowed planes to offer cheaper tickets. It turned out people didn’t need much luggage to begin with.

The thing that feels so wrong about BMW’s heated seats is that they have already built the filaments into your seats before you start paying. An entire lifespan of heat has already been manufactured — they just refuse to turn them on until you pay them each month. What’s worrying is that it’s an example of software interfering with hardware in a way that wasn’t even possible until recently.

Suppose Tesla pioneered the remote ignition switch in 2013. On the Tesla app, owners of the Model-S could now unlock and switch their cars on before leaving the house, and they offered this for free with every model. But what if, in their next over-the-air update, or next model, they put this behind the service paywall? Well now you’ve gotten used to it and you’re factoring it into your daily routine. By definition, it isn’t a necessity — suppose nobody — even the Sultan of Brunei — could do this before the Model-S came out. Tesla are well within their rights to introduce price discrimination for complementary software. It hurts their brand loyalty short-term, but if it makes them more money, it’s on the books (which is why Toyota might be doing this soon).

Ultimately, software-as-a-service enables companies like Netflix to produce new content and improve their offering while you’re subscribed. It allows for better forcasts of revenue, and longer horizon projects. But as this model becomes coupled with hardware, there is tension between exploiting the value of the intrinsic good bought outright and the services that sit on top.

Perhaps this makes me uncomfortable because it’s so effective when there are deep consolidations of power. It makes consumers seem vulnerable, without any obvious reason for regulation - I believe the only adverse pressure against this is the damage it would do to an established brand; to exploit consumers so vicerally.

Either way, I do hope this trend comes to an end.



Freemium Traps:

  • NVIDIA restricting GPU usage for some tasks like mining, despite their capability, forcing consumers to purchase more expensive GPUs for purpose.

  • PlayStation disabling the ability to download one disk on multiple consoles, to eliminate resells (this was considered, there was outrage, but as online purchases become standard, resells have died out anyway).

  • John Deere restricting farmers from simple repairs by preventing access for unauthorised dealers, forcing them into a high-priced market of authorised repairs.

  • Amazon Kindle only offering support for AZW and KFX formats, without offering operability with ePub despite their ubiquity among e-book stores and public libraries, forcing rebuys.

  • Adobe Premier Elements, a video editing software, prevents high quality export formats or some basic tools without a Premier Pro subscription, despite the few lines of code they require to run.

  • Internet routers with higher throughput, custom firmware support, or Quality of Service management built-in, but hidden behind a payment wall.