How Subscriptions Are Remaking Corporate America

How Subscriptions Are Remaking Corporate America

Excerpts from the article by Alex Eule on Barrons

When Microsoft leapfrogged Apple last month to become the world’s most valuable company, the symbolism was rich, given the pair’s intertwined history.

But the milestone carried a deeper significance about the future: Wall Street has recognized the value of subscriptions over traditional sales.

While Apple investors fret over the latest iPhone sales, the market has rewarded Microsoft for locking in a regular stream of revenue tied to the cloud and its Office 365 franchise. Those old Windows software boxes? They’ve been replaced by shiny mobile apps tied to monthly payments.

Sure enough, Microsoft (ticker: MSFT) shares rose 3.8% in November, even as Apple (AAPL) tumbled. Despite Apple’s user base of one-billion-plus iPhones, the company’s shareholders still worry every year about the next device. It’s an exhausting cycle for consumers, investors, and, surely, Apple itself.

Subscriptions offer a way off the product hamster wheel. Recurring payments have changed the way that Americans consume software, music, movies, television, fitness, clothing, and food. Even tractor maker Deere (DE) is trying to sell subscriptions to farmers. And the trend goes beyond Corporate America. Don Ward, who has shined shoes for 18 years just outside Barron’s offices in midtown Manhattan, began offering a subscription service in 2010. For $100 a year, customers get unlimited shines. For $500—the “platinum” service—customers get shoeshines for life.

“It helps me because I reward my most loyal customers,” Ward says. Plus, “who doesn’t want to get paid in advance?”

Consumers and businesses have found an unlikely alignment through subscriptions. Merchants can see revenue months down the road, while customers get convenience, customization, and the promise of ongoing service upgrades for one, all-you-can-eat price.

“The entire $80 trillion economy is up for grabs,” Tien Tzuo, CEO of subscription-billing platform Zuora (ZUO), writes in his new book, Subscribed. Zuora’s stock is up 30% since it went public in April. Its revenue is expected to grow 39% this fiscal year, to $234 million.

Investors, somewhat belatedly, have discovered the subscription payoff. The market now values Microsoft at $23 for every dollar of profit it generates, while Apple’s price/earnings ratio is mired at a hardware-like 13 times.

The valuation math illustrates how important subscriptions can be. Getting the model right can generate billions of dollars for shareholders. Take the rise of Netflix (NFLX), which trades at a sky-high 67 times projected earnings for next year. Wall Street has become more and more bullish with every passing quarter. And, as long as customers pay their monthly bill, no one is worried about the commercial success of its latest show.

Read the full article on Barrons