Since we’ve been talking about the value of recurring subscription revenue vs hardware revenue on this board, this Barron’s article seemed appropriate (it even mentions ZUO which has been talked about a little). It talks about how a wave of subscription models has delivered value to both businesses and customers. I definitely wouldn’t ignore a company selling hardware, but life is a lot tougher for those businesses.
In 2013, Adobe stopped selling boxed versions of its Photoshop and other design software, which cost as much as $2,500. Instead, users are now pushed to pay from $10 to $50 a month for access to the products.
Customers complained loudly at first. They didn’t like the idea of a never-ending rental charge for Photoshop, when previously they could pay a one-time fee.
But the lower upfront cost attracted new customers, and Adobe earned customer satisfaction by layering new value into the subscription at the same price. Adobe’s Creative Cloud now includes photo storage in the cloud and mobile apps that sync across multiple devices.
In 2012—the last full year it sold boxed software—Adobe earned $2.35 a share. This year, the company is projected to earn $6.82, going to $7.98 next year.
Since we’ve been talking about the value of recurring subscription revenue vs hardware revenue on this board, this Barron’s article seemed appropriate
Uh oh! If even Barrons has discovered what we’ve known about for two years, is that a contrarian signal.
There is a downside here, likely tiny.
I work for a small company, ~$5m in annual revenue. Our marketing budget is correspondingly tiny, and marking is me (part time) and a new hire.
We have old licenses for the Adobe programs – InDesign, PhotoShop, whatever. We’re not in position to pay an annual fee for the current versions – we’re getting by with the features offered by those programs from a few years ago.
As an investor I’m a fan of the cloud migration. As the responsible party for our marketing results and investments I don’t like the subscription prices.
to continue reading
For me that’s one subscription that’s not worth making, buying the hardware version was not worth it either. On the other hand, I’ve used subscription based servers for over 20 years and I think it is a fantastic deal once you find the right provider. The first three lasted a short time, one was Mac oriented instead of universal and expensive to boot, the second was really cheap and went broke. The third used non-mainstream (non x86) processors and lasted less than two months. My current one is well over 15 years old. For the same $35 I’m getting more and more as time goes by, faster machines, more memory, offsite backup, offsite emergency server and the help desk is great for the very few occasions when I need them. They update all the software which is the only thing that is occasionally disruptive when my old code stops working on new versions. But that forces me to stay up-to-date which is a good thing.* Consider the alternative, home installed hardware. If I were an enterprise it would mean hiring a priesthood to tend the beast and dealing with a dozen software providers!
There are plenty other subscriptions which can quickly become a drain of cash, news, films, music, if you don’t use them fully. Banks (a centuries old subscription service) nickel and dime customers to death.
For the investor, which is what interests us here, subscription revenue is regarded as “higher quality” than hardware revenue because it is less lumpy, more predictable.
Not all subscriptions are as sticky. For example I didn’t trust Mongo’s freemium revenue but Atlas is a game changer. One can consider using the open source code without paying the freemium subscription but you can’t use Atlas without a subscriptions.
My point is, don’t be dazzled by “subscription.” Be selective. They come in many varieties, not all good.
- Apple updates Mac software sooner than my web host meaning that often I have to update the local version before the webhost updates the server so I’m prepared for it.
BTW, way back pre 1956 you could only get IBM equipment on a subscription basis. IBM only rented their machines (monthly), didn’t sell them! It took government action to get IBM to sell…
IBM consent decree
Tom Watson Sr. sure knew what he was doing!
Im curious how companies make the allocation decisions if a software offers subscription.
If it’s a new application, this would be more difficult than adding services to an existing vendor where benefits have been proven. Probably why land and expand is a successful strategy.
What calculation is the customer making with subscription costs? NPV with forever payments? Or, contract length of just a year or two?
Subscription is expense as well as all the installation and misc ramp up and now more and more there will be some rented cloud space to go with the software, so does that exclude common capital hurdles like ROIC and EVA?