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How Subscriptions Are Remaking Corporate America

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 They’ve been replaced by shiny mobile apps tied to monthly payments.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.

The market never knows how to price Apple. This time may be no different. Either way, it’s about time investors started caring about cash flow.

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 jump for Adobe is really eye opening. I knew their subscription service was going well, but I didn’t know how well.

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.

It’s a stunning jump for a 36-year-old outfit. The stock’s gain has outpaced earnings growth because investors are paying more for every dollar of profit. The stock has risen 793% since Adobe outlined its subscription strategy in 2011. Adobe trades at 31 times next year’s earnings projections. In 2012, the multiple was 12.

This is the quote that went viral.

“Retention is the new growth,” Narayen tells Barron’s. The subscription model, he adds, has made the company more responsive, with developers tracking customer habits and updating software in nearly real time.

“What is so obvious in retrospect with a transaction-based software model is that you’re at least two steps removed from the end customer,” Narayen adds.
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