Why did venture capitalists believe that subscriptions are the clearest way around a difficult advertising world?

How did they evaluate the startup adopted in this model?

Why do they estimate that an existing subscriber of Netflix is worth higher than of Spotify?

W Price 1193 hen Microsoft The valuation math illustrates how important sub curring, up from 5% before the transition, Adobe CEO leapfrogged Apple scriptions can be. Getting the model right can generate Shantanu Narayen says. last month to be billions of dollars for shareholders. Take the rise of Investors have also learned new ways to evaluate come the world's Netflix (NFLX), which trades at a sky-high 67 times Adobe's stock, freeing the company from earnings met- most valuable com projected earnings for rics that don't gener- pany, the symbol next year. Wall Street ally align with cus- ism was rich, given has become more and The Power of Subscriptions tomer happiness. the pair's inter more bullish with ev- "Retention is the twined history ery passing quarter. The software industry has spent the past decade transitioning to a subscription model. For investors, the payoff has been significant new growth," Narayen But the mile- And, as long as cus- tells Barron's. The stone carried a S&P tomers pay their Company/Ticker Transition Period Change Performance subscription model, he deeper significance about the future: Wall Street has monthly bill, no one is recognized the value of subscriptions over traditional Aug 04-Aug '07 adds, has made the Synopsys/SNPS 21.1% worried about the 33.7% Advent Software/ADVS Oct 04-April 07 72.6 30.5 company more re- sales. commercial success of sponsive, with devel- While Apple investors fret over the latest iPhone its latest show. Ariba/ARBA April 05-May '12 361.3 13.5 opers tracking cus- sales, the market has rewarded Microsoft for locking in While Netflix has Cadence/CONS July 08 July '12 11.2 tomer habita and a regular stream of revenue tied to the cloud and its 0 taught the world how Aspen Technology/AZPN July '09-Aug '15 359.1 135.0 updating software in fice 365 franchise. Those old Windows software boxes? to build a subscription Adobe /ADBE Nov '11- 7927 nearly real time. They've been replaced by shiny mobile apps tied to business from scratch, Autodesk /ADSK Oct 13- 229.4 59.2 "What is so obvi- monthly payments. Adobe (ADBE) has Intuit / INTU Aug '14 146.5 35.3 ous in retrospect with Sure enough, Microsoft (ticker: MSFT) shares rose demonstrated that old Model N/MODN Feb 15- 31.2 31.6 & transaction-based 3.8% in November, even as Apple (AAPL) tumbled. De companies can re- PTC/PTC April 15- 128.3 29.3 software model is that spite Apple's user base of one-billion-plus iPhones, the make themselves with PROS Holdings/PRO May '15- 47.8 29.1 you're at least two company's shareholders still worry every year about the subscriptions Guidewire Software/ steps removed from next device. It's an exhausting cycle for consumers, In 2013, Adobe GWRE March 17 52.7 13.2 the end customer," investors, and, surely, Apple itself. stopped selling boxed Average 187.8% 44.6% Narayen adds. Subscriptions offer a way off the product hamster versions of its Photo- Sources: JP Morgan Bloomberg wheel. Recurring payments have changed the way that shop and other design Not every company Americans consume software, music, movies, television, software, which cost can be an Adobe or a fitness, clothing, and food. Even tractor maker Deere as much as $2,600. Instead, users are now pushed to pay Netflix, of course. The subscription model itself can't (DE) is trying to sell subscriptions to farmers. And the from $10 to $50 a month for access to the products. generate demand or lower the cost of doing business. trend goes beyond Corporate America. Don Ward, who Customers complained loudly at first. They didn't like And as subscriptions proliferate, investors need to dig has shined shoes for 18 years just outside Barron's of the idea of a never-ending rental charge for Photoshop, deeper into the dynamics of their models, says Aswath fices in midtown Manhattan, began offering a subscrip when previously they could pay a one-time fee. Damodaran, a finance professor and valuation specialist tion service in 2010. For $100 a year, customers get un But the lower upfront cost attracted new customers, at New York University's Stern School of Business. limited shines. For $600-the "platinum" service and Adobe earned customer satisfaction by layering new "Many venture capitalists and public investors are customer's get shoeshines for life. value into the subscription at the same price. Adobe's pricing user-based companies on user count, with only "It helps me because I reward my most loyal custom Creative Cloud now includes photo storage in the cloud a few seriously trying to distinguish between good, indif- ers," Ward says. Plus, "who doesn't want to get paid in and mobile apps that syne across multiple devices. ferent, and bad user-based models," Damodaran wrote advance?" In 2012-the last full year it sold boxed software earlier this year. Consumers and businesses have Adobe earned $2.35 a share. This year, It took the software industry a few years to find the found an unlikely alignment through the company is projected to earn 81.82, best way to communicate its subscription strategy. But subscriptions. Merchants can see reve- going to $7.98 next year. the power of the model is now clear. So-called software nue months down the road, while cus- "You're now looked at It's a stunning jump for a 36-year as a service, or Saas, dominates business models. In ad- tomers get convenience, customization, old outfit. The stock's gain has out dition to Microsoft and Adobe, Autodesk (ADSK) and and the promise of ongoing service up- strangely as a software paced earnings growth because inves Intuit (INTU) are among the software producers that grades for one, all-you-can-eat price. company if you're not tors are paying more for every dollar are remaking their businesses as a subscription model. "The entire $80 trillion economy is using a subscription of profit. The stock has risen 793% "You're now looked at strangely as a software com- up for grabs," Tien Tzuo, CEO of business model." since Adobe outlined its subscription pany if you're not using a subscription business model," subscription-billing platform Zuora strategy in 2011. Adobe trades at 31 says Sterling Auty, software analyst at J.P. Morgan. (ZUO), writes in his new book, Sub- -Sterling Auty times next year's earnings projections. J.P. Morgan analyst The transitions have produced stellar results for in- scribed. Zuora's stock is up 30% since In 2012, the multiple was 12. vestors. Auty has tracked 12 subscription transitions it went public in April. Its revenue is "On earnings that are three times since 2001, some of which are ongoing. During the tran- expected to grow 39% this fiscal year, larger, the multiple has tripled," says sitions, the stocks have an average gain of 188%, versus to S234 million. Barry Gill, head of active equities at 45% for the S&P 500. Investors, somewhat belatedly, have discovered the UBS. "All of a sudden, the universe of buyers and the subscription payoff. The market now values Microsoft at frequency of repurchases have expanded. Because of Start-ups are taking subscriptions well beyond the soft- $23 for every dollar of profit it generates, while Apple's that, investors are prepared to pay a higher multiple." ware and tech world. Alan Patricof, a longtime venture price/earnings ratio is mired at a hardware-like 13 times. Some 90% of Adobe's revenue is now classified as re capitalist, an early investor in Apple, and the co-founder QUALITY IS IN OUR DNA UALITY QUALIT QUALI VALT and managing partner of Greyerodt, says where each in-studio class can be $30 or subscriptions are the clearest way around more. Peloton says ita at-home bike is rid- a difficult advertising world. den an average of 10 times a month. "We're living in an environment where Over time, Peloton has added addi- Facebook, Google, and Amazon are suck tional content, including running and ing up so much of the advertising reve stretching. It's starting a yoga program nue," he says. "Subscriptions and e-com at the end of December. The subscription meree are an antidote to that." price has remained constant. Greycroft has more than 200 compa "Never say never, but I see it as our nies in its portfolio. Its past investments golden goose, and that $39 price point is include subscription services Plated and sacrosanct to me," Peloton CEO and co- Trunk Club. founder John Foley tells Barron's. "You These days, Patricof sounds particu have to do delightful things and leave larly excited about Osmosis, a medical money on the table." education company founded by former Foley says subscriptions are the key students of the Johns Hopkins School of Peloton's version of at-home fitness. "The Medicine. The company is selling sub monthly service is what you really buy." scriptions to popular videos that guide he says. "That was the flaw with the old students through anatomy and other core models. It was just hardware." medical school classes. Osmosis is now Some of Peloton's subscribers use their adding content for residency programs own equipment and stream classes over and continuing education. mobile devices. They pay $19 a month. "Fifty percent of what The six-year-old company's you knew in med school is monthly churn-customer out of date within five defections-is "dramatically years of graduation. Liter- "Retention is the less than 1%," Foley says. ally, it's lifelong learning" new growth." (Netflix doesn't disclose its Osmosis CEO and co- founder Shiv Gaglani says. -Shantanu Narayen, churn, but Morgan Stanley estimates it at 2% to 3% Osmosis' goal is to re- Adobe CEO monthly.) tain medical professionals Earlier this year, Pelo- as customers from school ton raised $650 million, all the way to retirement, with a payment which values the New York-based start- every month or year along the way. up at about $1 billion. An initial public of- Gaglani says his average subscriber fering is the likely next step. tenure has doubled from one year to two Foley wouldn't comment on current in the past 12 months "because we're timing, but the company has previously adding more content that keeps people talked about a 2019 public debut. One engaged longer." He cites streaming pio question is how public markets will react neer Netflix as the model: "Original con to the business model and Peloton's tent driving subscriptions." unique mix of subscription data. Netflix has paved the way for start "We're anxious about the Street un- ups that recognize the value in growing derstanding how beautiful our business up with paying customers by their side model is, because there's nothing else like basically from the start. it." Foley says. "Customers are giving us a 0% inter A Peloton spokeswoman says ita U.S. est loan, and then we're using that loan to bike business is currently profitable, but build out content for them," Gaglani says. the company is planning to invest further in Osmosis recently raised $2.5 million from product, retail, and international opportuni- Patricof's Greycroft and others. ties. "As a result, like most well-capitalized, fast-growth companies, we don't expect to Peloton, the private spin-bike company, show profitability for some time." is further along in its subscription evol Initial public offerings have tripped up tion. The company sells its at-home bike some subscription plays. Blue Apron for $2,000. Users then pay $39 a month to (APRN), the subscription meal service, access classes streamed over a tablet at has fallen almost 90% since its June 2017 tached to the bike. IPO. Blue Apron ultimately spent too Peloton has long argued that the sub much money attracting new customers. scription is a bargain, compared with Cost of acquisition is subscription charges at spin studios like SoulCycle, kryptonite. HAVERFORD QUALITY INVESTING THE HAVER FORD TRUST COMPANY time high in October Can Subscriptions Pull Apple Out of Its Tailspin? Damodaran, the NYU professor, says, "We're letting [companies get the upside of these numbers. But we're A Prime-like deal would make not asking them the questions we need to ask to see if investors and customers happy the numbers pay off." He has calculated the economies of two subscription models: Netflix and Spotify Technology (SPOT). The hares of Apple are down major difference, he writes, is how the companies pay 27% since hitting an all- for content. Netflix pays once and geta economies of scale with every additional subscriber, whereas Spotify's Most of the pain has come cost basis is pegged to the number of song listens. since Nov. 1, when Apple said it "As a result, Netflix derives much higher value from would no longer be reporting unit both existing and new subscribers," he wrote in May. sales for its iPhone, iPad, and After adjusting for costa, Damodaran estimates that Mac devices. an existing Netflix subscriber is worth $609, with new The announcement rattled inves- subscribers worth $398. For Spotify, he gets a value of tors, who have long focused on $109 for existing subs and just $81 for each additional iPhone sales, often to the exclusion of everything else. A wave of Wall Damodaran tells Barron's that it's also important to Street downgrades has hit Apple understand the distribution of usage across a customer stock in recent weeks. base. He says that Uber and Lyft, for instance, can't af "Apple's iconie hardware unit ford to offer subscriptions because a small percentage growth is broadly over for now," of users make up a majority of revenue. If those custom HSBC analyst Erwan Rambourg ers get an all-you-can-cat plan, revenue dries up. "That's wrote last week in downgrading "If churning off the iPhone is be to 24 months. (UBS estimates a what Movie Pass missed," he says. In 2017, the much Apple shares to Hold from Buy. coming more diMcult, then iPhone current 26 months in the U.S. and heralded subscription service began offering a one-a-day Apple fed the narrative by pull units may be less relevant," Gill says. longer abroad.) So what if the com- movie plan for just $10 per month. ing back on its unit sales disclo Investors, with Apple's help, need pany used a subscription that com- "They were offering subscriptions to moviegoers on sures. "The company is, for some to find a better way to value the bines sotware and hardware to the false premise that they were charging more for sub reason, trying to shift the investor installed base. Enter subscriptions. shorten the cycle? Using the iPhones scriptions than the average moviegoer paid. But it was mind-set to revenues," says Barry The company can look to Adobe current average selling price of $798, the avid moviegoer who bought the subscription." Gill, head of active equities at UBS. as a model. In 2011, the Photoshop Apple would have to charge $33 a The stock of MoviePass' parent company was $8,225 One likely reason: Apple custom maker began moving to a subscrip month to capture the equivalent of a a share in October 2017, on a split-adjusted basis. Today, ers are holding on to their iPhones tion model in lieu of its boxed soft 21-month replacement. it trades for two cents. longer than ever. ware. Its stock has soared 793% Now, let's say it offers a discount Now, AMC Entertainment (AMC), the country's And yet no one is worried about since then. on Goldman's Apple Prime package: largest theater chain, is dealing with the aftermath. a shrinking user base for iPhones. Goldman Sachs analysts have S15 instead of $80. For $18 a month, AMC introduced its own subscription program called Consider that while sales of the de pondered an "Apple Prime" subscrip Apple could provide a new phone ev- Stubs A-List. The $20-a-month program allows subscrib vices were flat in Apple's just tion program priced at $30 a month - ery 24 months, along with the best ers to see three movies a week, including more expen ended fiscal year, its services one to combine Apple Music, iCloud services tailor-made for the phone. sive IMAX and 3-D shows. revenue-iCloud, iTunes, and Apple storage, AppleCare warranties, and Apple could do more to integrate its During its November earnings call, AMC said that A Music-jumped 21%, to $37.2 billion. Apple's long-rumored video service. services if more people used them. List was exceeding expectations, with 500,000 sign-ups Indeed, iPhone users may not be Such a bundle could add $18 billion in Customers would be happy. In- in the first five months. That apparently sparked con upgrading as frequently, but they're revenue and 1% to earnings. vestors would be happy. And Apple cerns of a Movie Pass 2.0. AMC shares tumbled 14%, spending more within the ecosystem But Apple can do more. Inves would be back to Steve Jobs' goal of despite generally good news on the earnings front. than ever before. And that means tors would be ecstatic if Apple controlling the full experience "The failure of MoviePass is making it more difficult they're sticking around. brought ita replacement cycle back from hardware to software. -AE for AMC to get its subscription model past investors even though AMC is a much better business model," Da- modaran says. "It has made investors much more con- scious." tiple, rather than a traditional movie theater multiple. And In the latest quarter, A-List helped grow attendance at AMC CEO Adam Aron says the company has done its the reason that subscription multiples are higher is this no AMC, Aron says, a rare feat in an industry that has seen homework and struck a balance between ticket sales and tion that you don't need to find the customers over and over anmaal attendance declines for the past 20 years. subscriptions. A-List subscribers are averaging 2.7 visits again. You've already found them." "I think you're going to continue to see with the a month, he says, in line with company estimates. "The Based on enterprise value, AMC trades at seven times success of A-List, more people going to the movies more vast majority of people coming to AMC will come the next year's Ebitda, or earnings before interest, taxes, de often. That is good for Hollywood, and that's good for us old-fashioned way: one ticket at a time," he says. But in preciation, and amortization. Netflix's comparable multiple as a theater operator," Aron adds. "And it's great for just a few months, roughly 10% of attendees are already is 11. Even if AMC's multiple goes to 10, ita stock is worth consumers." coming from the subscription program. $11, or nearly three times its current value. "Who knows where this will settle out," Aron says. "But Subscriptions, meanwhile, are resonating with youn Tell Us What You Think: Are you part of the subscription you could make a pretty strong case that, if it were to top ger viewers. The company says 27% of A-List subscrib economy? Tell us how at mail@barrons.com, and we may out at 20%, then we ought to be getting a subscription mul ers are 30 or under publish your take. Find out more at barrons.com/mailbag. Joel Antale W Price 1193 hen Microsoft The valuation math illustrates how important sub curring, up from 5% before the transition, Adobe CEO leapfrogged Apple scriptions can be. Getting the model right can generate Shantanu Narayen says. last month to be billions of dollars for shareholders. Take the rise of Investors have also learned new ways to evaluate come the world's Netflix (NFLX), which trades at a sky-high 67 times Adobe's stock, freeing the company from earnings met- most valuable com projected earnings for rics that don't gener- pany, the symbol next year. Wall Street ally align with cus- ism was rich, given has become more and The Power of Subscriptions tomer happiness. the pair's inter more bullish with ev- "Retention is the twined history ery passing quarter. The software industry has spent the past decade transitioning to a subscription model. For investors, the payoff has been significant new growth," Narayen But the mile- And, as long as cus- tells Barron's. The stone carried a S&P tomers pay their Company/Ticker Transition Period Change Performance subscription model, he deeper significance about the future: Wall Street has monthly bill, no one is recognized the value of subscriptions over traditional Aug 04-Aug '07 adds, has made the Synopsys/SNPS 21.1% worried about the 33.7% Advent Software/ADVS Oct 04-April 07 72.6 30.5 company more re- sales. commercial success of sponsive, with devel- While Apple investors fret over the latest iPhone its latest show. Ariba/ARBA April 05-May '12 361.3 13.5 opers tracking cus- sales, the market has rewarded Microsoft for locking in While Netflix has Cadence/CONS July 08 July '12 11.2 tomer habita and a regular stream of revenue tied to the cloud and its 0 taught the world how Aspen Technology/AZPN July '09-Aug '15 359.1 135.0 updating software in fice 365 franchise. Those old Windows software boxes? to build a subscription Adobe /ADBE Nov '11- 7927 nearly real time. They've been replaced by shiny mobile apps tied to business from scratch, Autodesk /ADSK Oct 13- 229.4 59.2 "What is so obvi- monthly payments. Adobe (ADBE) has Intuit / INTU Aug '14 146.5 35.3 ous in retrospect with Sure enough, Microsoft (ticker: MSFT) shares rose demonstrated that old Model N/MODN Feb 15- 31.2 31.6 & transaction-based 3.8% in November, even as Apple (AAPL) tumbled. De companies can re- PTC/PTC April 15- 128.3 29.3 software model is that spite Apple's user base of one-billion-plus iPhones, the make themselves with PROS Holdings/PRO May '15- 47.8 29.1 you're at least two company's shareholders still worry every year about the subscriptions Guidewire Software/ steps removed from next device. It's an exhausting cycle for consumers, In 2013, Adobe GWRE March 17 52.7 13.2 the end customer," investors, and, surely, Apple itself. stopped selling boxed Average 187.8% 44.6% Narayen adds. Subscriptions offer a way off the product hamster versions of its Photo- Sources: JP Morgan Bloomberg wheel. Recurring payments have changed the way that shop and other design Not every company Americans consume software, music, movies, television, software, which cost can be an Adobe or a fitness, clothing, and food. Even tractor maker Deere as much as $2,600. Instead, users are now pushed to pay Netflix, of course. The subscription model itself can't (DE) is trying to sell subscriptions to farmers. And the from $10 to $50 a month for access to the products. generate demand or lower the cost of doing business. trend goes beyond Corporate America. Don Ward, who Customers complained loudly at first. They didn't like And as subscriptions proliferate, investors need to dig has shined shoes for 18 years just outside Barron's of the idea of a never-ending rental charge for Photoshop, deeper into the dynamics of their models, says Aswath fices in midtown Manhattan, began offering a subscrip when previously they could pay a one-time fee. Damodaran, a finance professor and valuation specialist tion service in 2010. For $100 a year, customers get un But the lower upfront cost attracted new customers, at New York University's Stern School of Business. limited shines. For $600-the "platinum" service and Adobe earned customer satisfaction by layering new "Many venture capitalists and public investors are customer's get shoeshines for life. value into the subscription at the same price. Adobe's pricing user-based companies on user count, with only "It helps me because I reward my most loyal custom Creative Cloud now includes photo storage in the cloud a few seriously trying to distinguish between good, indif- ers," Ward says. Plus, "who doesn't want to get paid in and mobile apps that syne across multiple devices. ferent, and bad user-based models," Damodaran wrote advance?" In 2012-the last full year it sold boxed software earlier this year. Consumers and businesses have Adobe earned $2.35 a share. This year, It took the software industry a few years to find the found an unlikely alignment through the company is projected to earn 81.82, best way to communicate its subscription strategy. But subscriptions. Merchants can see reve- going to $7.98 next year. the power of the model is now clear. So-called software nue months down the road, while cus- "You're now looked at It's a stunning jump for a 36-year as a service, or Saas, dominates business models. In ad- tomers get convenience, customization, old outfit. The stock's gain has out dition to Microsoft and Adobe, Autodesk (ADSK) and and the promise of ongoing service up- strangely as a software paced earnings growth because inves Intuit (INTU) are among the software producers that grades for one, all-you-can-eat price. company if you're not tors are paying more for every dollar are remaking their businesses as a subscription model. "The entire $80 trillion economy is using a subscription of profit. The stock has risen 793% "You're now looked at strangely as a software com- up for grabs," Tien Tzuo, CEO of business model." since Adobe outlined its subscription pany if you're not using a subscription business model," subscription-billing platform Zuora strategy in 2011. Adobe trades at 31 says Sterling Auty, software analyst at J.P. Morgan. (ZUO), writes in his new book, Sub- -Sterling Auty times next year's earnings projections. J.P. Morgan analyst The transitions have produced stellar results for in- scribed. Zuora's stock is up 30% since In 2012, the multiple was 12. vestors. Auty has tracked 12 subscription transitions it went public in April. Its revenue is "On earnings that are three times since 2001, some of which are ongoing. During the tran- expected to grow 39% this fiscal year, larger, the multiple has tripled," says sitions, the stocks have an average gain of 188%, versus to S234 million. Barry Gill, head of active equities at 45% for the S&P 500. Investors, somewhat belatedly, have discovered the UBS. "All of a sudden, the universe of buyers and the subscription payoff. The market now values Microsoft at frequency of repurchases have expanded. Because of Start-ups are taking subscriptions well beyond the soft- $23 for every dollar of profit it generates, while Apple's that, investors are prepared to pay a higher multiple." ware and tech world. Alan Patricof, a longtime venture price/earnings ratio is mired at a hardware-like 13 times. Some 90% of Adobe's revenue is now classified as re capitalist, an early investor in Apple, and the co-founder QUALITY IS IN OUR DNA UALITY QUALIT QUALI VALT and managing partner of Greyerodt, says where each in-studio class can be $30 or subscriptions are the clearest way around more. Peloton says ita at-home bike is rid- a difficult advertising world. den an average of 10 times a month. "We're living in an environment where Over time, Peloton has added addi- Facebook, Google, and Amazon are suck tional content, including running and ing up so much of the advertising reve stretching. It's starting a yoga program nue," he says. "Subscriptions and e-com at the end of December. The subscription meree are an antidote to that." price has remained constant. Greycroft has more than 200 compa "Never say never, but I see it as our nies in its portfolio. Its past investments golden goose, and that $39 price point is include subscription services Plated and sacrosanct to me," Peloton CEO and co- Trunk Club. founder John Foley tells Barron's. "You These days, Patricof sounds particu have to do delightful things and leave larly excited about Osmosis, a medical money on the table." education company founded by former Foley says subscriptions are the key students of the Johns Hopkins School of Peloton's version of at-home fitness. "The Medicine. The company is selling sub monthly service is what you really buy." scriptions to popular videos that guide he says. "That was the flaw with the old students through anatomy and other core models. It was just hardware." medical school classes. Osmosis is now Some of Peloton's subscribers use their adding content for residency programs own equipment and stream classes over and continuing education. mobile devices. They pay $19 a month. "Fifty percent of what The six-year-old company's you knew in med school is monthly churn-customer out of date within five defections-is "dramatically years of graduation. Liter- "Retention is the less than 1%," Foley says. ally, it's lifelong learning" new growth." (Netflix doesn't disclose its Osmosis CEO and co- founder Shiv Gaglani says. -Shantanu Narayen, churn, but Morgan Stanley estimates it at 2% to 3% Osmosis' goal is to re- Adobe CEO monthly.) tain medical professionals Earlier this year, Pelo- as customers from school ton raised $650 million, all the way to retirement, with a payment which values the New York-based start- every month or year along the way. up at about $1 billion. An initial public of- Gaglani says his average subscriber fering is the likely next step. tenure has doubled from one year to two Foley wouldn't comment on current in the past 12 months "because we're timing, but the company has previously adding more content that keeps people talked about a 2019 public debut. One engaged longer." He cites streaming pio question is how public markets will react neer Netflix as the model: "Original con to the business model and Peloton's tent driving subscriptions." unique mix of subscription data. Netflix has paved the way for start "We're anxious about the Street un- ups that recognize the value in growing derstanding how beautiful our business up with paying customers by their side model is, because there's nothing else like basically from the start. it." Foley says. "Customers are giving us a 0% inter A Peloton spokeswoman says ita U.S. est loan, and then we're using that loan to bike business is currently profitable, but build out content for them," Gaglani says. the company is planning to invest further in Osmosis recently raised $2.5 million from product, retail, and international opportuni- Patricof's Greycroft and others. ties. "As a result, like most well-capitalized, fast-growth companies, we don't expect to Peloton, the private spin-bike company, show profitability for some time." is further along in its subscription evol Initial public offerings have tripped up tion. The company sells its at-home bike some subscription plays. Blue Apron for $2,000. Users then pay $39 a month to (APRN), the subscription meal service, access classes streamed over a tablet at has fallen almost 90% since its June 2017 tached to the bike. IPO. Blue Apron ultimately spent too Peloton has long argued that the sub much money attracting new customers. scription is a bargain, compared with Cost of acquisition is subscription charges at spin studios like SoulCycle, kryptonite. HAVERFORD QUALITY INVESTING THE HAVER FORD TRUST COMPANY time high in October Can Subscriptions Pull Apple Out of Its Tailspin? Damodaran, the NYU professor, says, "We're letting [companies get the upside of these numbers. But we're A Prime-like deal would make not asking them the questions we need to ask to see if investors and customers happy the numbers pay off." He has calculated the economies of two subscription models: Netflix and Spotify Technology (SPOT). The hares of Apple are down major difference, he writes, is how the companies pay 27% since hitting an all- for content. Netflix pays once and geta economies of scale with every additional subscriber, whereas Spotify's Most of the pain has come cost basis is pegged to the number of song listens. since Nov. 1, when Apple said it "As a result, Netflix derives much higher value from would no longer be reporting unit both existing and new subscribers," he wrote in May. sales for its iPhone, iPad, and After adjusting for costa, Damodaran estimates that Mac devices. an existing Netflix subscriber is worth $609, with new The announcement rattled inves- subscribers worth $398. For Spotify, he gets a value of tors, who have long focused on $109 for existing subs and just $81 for each additional iPhone sales, often to the exclusion of everything else. A wave of Wall Damodaran tells Barron's that it's also important to Street downgrades has hit Apple understand the distribution of usage across a customer stock in recent weeks. base. He says that Uber and Lyft, for instance, can't af "Apple's iconie hardware unit ford to offer subscriptions because a small percentage growth is broadly over for now," of users make up a majority of revenue. If those custom HSBC analyst Erwan Rambourg ers get an all-you-can-cat plan, revenue dries up. "That's wrote last week in downgrading "If churning off the iPhone is be to 24 months. (UBS estimates a what Movie Pass missed," he says. In 2017, the much Apple shares to Hold from Buy. coming more diMcult, then iPhone current 26 months in the U.S. and heralded subscription service began offering a one-a-day Apple fed the narrative by pull units may be less relevant," Gill says. longer abroad.) So what if the com- movie plan for just $10 per month. ing back on its unit sales disclo Investors, with Apple's help, need pany used a subscription that com- "They were offering subscriptions to moviegoers on sures. "The company is, for some to find a better way to value the bines sotware and hardware to the false premise that they were charging more for sub reason, trying to shift the investor installed base. Enter subscriptions. shorten the cycle? Using the iPhones scriptions than the average moviegoer paid. But it was mind-set to revenues," says Barry The company can look to Adobe current average selling price of $798, the avid moviegoer who bought the subscription." Gill, head of active equities at UBS. as a model. In 2011, the Photoshop Apple would have to charge $33 a The stock of MoviePass' parent company was $8,225 One likely reason: Apple custom maker began moving to a subscrip month to capture the equivalent of a a share in October 2017, on a split-adjusted basis. Today, ers are holding on to their iPhones tion model in lieu of its boxed soft 21-month replacement. it trades for two cents. longer than ever. ware. Its stock has soared 793% Now, let's say it offers a discount Now, AMC Entertainment (AMC), the country's And yet no one is worried about since then. on Goldman's Apple Prime package: largest theater chain, is dealing with the aftermath. a shrinking user base for iPhones. Goldman Sachs analysts have S15 instead of $80. For $18 a month, AMC introduced its own subscription program called Consider that while sales of the de pondered an "Apple Prime" subscrip Apple could provide a new phone ev- Stubs A-List. The $20-a-month program allows subscrib vices were flat in Apple's just tion program priced at $30 a month - ery 24 months, along with the best ers to see three movies a week, including more expen ended fiscal year, its services one to combine Apple Music, iCloud services tailor-made for the phone. sive IMAX and 3-D shows. revenue-iCloud, iTunes, and Apple storage, AppleCare warranties, and Apple could do more to integrate its During its November earnings call, AMC said that A Music-jumped 21%, to $37.2 billion. Apple's long-rumored video service. services if more people used them. List was exceeding expectations, with 500,000 sign-ups Indeed, iPhone users may not be Such a bundle could add $18 billion in Customers would be happy. In- in the first five months. That apparently sparked con upgrading as frequently, but they're revenue and 1% to earnings. vestors would be happy. And Apple cerns of a Movie Pass 2.0. AMC shares tumbled 14%, spending more within the ecosystem But Apple can do more. Inves would be back to Steve Jobs' goal of despite generally good news on the earnings front. than ever before. And that means tors would be ecstatic if Apple controlling the full experience "The failure of MoviePass is making it more difficult they're sticking around. brought ita replacement cycle back from hardware to software. -AE for AMC to get its subscription model past investors even though AMC is a much better business model," Da- modaran says. "It has made investors much more con- scious." tiple, rather than a traditional movie theater multiple. And In the latest quarter, A-List helped grow attendance at AMC CEO Adam Aron says the company has done its the reason that subscription multiples are higher is this no AMC, Aron says, a rare feat in an industry that has seen homework and struck a balance between ticket sales and tion that you don't need to find the customers over and over anmaal attendance declines for the past 20 years. subscriptions. A-List subscribers are averaging 2.7 visits again. You've already found them." "I think you're going to continue to see with the a month, he says, in line with company estimates. "The Based on enterprise value, AMC trades at seven times success of A-List, more people going to the movies more vast majority of people coming to AMC will come the next year's Ebitda, or earnings before interest, taxes, de often. That is good for Hollywood, and that's good for us old-fashioned way: one ticket at a time," he says. But in preciation, and amortization. Netflix's comparable multiple as a theater operator," Aron adds. "And it's great for just a few months, roughly 10% of attendees are already is 11. Even if AMC's multiple goes to 10, ita stock is worth consumers." coming from the subscription program. $11, or nearly three times its current value. "Who knows where this will settle out," Aron says. "But Subscriptions, meanwhile, are resonating with youn Tell Us What You Think: Are you part of the subscription you could make a pretty strong case that, if it were to top ger viewers. The company says 27% of A-List subscrib economy? Tell us how at mail@barrons.com, and we may out at 20%, then we ought to be getting a subscription mul ers are 30 or under publish your take. Find out more at barrons.com/mailbag. Joel Antale