Pro Analysis

Santoli: ‘Subscription Economy’ sweeping across Wall Street; Amazon sets enviable standard

Amazon Prime
Daniel Acker | Bloomberg | Getty Images

Just selling a product or service to a customer is so yesterday. The trendiest thing today is offering customers an all-inclusive bundle of stuff for a regular fee.

Performance-minded executives are embracing the Subscription Economy as a way to capture a stable revenue stream while exploiting the network efficiencies of pervasive technology. And investors like the economics enough that they place far higher valuations on the companies that can pull it off - which makes more CEOs try to pull it off. And so on.

You've heard of "software as a service." It now seems much of the business world is edging toward "everything as a service." A few examples of how this theme is gathering momentum on Wall Street:

-Goldman Sachs analysts this month argued for the creation of "Apple Prime," a $50-per-month package including one iPhone a year, Apple Music, Apple TV and iTunes video offerings.

Thus Apple could defend against a flattening of smartphone demand and bind customers who own the one billion iPhones now in circulation to the company indefinitely.

Clearly, Amazon Prime - the $99 annual font of free shipping, video and other goodies - looms over this discussion. It's just one lucrative service Amazon boasts, along with its Amazon Web Services cloud business, which operates a similar monthly-fee model hosting other companies' digital operations.

-This is also what's behind every mature enterprise-tech company promoting its "cloud strategy," the way every aged company in 1999 boasted of its "digital strategy" and a decade ago pitched its "mobile strategy."

One of the vaunted exemplars of such a shift is Adobe Systems, which in recent years transitioned from one-time software-license sales to a cloud subscription approach. The move has paid off. Adobe shares are one of the best performers of recent years. In 2012, their forward price-earnings multiple was 15; today it exceeds 28.

Adobe Systems, 3 years

And so IBM and Oracle and others – with P/E multiples of 14 or below, tout their cloud business (as they define it) growing from small bases.

-The media newsletter Redef a few months ago made the case for "Disney as a service," a direct-to-consumer subscription bundle that would corral much of the video content it now licenses to Netflix and other networks.

The author of the piece was Matthew Ball, who has since become head of Amazon Studios. He argued: "This Disney subscription service will likely go far beyond just video content. It will also bundle in access to all Disney comics, books, apps, digital games and albums (Frozen!), as well as Disney's network television portfolio. In addition, subscribers will benefit from discounted theme park passes and merchandise promotions, and in time, the ability to purchase 'day & date' theatrical content, too."

While Walt Disney CEO Bob Iger has openly mulled ways to go "over the top" of the pay-TV bundle, there are no firm indications of so radical an approach being taken.

In less-dramatic fashion, AT&T's planned purchase of Time Warner heads in this direction. The premise is to wrap wireless service and video content more tightly.

For AT&T, the subscription-renewal treadmill is exhausting, a near zero-sum game among four big players. Owning content brands such as HBO – which enjoy far more loyalty than AT&T phone service does – becomes an edge. For Time Warner, the allure is direct access to customers, buffering against price or subscribership erosion from selling through other distributors.

There's a slight irony here: When AOL bought Time Warner in that bubble-topping merger in early 2000, AOL CEO Steve Case said the one word that defined the deal was "subscriptions." An idea perhaps before its time, and a merger executed at an absurdly awful valuation, but not wholly wrong.