I remember reading an article over a decade ago that discussed the transition of anti-virus software from a perpetual license for updates to a subscription-based system. Nowadays, that model has shifted to be completely free anti-virus software for private, non-commercial users in order to safeguard the Internet as a whole.
Even subscription-based online games have moved to a free-to-play model with micro-transactions. So it is not just anti-virus that went from subscription to free. The subscription model does work for certain kinds of businesses, such as Adobe Systems Incorporated (NASDAQ:ADBE), which recently reported earnings that validated the shift to the subscription model.
Subscription model sees early success
Adobe Systems Incorporated (NASDAQ:ADBE) is actually pretty late to the game considering the type of software it creates. Photoshop and other creative programs are so expensive and so feature-filled that it just makes sense to have a recurring license that can have incremental updates. That way, users will never have to make a decision about keeping their old product, making Adobe no money, or buying the newest one with features they may or may not need.
Adobe Systems Incorporated (NASDAQ:ADBE)’s subscription goal for 2013 is very steep, and it is not certain that the company will be able to meet this goal. Considering the company is making money, buying back stock, and generally chugging along nicely, missing on subscription numbers might not do much to the stock. It really comes down to whether analyst predictions incorporate its target 100% or not. I think it is far too difficult to ascertain whether Adobe will be able to achieve 1.25 million subscribers by the end of 2013, but the goal is ambitious enough to warrant caution.
One of the more interesting things I witnessed on the earnings conference call was that most of the sign-ups have been individuals. The company wants to expand efforts to sign over teams. It makes sense for professional teams versus private hobbyists to go with a subscription as it gives them access to all the newest features and smooths out their expenses instead of spiking whenever a new version comes out. It should not be hard to convert group license holders to shift to the subscription model, but my concern is why they have not already done so.
I liked Adobe Systems Incorporated (NASDAQ:ADBE) at $30, but at $44 it strikes me as expensive, especially since I remain hesitant on whether it can meet its own goal. The company is not a bad one, but all the recent price action has made the stock far worse than the company. I cannot say it is going down, but it seems expensive.
Subscription model makes an exit
Activision Blizzard, Inc. (NASDAQ:ATVI) is a stock I have written a lot about and have been extremely bullish on up until a few weeks ago, when I recommended reducing position sizes. The stock has fallen since then, which I do not attribute to the company specifically.
The company does not have a major game release until the fall with Call of Duty Ghosts, which might break sales records but will not be something we haven’t seen before. Activision Blizzard, Inc. (NASDAQ:ATVI) does not have a lot of titles and it needs Call of Duty to always break records to justify its top spot among video game stocks, and lack of innovation can chip away at gamers looking for something that feels fresher.
Skylanders faces pressure from The Walt Disney Company (NYSE:DIS) Infinity. I think having another competitor is a good thing, because it can draw more children to that style of gaming. However, there is a risk that it will at least stymie growth.
All of this is against the backdrop of falling subscription rates for World of Warcraft. Most of the drop came in Asia where it has far more volatility and lower revenue per subscriber, but total subscribers are still less than the game’s heyday. The game has no pending expansions, and I am sure plenty of players are losing interest. World of Warcraft will be killed by sheer age. There is just too much other stuff to play over the years to keep something going on permanently, especially as free-to-play becomes the new standard.
Activision Blizzard, Inc. (NASDAQ:ATVI) is coming out with World of Warcraft Hearthstone, which is a free-to-play online trading card game. The potential for micro-transactions is huge, but the revenue from this will trickle in over time. The longevity of games like this is impressive, but the quarter-to-quarter revenue will probably not mitigate more World of Warcraft subscription losses.