Why Apple and Disney Pursue Subscription Services

In 1981, Michael Bloomberg (the former NYC mayor) was laid off as a partner at the Salomon Brothers subsidiary, Phibro Corporation. Armed with several million dollars from the buyout of his equity position in PhiBro, Bloomberg launched a financial services firm called Innovative Market Systems (now Bloomberg L.P.) 

Bloomberg knew that the investor community would pay for well-organized, quickly updated business information and launched his Bloomberg terminals that would provide the type of information that you want to know if you were making an investment (specifically the type of financial data that would be useful in making a short-term investment).

Since the payoff for financial information is so high (imagine you find an idea reading the Wall Street Journal that makes you $10,000, well, the $500 annual subscription paid for itself), Bloomberg knew that he could charge accordingly. The financial cost $1,000 per month, and was instantly profitable because he sold 22 terminals to Merrill Lynch shortly after launch. This gave the company a revenue stream of nearly $264,000 essentially instantly (which in 1982 dollars is analogous to a $500,000 annual income stream today).

Nowadays, there are almost 350,000 terminals in use earning approximately $1,500 each, meaning that the successors to Bloomberg’s initial product now earns over $500 million per year. The scalability of the subscription service business model in general is why Michael Bloomberg has experienced a net worth increase from $10 million to $62 billion over the past forty years.

The executives at Apple, Disney, Netflix, Microsoft, and Amazon know this. Heck, every software company knows this, and that is why the software sector has switched from a one-time licensing/purchase fee to an ongoing monthly subscription fee. 

It is no wonder that Apple and Disney are launching their own content subscription products because it is one of the only ways that multi-billion companies can chart out a course that will lead to the continued prospect of double-digit earnings per share growth. While they won’t be able to charge anywhere near what Bloomberg did for his terminal, the potential market base could be nearly 100x or 1000x as large as Bloomberg’s audience size. 

In 1982, Fortune ran an article arguing that Coca-Cola was fully saturated in its markets and that its best days were behind it because the per capita beverage consumption of Coca-Cola didn’t appear as though it could move much higher. Many analysts are making similar observations about Amazon, Apple, and Disney today due to their sheer size. But Coca-Cola went on to deliver investment returns of 12% annualized since 1982, and subscription models open the doorway for these tech and entertainment giants to keep the growth going for many years to come.

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