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At some point in the last decade investors became obsessed with recurring revenue. Why take money from customers once when you can collect their money more than once?
The cynic in me likes to think that businesses like recurring revenues for the same reason customers hate them: they end up charging more that way. I’m still paying $25 monthly for my Blockbuster DVD rental subscription. I know, I know, I’m going to cancel it, just haven’t gotten around to it yet.
The less cynical explanation is that recurring revenue reduces uncertainty. MoneyLemma’s favorite point to make is that uncertainty kills businesses. This is why Boardwalk is the most overrated property in Monopoly. Sure, it’s a huge payout when it hits, but it rarely hits!
Most businesses that enter bankruptcy do so because they run out of money, not because they don’t make money. Making money is different from having money. In 2016 Tesla announced its Model 3 car. Over half-a-million customers put down $100 deposits to buy the car and vanquish all their insecurities. Tesla was definitely going to make money. However, in the time it took to actually manufacture the cars the company nearly went broke. That’s not an exaggeration:
Tesla survived to become a trillion dollar company, of course, but not all are so lucky. Businesses play a perpetual game of Twister, constantly contorting themselves into positions where they have enough cash to pay the bills. One misstep and they have to choose between calling it quits and getting uncomfortably close to a hot cousin (or bankruptcy lawyer).
More generally, smart businesses often sacrifice profit to offload uncertainty. A business can only collect money from customers if it exists; the more uncertainty in the business, the less likely it will exist. Stringer Bell, gang leader from the HBO show The Wire and a better teacher than any business school professor, explains this concept:
Stringer to Marlo: no amount of profit matters if the Feds hit you with life. Protect each other and we’ll have less profit but less failure risk!
Recurring revenue means that cash runs into a company’s coffers like a river fed by melting glaciers. When cash flow is predictable, running a business is infinitely easier. Investors will pay a big premium for a recurring revenue business because they have a better chance of long-term success. That’s why so many businesses are eager to become recurring revenue businesses, and will do so even if it means sacrificing near-term profit.
Recurring revenue is en vogue and it seems every company makes a claim to it. Six Flags CEO Jim Reid-Anderson even told Jim Cramer (MoneyLemma has a love-hate relationship with Jim Cramer) that theme parks are a recurring revenue industry. At first glance this feels like a real desperation move, the CEO equivalent of leaving a mixtape inside Wall Street stock analyst’s lockers (please, please like me). But he’s not wrong. Most of their revenue is recurring in nature. The same customers are coming back to the park every year. Somewhere, though, there has to be a line in the sand. Do tents that sell Halloween costumes or Fourth of July fireworks count as recurring revenue businesses? What about scholastically required TI-83 calculators or urinal cakes? If every business is a recurring revenue business, then the term has no meaning.
The real advantage of a recurring revenue business is that cash flow is predictable. The most extreme example is a mortgage, where a legally agreed upon fixed payment occurs each month. Contracts aren’t necessary, though. Netflix doesn’t have a contract with customers, but they still have highly predictable cash flows. That’s because watching Season 1 Episode 1 of Riverdale is like licking a frozen telephone pole - you’re not going anywhere.
Recurring revenue businesses rely on predictable human behavior to translate to predictable cash flows. Sometimes that means incentivizing outcomes: a discount for an annual subscription or a legal contract for a loan. Often, though, as in the case of Netflix, the enticement is psychological. In an extreme, like Facebook’s advertising business, it’s the case of a product becoming an unpickable wedgie in the social fabric. Even people who want to quit Facebook can’t do it. It would be like cancelling a toilet and going back to using an outhouse. Given the nuance at play, MoneyLemma uses this framework to judge the degree of recurring revenue:
Recurring revenue is a spectrum and many companies are on it. In theory, any company can have repeat customers, even a wedding ring salesman or a plumber with an exposed ass-crack. But for recurring revenue to translate to predictable cash flow, companies need a strong combination of financial and/or behavioral stickiness built into their product or service. That is how a company gets meaningful recurring revenue.
The ultimate recurring revenue business
All of these leads to the real topic of today’s post:
This is Judy Sheindlin, or Judge Judy. America’s adjudicator. She’s Ruth Bader Ginsberg crossed with Lara Croft crossed with David Letterman. She doesn’t take shit from anyone, not a manicurist with a grudge against an ex-roommate and not a deadbeat accordion player behind on alimony. America loves Judge Judy. Anyone interested in understanding why should check out this fantastic profile from New York Magazine, which is loaded with amazing and hilarious stories of Judge Judy Sheindlin (who was a real judge before playing one on TV).
This post isn’t about the woman called Judge Judy, though, it’s about the show called Judge Judy. Judge Judy has aired over 7,000 episodes since its launch in 1996. For the past 11 years it was the #1 first-run show in syndicated television, meaning that every weekday almost 10 million Americans watch her show. That’s 3 million more than Dr. Phil and Ellen combined. Judge Judy even beat Oprah most of the years they overlapped. Daytime television isn’t just regular TV, though, it’s highly routine-based entertainment. It’s less something people look forward to and more something they rely on. They vacuum with it on in the background, they watch as they change their car’s oil, they listen as they soak in a luxurious tub and nibble French chocolates. Ok, I have no idea what people do when they watch Judge Judy, but I know that they watch it with incredible consistency. It’s ambient television, comfort food, a pillar of stability in a chaotic life. From a business perspective, that means whoever airs Judge Judy can basically guarantee advertisers the same each day, which in turn means that revenue is highly predictable. In fact, the revenue is recurring. For such a gem, CBS paid Judge Judy a reported $47 million per year (for 52 days of filming), and an additional $99 million for the library of old episodes.
All of that came to an end earlier this year when Sheindlin’s contract with CBS ran out and Amazon made her an offer for an undisclosed amount. Rather than keep paying for new episodes, CBS has opted to play the hits - just air reruns. Will anybody be able to tell? Sheindlin, meanwhile, is betting that her audience will follow her to Amazon’s IMDB TV. This sets up a fascinating recurring revenue experiment. How sticky is Judge Judy’s audience? Are viewers dependent on Judge Judy, have they so molded their routines around a TV show that they’ll keep watching even if it means watching episodes from 1999? Or will the recurring revenue of Judge Judy prove to be more fragile than CBS predicted?
Signing up for IMDB TV and figuring out how to stream it seems like a small feat for the typical viewer who spends 150-200 hours per year watching her show. However, it does mean work, and it does mean changing a routine. Not being able to just flick on cable TV and watch a new episode of Judge Judy isn’t an inconvenience, it’s change. People hate change! That’s why behavior is sticky, that’s why recurring revenue businesses really work. This is one case that MoneyLemma will be following closely. Expect a follow-up once viewership numbers start to flow in. Until then: