This article first appeared in The Australian
By David Swan
New global accounting standards for financial reporting are threatening to wreak havoc with the world’s economy, according to Zuora boss Tien Tzuo, who says stock prices may plummet worldwide due to the new standards not properly accounting for the subscription economy.
“This is big news and it’s not covered enough,” Mr Tzuo told The Australian. “Stocks are going to drop by 10, 20, 50 per cent, companies will come out and realise things like, ‘I can’t close my books, I have to delay my earnings call’.”
“Investors will say ‘gosh what’s going on here? Our revenues are way higher or lower than expected’ and it’s going to be really confusing.”
In Australia, the new standards are known as AASB 15 Revenue from Contracts with Customers, which will come into effect in January 2018. The US is facing the same issue, and Mr Tzuo said the past 100 years had seen relatively simple business models, but the subscription economy demanded new ways of financial reporting.
“The past 100 years has been about making products on an assembly line and then selling them,” he said. “We’ve been in this new world of subscription services for the past 15 years, and the accounting standards have not kept up. They do not capture the health of these businesses.”
According to Mr Tzuo, the accounting standards bodies around the world are making a concerted effort to tackle the issue, but aren’t going far enough. He said there would soon be guidelines in place for reporting subscription revenue, but there would be different ways of interpreting them.
“We want them to realise the nature of recurring revenue is different to the nature of one-time revenue,” he said. “At a basic level, that’s intuitive. If you and I have an agreement for me to pay you $10 a month for the next five years, versus I give you $10 right now, obviously the first one is much, much more valuable. But they’re reported as being the same. There’s no sense of that $10 being recurring, and that’s fundamentally what the accounting standards need to wrestle with.”
Born in Taiwan but raised in Brooklyn, Mr Tzuo was the 11th hire at Salesforce.com, after working as a sales consultant at Oracle for six years. He went on to serve as chief marketing officer and chief strategy officer at Salesforce, before pitching CEO Marc Benioff with an idea for Zuora.
In Mr Tzuo’s words, Zuora is a cloud-based solution to enable companies, from start-ups to category leaders, to run subscription-based businesses following the models of Netflix and Amazon.
The subscription economy is now shaking up business models across industries, from media and technology to consumer-packaged goods and telecommunications. And just as Mr Benioff, then an Oracle employee, had received funding from CEO Larry Ellison to start Salesforce, Mr Benioff invested in Zuora.
“Marc had to ask permission three times from (Oracle boss) Larry Ellison to leave and go and start Salesforce.com,” Mr Tzuo said.
“I thought he’d say no, that I’d have to ask a few more times before he’d respond. But he really liked the idea, and here we are.”
Zuora has since grown to more than 800 employees, and the company has aspirations to go public.
Not yet, though.
“We’re going really, really well,” Mr Tzuo said. “What we’re seeing now is the vision of a subscription economy becoming widespread. Our customer base today is much broader than software-as-a-service companies and technology companies.
“Today we have customers in the media sector like The Wall Street Journal, The Sun, FT, The Economist and HBO. We’re talking to Ford and General Electric; [exploring] this whole vision of saying ‘we don’t need our customers to buy a product, but we can use digital tech to give them the outcome they want’.”
The CEO is adamant every business will become a subscription business, and the best way for Zuora to capitalise in the long run will be as a public company.
“We take a look at it every single quarter,” he said. “The way we look at it is, ‘what’s your long-term goal?’ We really believe in the transformational power of software, and the shift in business models that creates. We think we can be the next Salesforce, SAP, or Oracle. We can be a multi-billion-dollar company.”