Business Evolution
Kathleen Maher
Issue: Volume 35 Issue 3 April/May 2012

Business Evolution

It’s true that hard times foster change and innovation. In a perverse way, Adobe has been lucky because some of its prime markets are very sensitive to economic cycles, and the company went through tough times earlier than some of its competitors in related sectors.

Consider this: Macromedia enjoyed a skyrocket ride with interactive media, including CDs. Adobe has been a leader in desktop publishing. Both of those industries saw early challenges. The film and TV industry served by Adobe’s video products is a leading indicator of economic headwinds. There are many other examples from Adobe’s product lines, but the point is, the company has adaptation built into its DNA from its very early days. By the time the desktop publishing business seriously went south in 2009–2010, the company was already thinking about how to re-invent publishing for the enterprise. With the Creative Suite (CS) line, Adobe was creating the strongest competition to its industry-leading point products, including Photoshop, Illustrator, and Dreamweaver.

Adobe sees a “cloudy” future for its product line, recently announcing a full-scale commitment
to the cloud.

The company shared its most audacious vision several months ago during the Max Conference of 2011, as CTO Kevin Lynch outlined plans to enable collaboration throughout its products via the Internet. The company announced it was making a full-scale commitment to the cloud and also to a subscription model for its products. At the same time, Senior Vice President and General Manager David Wadhwani campaigned among investors to prepare them for the shift to new business models.

Users have been nervous about what the new model would mean to them, but the investors have been getting the overall picture. Adobe understands its customer base better than most companies. It actively pursues registration and provides forums, tutorials, and other incentives to keep customers actively communicating. In its presentations to investors, Adobe said that according to its calculations, customers buying the Creative Suite products and upgrading with varying degrees of frequency each provide about $30 a month to the company. And, as a result of early testing of subscriptions, Adobe estimated those customers would provide $40 a month. Easy math.

In the first week of February, Wadhwani addressed the analyst community again to share the company’s plans and experience with the early stages of rolling out its cloud content. At the same time, the company hosted press briefings and brought key users up to date. This is an important move for the company, and it wants to get the message right.

Wadhwani says that in early tests of user reactions to subscriptions, customers were overwhelmingly positive. Yes, that is what they all say, but he also notes that the online and subscription pricing was fairly ambitious. The company tested out its Creative Cloud with consumers at higher prices, ranges that included $69 to $129, and still got good response. Better yet, says Wadhwani, the firm got a bump in new users. From the trial, 40 percent came on as new users. As a result, the company realizes it can meet its targets and charge a more attractive monthly rate. Adobe contends the average monthly subscription price will be $49.99. Subscriptions also will be available for enterprise customers at $60 a month. According to Wadhwani, the company expects to see 800,000 new users by 2015 as a result of the subscription model.  

The Creative Cloud
Adobe’s new products will be rolling out gradually through the year. People who sign up for the Creative Cloud when it debuts in March will get CS6 when it arrives. Along the way, we’ll see the next version of Photoshop (Adobe upgraded all its products for CS5.5 except Photoshop).

The company isn’t releasing details about CS6, but Photoshop Product Manager Zorana Gee has a short teaser on YouTube demonstrating “background save” for Photoshop, enabling people to stop and save huge files in the background while working on something else. She also showed GPU acceleration for the Liquify tool. It’s pretty specialized—Liquify is a filter that lets you squish the pixels. We’re thinking the demonstration is an indication that the GPU is going to be put to work in even more places. 

Adobe Group Product Manager Heidi Voltmer, who oversees Web and interactive products, contends that this is a major period of transformation for the company. It has transitioned to one-year release cycles with CS5.5, and the biggest change was in publishing when Adobe released tools to enable digital publishing for tablets.  

When it comes to publishing, Adobe really is on the bleeding edge. Its customers are going through tremendous change, as electronic devices show every sign of replacing printed books and magazines for many people. And the traditional press has been fast to see the advantage: Now they can compete with TV and online advertising with the ability to create digital publications containing animated and interactive content.

According to Voltmer, Adobe believes it has to move faster: 18-month and even one-year product release cycles are just too slow to keep up with the pace of change­—and it’s not just concerning the publishing industry. The Web today is nothing like the Web 10 years ago, and it’s nothing like we thought it would be 20 years ago. We might not be walking around in virtual-reality spaces, but static pages look like they could become a thing of the past. Voltmer says CS6 is going to get updates a lot more frequently. Among other things, it will be updated routinely to keep up with the fast-paced evolution of HTML5, a Web protocol designed to rebuild the Web from the bottom up—almost like building a car’s engine while it is still running down the road.

So, what do Adobe’s customers get for $50 to $70 a month? A whole lot. For one, they get access to Adobe Creative Suite and other applications. Plus, Adobe is throwing in Type­kit, Lightroom, Edge, Muse, the touch Apps for Tablet, and other goodies that might come along. They also get the Creative Cloud, 20gb of storage on the Web that will be accessible to tablets, phones, and PCs. Content can be uploaded and shared with subscribers and non-subscribers alike, and users will be able to sync content with the cloud and their devices. What’s more, they get access to the Creative Community area. Adobe sees this as a resource for users who can share inspiration through galleries, training, and support. The firm is in the process of revamping its site to better integrate Creative Cloud. Right now, Adobe’s various resources for users are spread out throughout the company’s site. There’s great stuff there, but you have to really want to find it in order to locate it. At first, users will see the collaboration and the galleries. The training tools will come later, but still in the first half of 2012.

This subscription program will cost each user about $600 a year. So, yes, it’s more than a regular upgrade of the boxed products if you’re using one of the point offerings or the basic suites (Design Edition, Web Premium, or Production Premium). But it’s about the same price as the Master Suite Collection upgrade, which is currently advertised as $545 (the boxed set costs $2600), and you get all the great additional stuff.

With a subscription, users also will be able to split their license between the Mac and the PC. Currently, users can run the products on two machines, but they have to buy either a Mac product or a PC product. If they quit the subscription program, they lose access to the programs. Voltmer suggests that users might then decide to buy a point product or perpetual license if they work with certain products all the time. The scheme is perfect for companies that can extend licenses to contract workers or employees and then shift the license when the contract is done or the employee leaves the company.

The move to subscriptions and digital distribution makes sense, Voltmer says, because the industry is moving so fast and Adobe would like to be able to upgrade the products as the features are ready, rather than wait every 18 months or so to roll out a sweeping change. It’s better for customers who have a chance to assimilate changes, and certainly it’s better for Adobe, which sidesteps the boom and bust cycle, lowers the cost of printing and shipping boxed sets, reduces support because customers have an easier time learning new features, and encourages customers to try out new tools.

Indeed, there was definite worry among customers when Adobe’s strategy was first announced. There was a fear that customers would be forced into the subscription option, rather than buying and upgrading releases. Voltmer relays that some people worried that they would only be able to access Adobe’s products in the cloud. As the details are being revealed, however, it seems clear that customers are becoming more positive. Those who want to continue buying the products as a release with a perpetual license can do so. Adobe is trying to move all its active customers up to CS6 and has enabled upgrade pricing for CS3 through the current 5.5 release.

The Online Opportunity
As I stated earlier, Adobe is also including its online tools, such as Business Catalyst and Adobe Typekit, into the deal. These SaaS (software as a service) tools are intriguing new products that are harbingers of new ways of working and interacting with clients.
Business Catalyst is an online development tool that provides content management,
e-commerce, e-mail marketing, an integrated CRM database, and reporting and analytic capabilities. Adobe bought Business Catalyst in 2009 from Australian developers Bardia Housman and Adam Broadway. (We at Jon Peddie Research have played with the product under the guidance of Adobe and really liked it.)

However, Business Catalyst is competing in the market against an army of creative Web developers that put together sites using modules from a variety of sources that can be very low cost or free. Adobe’s business model on this is to make itself a partner to Web developers: Customers pay a monthly fee for their site and services, and Adobe pays Web developers a commission for the hosted sites. Adobe offers to handle billing itself or will bill Web developers, which will then bill their clients.

Adobe Typekit, meanwhile, is similar to everything we’re talking about here. It’s also billed monthly and, in return, customers get access to all the type styles in the universe (that’s how it looked to us). Developers can pay a low fee for access to the type—the only catch is that they have to keep paying or dull, boring typefaces will be substituted when the subscription lapses. With the subscription, at least customers won’t have to keep paying that additional fee, and Adobe has one more hook into the customer.

There’s a pattern emerging here, and it is that Adobe sees just as much value from maintaining an ongoing relationship with the creative people who are its customers for the point products and their employers who use the content for publishing and advertising.
Adobe’s product strategy links its products for creating content with its products being developed to monetize content and also to track usage.

Adobe is keeping its customers close by building an environment for them to work in. It’s building links to end customers: content consumers through its online marketing tools. For instance, Business Catalyst is a variation on the products being developed for large publishers on Adobe’s Omniture side of the business. Business Catalyst can report back on the behavior of visitors to a Web site. Similarly, Adobe’s enterprise customers using Omniture pay a regular fee for Adobe’s technology to track the ways readers interact with content—Do they click on an ad or jump to specific sections?—and, thus, they can provide real data to advertisers.

Adobe laid the groundwork for its new strategy at its Max Conference for the user community.  

Privacy advocates may balk at the use of the term “virtuous circle” to describe the information links that Adobe is building between the different groups of customers who use its products, but it certainly has the potential to be a lucrative circle. Also, practically speaking, enabling people who create content to realize more revenue from their work will lead to more content and, it is devoutly to be hoped, better content.

Adding It Up
Adobe gets systems. The firm has long had a systems-oriented approach from the first days of Acrobat and its Knowledge Worker products. For a company that builds products for artists, it has a long history of thinking about the entire workflow. It has viewed its creative base as a people who, ultimately, work in some way for an enterprise.

Put in a more unkind way, Adobe’s customers are cogs in a machine, and Adobe serves the machine because somewhere along the way, the art created is used by a company, or a studio, or a magazine. If it’s digital, it gets distributed. And, none of this is a bad thing. Adobe wants to stay in touch with its customers, but the company is also enabling its customers to do a better job and stay in touch with one another and the people they’re working for.

Adobe Bets on HTML5 for Mobile

Edge will enable new content development

At the end of last year, Adobe announced that it does not plan to continue development of Flash for the mobile platform. Still, the press seemed surprised that Chrome for Android will not run Flash. Group Product Manager Bill Howard spelled it out again on an Adobe blog, saying, “Adobe is no longer developing Flash Player for mobile browsers, and, thus, Chrome for Android Beta does not support Flash content.” You can almost hear the “Well, duh” at the end of that sentence, can’t you?

The basic browser on Android phones does support Flash, so content developers are not being left high and dry if users are willing to switch browsers to see the content. Instead, says Howard, Adobe is concentrating on HTML5 for multimedia in mobile.

Adobe has announced that its Edge product, which is still in development, will be included with the Creative Cloud products. Edge is Adobe’s new tool for creating HTML5 interactive content. Because it is part of the HTML5 initiative, it combines resources from HTML, JavaScript, and CSS. Its sister product is Adobe Muse, a WYSIWYG development tool geared to graphic designers for creating HTML Web sites without code. At Jon Peddie Research, we have not had a chance to play with this yet, but we’ve talked to Web designers who are very enthusiastic about it.

In his presentation for press and analysts earlier in February, Adobe Vice President and General Manager David Wadhwani said he is not giving an inch on Flash in targeted applications such as the Web, PCs, TVs, and so forth, adding that Adobe intends to stay out in front with that product. HTML5 and Edge will be a common-denominator meeting standards, but with Flash, they can push the envelope. It’s a virtuous circle, says Wadhwani, who notes that as the Web and devices get more powerful and the standards are updated, the improvements in Flash can get pushed into HTML5 and Edge if it makes sense.

Adobe is repositioning Flash a bit, and company representatives maintain they are developing it for rich and immersive applications and PCs via Adobe AIR or the Flash Player, depending on which is appropriate for the content. The way Adobe is seeing it now is that Flash can deliver more heavyweight content, like games and premium video. If the client system, like the PC, has the horsepower, Flash can stream. If the system is constrained, as it is in mobile devices and TVs, then the content can be packaged in Adobe AIR. In other words, Flash is moving up the food chain. Also last year, Adobe introduced hardware acceleration for 2D and 3D graphics in Flash for PCs. In the future, hardware acceleration will come to the mobile platform via content packaged in AIR.

Wadhwani also underlines Adobe’s commitment to HTML5 and notes that Adobe is an active member of the standards group, adding its own IP into the mix. And, Howard mentions CSS Regions, which allows more page layout flexibility on the Web, and says Adobe is collaborating with HTML5 members on CSS Shaders, which will allow cinematic and visual effects via HTML5. Howard also says Adobe is considering HTML5’s Shadow DOM proposal to standardize the integration of rich interface components for developers. All of this is pretty interesting because it means that Adobe is finding more and more places where it makes sense to reach out and work with the development community, rather than go it alone with Flash and do battle with HTML5.

—Kathleen Maher

Kathleen Maher is a contributing editor to CGW, a senior analyst at Jon Peddie Research, a Tiburon, CA-based consultancy specializing in graphics and multimedia, and editor in chief of JPR’s “TechWatch.” She can be reached at