Adobe's biggest Creative Cloud perk could be lower piracy

Adobe's biggest Creative Cloud perk could be lower piracy

Summary: Adobe's Creative Cloud may cannibalize Creative Suite sales, but in the long run there's a piracy payoff.

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Adobe will report its fiscal first quarter results on Monday and analysts are expecting results roughly in line with expectations. The quarter will be the first of many where the big issue will be cloud cannibalization of Adobe's core Creative Suite.

Historically, Adobe's financial results have largely been fueled by big releases of its Creative Suite, which includes PhotoShop, Illustrator and other key tools for creative pros. The issue is front and center given that the Creative Suite (CS) 5 upgrade cycle is about played out and CS 6 is on deck.

Wall Street is looking for earnings of 57 cents a share on revenue of $1.05 billion for the fiscal first quarter.

Also: Adobe rolls out Photoshop Lightroom 4 | Adobe launches Photoshop Touch for the iPadAdobe Creative Cloud - a better option for students? | CNET: Creative pros: Tell us what you think of the new AdobeAdobe's shift to cloud is going to hurt at first

The wild card for Adobe is whether CS 6 upgrades will be swapped out for subscriptions. CS 6 is expected to be released in April and there is a subscription plan for $49.99 to $69.99 a month. Deutsche Bank analyst Tom Ernst expects CS 6 upgrades to produce revenue growth of 6.5 percent in fiscal 2012. That growth rate is the lowest of any previous Creative Suite upgrade cycle---CS 3 delivered sales growth of 32 percent year over year compared to 9.2 percent for CS 4 and 18.5 percent for CS 5.

In many respects, Adobe is among the front runners of software companies transitioning from a licensing to a subscription model. Adobe's rocky quarters are likely to ring true for Oracle, SAP and others as they move to a subscription-based revenue stream. The upshot is that revenue growth takes a hit as subscriptions trump big upgrades. For instance, Adobe customers would pay $1,900 or so for CS 6, but under a subscription plan would average $720 a year in subscription fees a year. It will take Adobe almost three years to recoup the revenue it would get from an upgrade.

According to Ernst, power users are likely to ding CS 6 revenue growth, but there is a nice side effect to SaaS. Piracy rates could decline dramatically. Ernst explained in a research note:

Adobe products consistently top the list of the most frequently pirated software in the world, but the Creative Cloud could be a start to curb that trend. One of the most popular and easiest ways of obtaining pirated software is to download it via a technology like BitTorrent and the largest website hosting these torrents is “The Pirate Bay”. Adobe products are consistently the No. 1 most often downloaded, with Microsoft a close second. Adobe software represents 10 out of the top 20 most often pirated on the site. We believe that the subscription model of the Creative Cloud could help reduce piracy, because it becomes harder to pirate software that requires periodic authentication via the web.

With subscriptions, Adobe's CS 6 will be cheaper and less of a piracy target.

In other words, it's possible that Adobe could make up any lost revenue with lower piracy trends. For now, Adobe is allowing upgrade pricing for CS 3 and CS 4 users and dangling exclusive features for subscribers. If Adobe is successful, Creative Cloud could keep customers locked in with just another revenue model.

Adam Holt, an analyst with Morgan Stanley, said that subscriptions may weigh on revenue in the short term, but "may represent a longer-term opportunity if Adobe is able to capture new users." Holt said that it's possible that Adobe could have the best of two worlds---increasing Creative Cloud subscriptions and a CS 6 upgrade cycle that's better than feared.

Ernst said a virtuous cycle is possible for Adobe.

Among other key items in Adobe's quarter:

  • The first quarter marks a new reporting set-up for Adobe, which will focus on digital media, digital marketing and print and publishing.
  • Stifel Nicolaus analyst Blair Abernethy said that he expects Omniture results---a SaaS business---to offset any slowdown in CS 5 upgrades.
  • Analysts will be looking for progress on Adobe's ongoing layoffs in the first quarter.
  • The transition from Flash to HTML5 is a continual topic on Adobe conference calls.

Topics: Banking, Enterprise Software, Piracy, Security

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6 comments
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  • Dangerous trend

    Making one pay monthly for software instead of a purchase price is a very bad policy and one that I will avoid totally. Two of my desktops are still using Windows XP because it works. But if it had been subscription, I would still be paying for it over the many years since I bought it. The total cost would be much, much greater than my purchase price was.

    This will not reduce the cost of software for the average user, only the few who resolutely have to have the latest version. The rest of us will be paying much more.

    But that's the way they want it, no?
    Shara8
  • THE CLOUD

    ADOBE CAN STICK THE CLOUD WHERE THE SUN DON'T SHINE I WILL NOT USE IT AGAIN AND IF ANY ONE PUT MY INFO IN THE CLOUD I WILL SUE THEM
    ttx19
    • Re: THE CLOUD

      I believe you already have put your info into the cloud just by responding to this article, guess a lawsuit is mute.
      techrepublic@...
  • Might work

    Besides lower piracy, they might also increase customer retention. The Adobe creative suites are getting ridiculously expensive, and they keep eliminating the stripped-down models (like Web Standard), hoping to force you into $699 "upgrades" to Web Premium.

    What they've done in my case is renew my love of CS4, which I already have and which works pretty well. I doubt I'm the only customer who now skips at least one cycle between upgrades.

    If for $50/month I can get -all- the goodies, I might just go for that. That's a much better deal than the $1400 they want for the "Master Collection." They weren't going to get $1400 out of me, they were going to get zero. $600 is better than nothing.
    Robert Hahn
    • on the contrary

      Rent vs buy...
      No retention, no loyalty... if everyone rents how often do you think they will add new developments to their software? Same rate or at a lower rate due to a lesser need to innovate?

      If it cannot phone home, will it disable itself until it finds a net connection?

      SaaS makes a aaSS out of the sucker blindly buying into it... renting it...
      HypnoToad72
  • Always Have Been Against Priracy

    This is great news. I happen to be a musician as well and I hope this put a huge dent to thieves.

    However, I really think Adobe needs to rethink their pricing model. The more subscribers they can muster, the more opportunties on spreading subscription costs, resulting in lower costs per month (10-20/monthly). Still, one has to decide if ROI will be higher than spending 720/year in subscription fees. If so, go for it.

    One thing that Adobe needs is to really target the consumer market even more. They need to come up with a 'powerpoint' rival that will be easy to use and innovative, using video presentation~ sort of like animoto.
    benr7277