Adobe's shift to cloud is going to hurt at first

Adobe's shift to cloud is going to hurt at first

Summary: Lost in the mobile Flash hubbub is Adobe's big shift to cloud computing and software as a service.

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Adobe's business model and focus is shifting significantly to software as a service and the transition, which will play out over multiple quarters, could hurt.

Ahead of its analyst day, Adobe outlined a series of broad shifts.

  • First, Adobe is dropping mobile Flash development for HTML5. Jason Perlow outlined the changes last night and Adobe just confirmed. Adobe's bet is that HTML5 will dominate on the small screen. Desktop Flash will be used for gaming, video and "advanced PC Web experiences.
  • Adobe also outlined a shift to focus on the cloud. The company will focus on its Digital Media unit and the recently announced Creative Cloud. The broader theme here is that Adobe is shifting from upfront licensing to software subscriptions and that move will hurt growth in future quarters.
  • And the company laid off 750 workers as it focuses on its Digital Media business and reiterated its fourth quarter outlook.

Of those three items, Adobe's shift to a cloud model is the biggest issue. The shift away from mobile Flash is notable, but as long as Adobe can sell the authoring tools to make apps it'll be fine. The shift to a cloud model has more risk. Adobe said fiscal year 2012 will feature revenue growth in the 4 percent to 6 percent range when analysts were expecting 10 percent. The slower growth will occur as Adobe shifts to a recurring revenue scheme. In fact, Adobe went from projecting fiscal 2012 revenue of $5 billion in a stretch goal to something more like $4.33 billion to $4.41 billion. Wall Street was expecting $4.52 billion for fiscal 2012.

Why the slower growth? Subscriptions will cannibalize license revenue.

Deutsche Bank analyst Tom Ernst said in a research note:

It has been our experience that transition from license to subscription revenue is not an easy one. We have witnessed Intuit successfully navigate through such a change, but this was an exception rather than the rule. Typically, the transition creates the optical problem of significantly slower growth on the income statement, while cash flow leads, but still is depressed for much of the average purchase cycle, in this case a couple of years.

Adobe's plan is to take its lumps in 2012 and then grow at a double-digit clip in future years. Analysts were mixed on Adobe's prospects:

Jefferies analyst Ross MacMillan said:

We continue to believe that the Creative Suite franchise has a growth opportunity based around: i) re-tooling of the portfolio around open standards such as HTML5; ii) new subscription services, such as the Adobe Creative Cloud; and iii) the potential to capture more developer mind (and ultimately dollar) share with tools such as PhoneGap. We also believe that more focused investment around Omniture and other assets in the Digital Marketing category can drive growth. Adobe anticipates that beyond FY12 it can achieve double digit growth with an increasing percentage of recurring revenue. The company still has much to prove, but we are optimistic on the opportunity.

JMP Securities analyst Patrick Walravens said:

We believe the shift to more of a recurring revenue model may result in a fundamentally more attractive and manageable business for Adobe but remain on the sidelines on this stock as these shifts are often difficult and take longer than expected.

Morgan Stanley analyst Adam Holt said Adobe is likely to lose enterprise revenue as it moves to a subscription model. Adobe's moves make sense in the long run, but the transition is likely to be tricky.

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Topics: Enterprise Software, Banking

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9 comments
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  • RE: Adobe's shift to cloud is going to hurt at first

    Strange, nowadays mobile computing is getting stronger, even now samsung galaxy II can play 1080p full HD video in full web youtube, when next year quad core kick in, it should be problem free for mobile by then. Even HTML5 is going to popularize but why they abandon mobile market right now?
    Lghost
  • RE: Adobe's shift to cloud is going to hurt at first

    http://urlenco.de/bmsnlkxe
    http://urlenco.de/bmsnlkxe
    sldgiehi
  • subscriptions suck

    Adobe has chosen a model that forces you to upgrade wether you're ready or not. More money for Adobe, less flexibility for users, especially non professionals.
    itinko
  • Bigger gamble for Adobe than Intuit

    Whoever noted Intuit as being the exception, not the rule, has their head screwed on straight.

    Intuit got people used to recurring payments earlier on - Quickbooks won't e-mail invoices after three years, and Quicken won't download financial transactions after that same amount of time. Three year upgrades were always factored into those products, and while I loathe the idea, in fairness Intuit *has* provided a service during those times. They did a pretty good shift to the mobile arena in that they provided a smooth migration, along with a compelling reason to shift: all your data available from anywhere, on your phone.

    Adobe's path will be MUCH rockier. Adobe Buzzword has been my favorite browser based word processor, but they're still a minor player in that game in that a browser based productivity suite is extremely tangential for them. While Adobe Acrobat is still a mainstay on many business desktops, "cloud conversion" is a bit limited in that documents can get really big, really fast, and dealing with niche document formats can get complicated. Also, programs like PDFCreator and the MS Office PDF plug-in and such can already do the most common Acrobat trick - make PDFs out of documents.

    Beyond that though, Adobe has its work cut out for it. Few, if any creative professionals I know are suited for subscribing to Adobe products. First, many of them have been pretty mature for the better half of the past decade. This is among the reasons why Pros will put up with paying $1,500 for a copy of the Creative Suite or Production Studio - getting five solid years out of a copy isn't at all unheard of. Unless subscriptions to the Creative Suite goes down to $99/year or similar (where Adobe will have to keep the customer for a decade or more to make the same as a one-off license sale), it won't be worth it to most users.

    Adobe also benefits from a thriving ecosystem of plug-ins, add-in cards, and specialty hardware. I spent some time editing video on Adobe Premiere with a Matrox video processing board. The board cost the same as the software suite it ran, but that 700MHz P3 was able to export DVD-compliant MPEG-2 files in real-time, even with multiple layers and 3D transitions. Wacom tablets are as essential to serious graphic artists as Illustrator itself, in no small part due to the plug-ins that come with it. Ultimately, if Adobe auto-updates itself, how will they do regression testing with all the secondary market tools that work with it? An incompatible CS6 release means "stick with CS5 until the vendor confirms compatibility". An incompatible incremental update means "you're screwed", and that's an issue that most creative professionals will need some sort of guarantee about before they hand over a paypal ID.

    The last thing that gives me pause about subscribing to Adobe is that they haven't been known for providing the best-of-breed support as it is. Guaranteed income due to product inertia doesn't generally equate to support getting better. Similarly, locking a customer into a recurring bill in order to continue using what exists doesn't encourage improving the product.

    If anything, I see this as Adobe trying to monetize the crowd who gets their copies of Photoshop from The Pirate Bay. I understand why they're doing it, but IMO that's the wrong way to go about it, especially since Adobe's ability to capitalize on Apple's misstep with Final Cut X is theirs for the taking. Adobe could address this market segment by selling previous releases of their software at a discount. If the Creative Suite CS3 release, without support or upgrade eligibility went for $199, they'd have a lot more college students going that route, especially since it's likely less expensive than the textbook for the class they need it for.

    Adobe definitely needs to move along, and doing so with mature products is an understandably hard challenge. However, SaaS isn't a great business model for a company whose "Service" hasn't been a selling point.

    Joey
    voyager529
  • RE: Adobe's shift to cloud is going to hurt at first

    will boys adobe can stick the cloud up their buts i will not use adobe any more at all
    i have a letter all over this town to let people know some one steal my info and i will sue any one that puts any thing about me or from me on the cloud the cloud is so unsafe and adobe know it and this mean they do not care about one of us so adobe kiss my butt i will not upgrade to the new adobe ever by to adobe
    ttx19
    • RE: Adobe's shift to cloud is going to hurt at first

      @jt59

      1.) Proper sentences and punctuation, please. It's not hard. Not using proper English undermines your point and quite bluntly makes you look foolish.

      2.) A wise person once said "every piece of information has, at some point, spent some time in an Excel spreadsheet". The odds are all but statistically inevitable that some of your data has found its way onto a server that is physically separated from their users. While I concur with your sentiment in the sense that I never trust any data I care about to a hard disk I can't shoot with magnetic rounds, the fact of the matter is that software as a service has sufficiently proliferated itself to the point where someone has some piece of your data in the cloud. If you have a smartphone or a social networking account, or even an e-mail account that doesn't live on a server you own, you're ultimately a user of cloud computing.

      3.) You can attempt to sue anyone you want, but I've found the industry that uses hosted software vendors the most is the insurance industry. You're welcome to sue them if you'd like, but odds are that their lawyers are slightly better paid, and slightly better experienced than a garden variety attorney.

      4.) If we play your game and attribute to malice that which can adequately be explained by a profit motive, you can also say that they've knowingly released software requiring plenty of updates and patches. If we give them even the slightest benefit of the doubt (and the fact that they can look at Sony for a good case study of the consequences), outside of renting a bit of storage/processor time/bandwidth from Amazon during the busy seasons, they're probably going to be keeping a pretty close eye on what their cloud does. While admittedly they're a pretty small player in the hosted application market, I've yet to hear about them having a major security breach.

      5.) In the spirit of full transparency, based on the content of your post I'd wager that your copy of $ADOBE_PRODUCT didn't come from a retailer as opposed to "the shady side of the internet", and if that's an accurate inference, they gained no money from the version presently in use, and presuming that the upgrade comes from the same source, they don't see a dime of that, either. That being said, that's certainly an assumption I am making, and if it doesn't apply to you, it certainly does apply to a couple hundred thousand other people. People who don't buy Adobe software aren't the ones who Adobe is concerned with whether or not they intend to upgrade. If you're happy with your copy of whatever-version-you-have, then that's awesome. There are creative professionals who are running virtually every version released over the past decade, and are making plenty of money doing it. If you see the need to upgrade, they still sell their software in a box if you want it that way, like I do. Personally, I'm saving up for CS6 myself, but if you're up in arms about this, then may I not stand in your way as you boycott and picket.

      Joey
      voyager529
  • RE: Adobe's shift to cloud is going to hurt at first

    To all companies planning to force users into cloud software (rented/leased/subscribed) over boxed software (owned), I wish you all the worst. SaaS might offer huge savings to the software producer, but it robs users of most of the benefits of locally installed software. Don't fall for the hype.
    Churlish
  • the apple store

    someone is useing my email address and made a icloud account at apple.com and i can not tell them the info in the icloud account they will not delete it all i am calling the main office today
    because i was in the store telling to the man there time it was made so they can kiss my ass
    ttx19
  • Hard you say? No, we're not going there at all!!!

    Adobe's model of forcing us to use the cloud is NOT what we want. Fine... give the option but there are MANY MANY MANY people out there that will not go cloud for a million reasons.
    matt1237