When Adobe Systems Inc. (NASDAQ:ADBE) released its financial results for Q1 2012, it marked one of the last reports before the company begins an ambitious attempt to tame three problems it faces with its flagship creative products: revenue tied to customer upgrade cycles, competition from cheaper alternatives, and piracy.
It also marks a year of transition for the company as it shakes up its business, embraces social media and tablets, and begins to adapt to an online world increasingly dominated by mobile browsers.
Adobe’s revenue for the quarter was up slightly ($1.045 billion), but the real story will play out through the rest of 2012.
For decades, Adobe’s creative software suite — including popular titles such as Photoshop, Illustrator, DreamWeaver, Flash, and inDesign — has been the choice for design professionals. The company has typically offered new versions of its products every 18 months to two years and would experience a revenue surge after the release of each as customers upgraded. However, Adobe’s premium pricing model (Photoshop alone can sell for $900) has led to increased competition and products that consistently top the list for most frequently pirated software. More professionals than ever are using Adobe products, but because of delayed purchases and piracy, the company’s revenue doesn’t fully reflect that.
A strategy to reduce theft
These threats are why Adobe decided to embrace the cloud. With its Creative Cloud, which is scheduled to launch in Q2 2012, Adobe is offering its most popular products as well as Web-exclusive tools, following a SaaS (software as a service) pricing model of $49.99 per month. The standalone products with the big price tags will continue to be offered, but the company hopes that by offering a $50 monthly online option, it will discourage piracy and regain customers who had turned to cheaper alternatives.
If a customer who had previously bought a single $900 product and upgraded every two years switched to Creative Cloud, the eventual cost would actually be a little higher, with 24 months of membership bringing Adobe $1,200. To make the proposition more attractive, Creative Cloud (which includes 20GB of free online storage) is also being touted as a social hub where professionals can share experiences and tips, show off their work, and build connections.
Other changes this year include the reintroduction of a free beta version of Photoshop CS6 (something the company has not done for the past several releases) and the introduction of inexpensive creative tools aimed at tablet users. Adobe Photoshop Touch for Apple‘s (NASDAQ:AAPL) iPad or Google (NASDAQ:GOOG) Android tablets provides powerful gesture-based photo editing tools for mobile users (along with hooks to social media sites like Facebook) and the ability to sync projects with Creative Cloud — for a very user-friendly $9.99 price.
An HTML 5 recharge for graphics and video
The company faces additional challenges as its Flash platform — once the Web standard for advanced graphics and video — has come under fire, first by Apple (which refuses to support Flash on its iPhone, iPad, or iPod) and then by Web designers. When the company halted development of its Flash player for mobile browsers, it subsequently announced the layoff of 7% of its workforce. It is now incorporating HTML5, the competing standard, in its products.
Adobe has undergone many changes since its 1982 launch. The company grew from the developer of the PostScript language used by laser printers into image editing and desktop publishing. It introduced the PDF (portable document format) standard and expanded its products into a dominant Web development platform.
But this coming transition marks a move into new territory and a new business model, one that could result in flat revenues for the rest of the year if many existing customers skip the upgrade and go with Creative Cloud instead. Still, in the long term, the shift has the potential to even out and boost revenue.
