Adobe Creative Cloud: End of the Upgrade Roller Coaster?

by James Cook on November 14, 2011

See also:  Adobe Creative Cloud announcement leaves users in a fog and Single Adobe Creative Cloud license will allow use of Creative Suite apps on Mac and Windows

Adobe recently announced Creative Cloud, which represents a shift in focus from software sales to a subscription model. For $49.99 per month subscribers will have access to the full range of Creative Suite programs as well as additional online services and community resources (additional price points for suites of fewer apps will be announced later). This article is the first of two where I explore the reasons behind Adobe’s recently announced shift from Creative Suite to Creative Cloud and its implications for the company and the users of its products.

Adobe Creative Cloud Roller Coaster cartoon

It’s been a wild ride lately for Adobe: layoffs, restructurings, acquisitions, and dropped development of the mobile Flash Player. The announcements have been the source of a lot of speculation, frustration and anger within the Adobe community. An online petition calling for Adobe CEO, Shantanu Narayen, to step down takes the anger to an extreme but it’s indicative of the turmoil within the Adobe community.

Lost amid the sound and fury is what, to my mind, is one of the most important developments in Adobe’s history, the announcement of the Creative Cloud service set to launch in 2012. In fact, all of the other recent developments are best understood when viewed as part of this bet-the-company initiative.

So, what’s going on?

To understand Creative Cloud, you have to understand an important fact about Adobe. People tend to believe that Adobe is in the business of selling software. Given that the Creative Solutions division accounts for approximately 50% of the company’s value (the Knowledge Worker division - better known as Acrobat - accounts for another 15%) that seems reasonable but it obscures an uncomfortable truth: After years of dominating its market space, Adobe is actually in the business of selling software upgrades.

Adobe’s profits (and its stock price) have become increasingly dependent upon the success of each Creative Suite upgrade. This presents Adobe with a number of challenges:

Adobe Revenue by Division

  • Failed upgrades: A poorly received upgrade - whether due to a poor product or a poor economy - is a major blow to Adobe’s bottom line.
  • Lengthy upgrade cycles: As the length of the upgrade cycle grows, Adobe’s revenue injections become less frequent.
  • Poor deployment of resources: The Creative Suite currently consists of nineteen individual products. Upgrading them all at the same time requires Adobe to spread its development teams over a large number of projects and results in a lack of coordination between the program developers, duplication of efforts and the lack of a unified user experience across the Suite.

Ancient history (April 2011)

With the release of Creative Suite CS5.5 earlier this year, Adobe attempted to address those challenges in two ways.

  • New upgrade cycle: Along with the release of CS5.5, Adobe announced a new upgrade cycle. The upgrade cycle for major, “dot zero” releases (CS6, CS7, etc.) was extended from 18 months to two years with “dot five” releases (CS5.5, CS6.5, etc.) occurring in the years between major releases. It’s worth noting that while there has been no official announcement, speculation in the community is that this plan has already been scrapped.
  • Subscription sales: As an alternative to buying programs (more accurately, purchasing a perpetual license to use the program), Adobe began offering subscription pricing which allows users to “rent” a program or the whole suite on a monthly basis. Subscription users will be migrated to Creative Cloud when it launches but no details have been announced.

Those changes represented a major shift in the way Adobe does business but, in just nine months, Adobe has acknowledged that they were insufficient (a less generous analysis is that the changes were timid, ill conceived and poorly implemented) and they are being replaced with Creative Cloud.

Creative Cloud

One thing that cannot be said about the Creative Cloud initiative is that it is timid. It’s hard to look at it as anything other than an all-in, bet-the-company gamble. Whether it turns out to be well conceived and properly implemented remains to be seen.

According to the press release, Creative Cloud includes:

  • Applications: The Adobe Creative Suite, Adobe Touch Apps (for mobile devices) and the recently introduced Muse and Edge applications.
  • Services: A variety of digital and web publishing services along with TypeKit web fonts.
  • Community: According to Adobe, Creative Cloud “will become a focal point for anyone creative.”

Unfortunately, the Creative Cloud announcement came in the midst of Adobe’s self-inflicted public relations disaster over the Flash announcement. To make matters worse the announcement was long on hype and short on details so we’re left to speculate about what this means for Adobe and its users going forward.

Cloud Nine for Adobe…

Adobe is facing a challenge unparalleled in its history. Its market dominating programs are under siege from competitors and emerging technologies. Adobe really had no choice but to make a major strategic shift.

If they can execute that strategy and successfully transition from the Creative Suite to Creative Cloud model, it will accomplish three very important corporate goals:

  • Dependable and predictable revenue: Hopping off the upgrade revenue rollercoaster will make the financial analysts happy.
  • Breaking the upgrade cycle: The opportunity to deploy development resources based upon the demands of the market place rather than an artificial upgrade calendar will make Adobe more nimble and efficient.
  • Wider usage of new Adobe programs and services: By rolling new products like Muse and Edge and services such as TypeKit into Cloud, Adobe will jumpstart their usage and also make life more difficult for competitors to successfully introduce competing products.

…Or a Dark Cloud?

Unfortunately for Adobe, transitioning from software sales to subscriptions is a major challenge. Some companies, such as Intuit, have succeeded but more have failed and there is no obvious model for what Adobe is trying to accomplish. They’ll need to overcome a number of obstacles to succeed.

  • Lost revenue: Even a well-executed transition from sales to subscriptions generally results in lost revenue for a period equal to at least one of the previous upgrade cycles. Adobe has already adjusted its forecast for 2012 downward. A botched or delayed launch of Cloud could extend that into 2013 and beyond.
  • Lost upgrade revenue:Adobe has announced they will not offer upgrade pricing for users who aren’t already using at least version CS5. Users of earlier versions have the following options:
    • Pay for an upgrade to CS5.5 now and pay again to upgrade to CS6 in a few months.
    • Pay full price for CS6.
    • Hop on the Cloud and write off their previous investment in Adobe software.

Given those options, many users may choose “none of the above” and simply decide to live with their current software as long as possible.

  • Consumer backlash: In the past Adobe has endured frequent complaints over its upgrade pricing and policies. In addition some upgrades have been plagued with bugs and over-hyped features that prove to be of little value to the vast majority of users. A misstep launching Cloud could severely damage the Adobe brand.
  • Takeover: Even prior to the Cloud announcement and subsequent eight percent drop in its stock price, Adobe was being mentioned as a possible takeover target. Any additional drop in the stock price due to the Cloud transition could make Adobe an even bigger target.

The Bottom Line

The next six months may be the most critical in the company’s history. Adobe’s customers, competitors and the stock market will be watching closely and any major stumbles will have very serious repercussions for Adobe’s bottom line and its future as an independent company.

Up next: What Adobe’s Cloud gamble means for the consumer

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