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Macromedia Looks Flash in Cell Phones

By Sarah Lacy Since 2003, amid much skepticism from some investors, Macromedia execs have been talking about how the next generation of cellular phones will transform their outfit's business. Now it looks like there is something behind all that talk. In the last month, the kingpin of software for adding interactivity to Web sites announced deals with cell-phone makers Samsung and Nokia (NOK) to include Macromedia's popular Flash multimedia technology in certain high-end phones. Financial terms weren't disclosed, nor did the companies specify how many phones will actually ship with Flash.

But without a doubt, San Francisco-based Macromedia (MACR), a design-software company many investors overlooked in recent years, is going to benefit. Macromedia will make royalties on every phone shipped with Flash. It won't say how much, but analysts estimate royalties at about 50 cents per phone.

ENORMOUS MARKET. So what does that amount to? To get an idea, consider Nokia's smart phone, the Series 60, which has 20 million customers, and whose sales are growing 100% per year, says Antti Vasara, head of Nokia's mobile-software sales and marketing.

Before these deals, Flash was on about 20 million phones, the bulk of which were part of NTT DoCoMo's (DCM) network in Japan, a Macromedia partner since 2003. In Macromedia's fiscal third quarter, which ended in December, it made $5.9 million from the inclusion of Flash in mobile devices.

While that sounds like a small amount, consider the massive market opportunity on the horizon. Nearly 200 million handsets shipped in the fourth quarter, according to market researchers at IDC. And for the year, shipments were up 30% from 2003. Some analysts estimate nearly half the phones shipping next year will have enough memory to run Flash. If current growth rates keep up, that's roughly 500 million phones with Flash potential.

ONE SIZE FITS ALL. Taking it a step further, if Flash one day becomes as widely used on cell phones as it is on PCs -- it's installed on 98% of new PCs -- it will be a tremendous windfall for Macromedia. "This kind of licensing deal has pretty much 100% gross margins," says Martin Pykkonnen, analyst with Janco Partners.

So what exactly is Flash? For an easy way to integrate rich animation, audio, and video, nothing beats Flash, developers say. Flash makes content more Web-like and interactive, notes Don Harris of San Francisco's Air Media, which adapts games and other Web services for mobile phones.

Flash was revolutionary in the early days of the Web because its animation and video look the same on any browser, and on any size screen. t would do the same thing for cell phones. Developers building offerings for cell phones currently have to design different versions of a game for the varied handsets, carriers, and screen resolutions.

"A VERY IMPORTANT THING." Cell-phone service providers are also hungry for more content-rich offerings, like video feeds and games. "We want to sell more phones," says Vasara of Nokia. "To make our money, we need to have the best phones with the most compelling content and the most innovative applications."

Clearly, this is the future for Macromedia. Analysts figure Flash for cell phones will account for a quarter of annual sales within a few years -- a welcome development given that its traditional design-software business is slowing. It sold $369 million worth of software last year, and in late January, raised 2006 guidance to more than $500 million. "This is a very important part of everything we are doing," says Macromedia CEO Stephen Elop. "This is very much the next generation of the company."

Elop says he won't be satisfied until Flash animation is on every consumer-electronic device with a screen. He wants to see digital-cable menus in Flash and GPS monitors in cars employing it, too. Last week, Elop bought a printer for digital photos, and he couldn't glance at it without thinking how much better it would look with a Flash-enabled screen. "It was a cheap device you plug your digital camera into, with a screen built on the front," he says. "It didn't have Flash, but it had these screens and interfaces Flash could have really helped with."

NEEDED: MORE DEALS. Wall Street is beginning to believe. Macromedia's stock has been trading at a two-year high in recent weeks, closing at $34.02 on Feb. 23. In the last month, it has been upgraded by analysts at Robert W. Baird, RBC Capital Markets, and Adams Harkness & Hill.

Challenges abound. Analysts want to hear of more distribution deals. Plus, it remains to be seen if U.S. cell-phone carriers will be willing to pony up like those in other countries. Nonetheless, this is as big an opportunity as Macromedia has ever had. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau

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