Adobe to Sell Software Online to Spur More Frequent Buying

Adobe Systems Inc. (ADBE) is overhauling the way it sells its most popular software to spur more frequent purchases by distributing programs such as Photoshop and Dreamweaver over the Internet.

Chief Technology Officer Kevin Lynch plans to release what Adobe calls its Creative Cloud software package early next year. The company will let customers rent programs on a monthly basis and share their work across PCs and mobile devices, rather than make larger purchases that can cost more than $1,000.

The move may help San Jose, California-based Adobe, the largest maker of graphic-design software, rely less on biennial releases to spur sales and record more consistent revenue growth. The Creative Cloud products make it easier for Adobe users to share their ideas over the Web, Lynch said in an interview.

“The reason we’re still here is we’re willing to change,” Lynch said in his San Francisco office, surrounded by the six computers, two tablets and a massive digital drafting table he keeps to test new product ideas. “If you look at Adobe software historically, it’s a person using a computer to make something. It’s no longer a solo experience. You’re not alone in the cloud.”

Sharing Work

Creative Cloud will move Adobe tools including the Photoshop photo-editing software, website-design tool Dreamweaver and publishing application InDesign to versions that customers can download for a subscription over the Web. They can share their work online through a so-called cloud computing service.

Adobe’s creative-solutions division supplied 45 percent of the company’s profit last quarter and delivered a gross margin of 95 percent. The company is facing competition from Apple Inc. and Microsoft Corp. and an industry shift away from its Flash technology for Web programming. The new way of selling software will add another challenge: protecting a gross profit margin that tops the software sector, according to Bloomberg data.

Computer users will pay less for online versions of Adobe’s tools than they do for versions that run on Macs and Windows PCs, said Brent Thill, an analyst at UBS AG in San Francisco.

Pricing to Come

“In the near term, the cloud is dilutive,” said Thill. Adobe, which plans to set pricing for the cloud computing version of its design tools in November, may need to keep prices affordable to attract freelance designers who are typically tight on cash, he said. Large publishing and advertising companies that use Adobe tools will continue to buy more expensive desktop versions because they’ll perform faster.

“Creative professionals don’t have a lot of money,” said Thill, who recommends buying Adobe shares because they are inexpensive. “Until the bandwidth gets good enough, no one’s going to go all the way to the cloud.”

Lynch compares the change from desktops to mobile devices and Web software to the shift from typed commands to mice 20 years ago. Creative Cloud will include access to six new “Touch Apps” for creating printed pages and websites using iPads and other tablet computers. Adobe announced the software earlier this week at a technical conference in Los Angeles.

While not as robust as Adobe’s pricey desktop tools, the Touch Apps may provide enough features to satisfy many users, said Lynch.

Soul of Photoshop

“It’s not everything Photoshop can do today on the desktop, but it is the soul of Photoshop,” he said.

Adobe has tinkered with subscription pricing before. Its Creative Suite 5.5 -- an interim release in April -- let customers download subscription-priced versions of Photoshop and Dreamweaver. This time, the company is folding Web, desktop and tablet versions of its software together under one pricing plan.

Lynch, who joined Adobe through its 2005 acquisition of his old company, Macromedia Inc., is also reckoning with the increasing popularity of HTML5 and other industry-standard software tools for creating video and graphics on the Web. Adobe got Flash in the deal, and the tools have been widely used.

Now the HTML5 programming language is supplanting them, and Adobe is adapting by supporting the new technology in more of its products. One new tool is the development software for mobile devices called PhoneGap that Adobe gained in its Oct. 3 acquisition of closely held Nitobi Software.

State of Innovation

“We see HTML in a state of great innovation right now,” said Lynch. “We are absolutely very focused on delivering new technology to the Web.”

Flash software has been shunned by Apple for its iPhone and iPad devices, most notably in a 2010 letter Steve Jobs wrote and posted online. The letter criticized Flash as outdated and ill- suited for the mobile device world.

Microsoft says the new design for Windows 8 won’t allow the use of Flash in its Internet Explorer 10 Web browser. Another version of the browser that relies on the older design of Windows will still run Flash.

Lynch declined to speculate on how relations with Apple might change in the post-Jobs era.

He preferred to recall his days as an early Mac developer in the 1980s, and of demonstrating Dreamweaver on stage with Jobs in 1997.

“He’s a very quick thinker, his patience is very short -- all that is true,” he said. Happily, the demo went well.

Adobe fell 5 cents to $25.28 yesterday in New York. The stock has dropped 18 percent this year.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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