Adobe’s Cloud Math Means New Programs Will Sell for Less

Adobe Systems Inc. (ADBE) is making its first big foray into subscription-based software, testing a business model that is designed to attract new users and stabilize revenue growth after years of uneven results.

The company today unveiled the latest edition of Creative Suite, its flagship set of design applications, including Photoshop, Dreamweaver and Illustrator. One version of the software, Creative Cloud, will be delivered over the Internet for $50 a month, or $600 for a one-year contract.

By moving to subscriptions, Adobe is attempting to make sales growth more predictable, avoiding the revenue shortfalls and stock declines that occur in between updates to Creative Suite. The shift also carries risks. It will take Adobe more than four years to collect from cloud customers as much as it generates from a single sale of the desktop version of the top- end “Master Collection,” which goes for $2,600.

“A lot of things are changing at Adobe,” said Steve Ashley, an analyst at Robert W. Baird & Co. in Milwaukee. “Now people who couldn’t afford the car can lease it for less money.”

Sales of Adobe’s digital media software, which includes Creative Suite products, such as the Photoshop editing software, Illustrator for drawing, Dreamweaver for Web design and After Effects for video editing, may increase just 5 percent to 7 percent this year, said Ashley, who has a neutral rating on the shares. Historically the segment grows about 10 percent a year, he said.

Source: Adobe Systems Inc

A screenshot of Adobe's Photoshop CS6. Close

A screenshot of Adobe's Photoshop CS6.

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Source: Adobe Systems Inc

A screenshot of Adobe's Photoshop CS6.

Trial Balloons

Chief Executive Officer Shantanu Narayen introduced Creative Suite 6 today with a gala at San Francisco’s de Young Museum that included a citywide scavenger hunt, champagne reception and 30-foot balloons depicting Photoshop and other products towering above the art museum’s Golden Gate Park concourse. It’s an apt metaphor as Adobe floats some trial balloons of its own.

The revamped package of programs for print, video and Web designers, scheduled for release by late May, includes the first major update to Photoshop in two years as well as faster image processing and new “content-aware” editing technology that makes intelligent assumptions about how to fill in backgrounds. The new suite also includes more tools for designing tablet- computer apps and more support for HTML5 technology, an open Web standard that’s replacing Adobe’s older Flash tools for many Web designers.

Reinvention

“Which other company can you look at to have a strategic relationship for all of your content needs?” Narayen said in an interview after the event. “This business will continue to grow,” and sales will increase faster next year, he said.

“People recognize that to build meaningful franchises for the future, you have to reinvent yourself,” Narayen said. “Transforming companies takes time sometimes.”

The biggest change is the transition to subscription pricing. The San Jose, California-based company, whose products command a loyal following among longtime users, is overhauling its business model to stay current.

Creative Cloud will cost $50 a month with a one-year commitment -- or $75 a month without one -- and give users access to 20 programs, which they can install on an Apple Inc. Mac or a personal computer running Microsoft Corp.’s Windows. It will be available even when they’re not connected to the Web. Adobe also will include a cloud-computing service for sharing work with colleagues and clients through a Web browser.

Promotional Rate

Owners of some older versions of Creative Suite will be able to qualify for a promotional $30-a-month rate for the first year. A version for business teams will come later this year, at $70 a month.

“It’s the new model of how software is being delivered,” Kevin Lynch, Adobe’s chief technology officer, said in an interview. “It’s very important to us to stay relevant.”

At a presentation to financial analysts in November, Narayen and other Adobe executives said they expected the Creative Cloud eventually to attract hundreds of thousands of new customers and add $1 billion in sales of software delivered as a service over the Internet. Yet sales in the near term will probably take a hit.

“Some short-term revenue may look like it’s not going up as much,” Lynch said. “The move to Creative Cloud is beneficial to Adobe and to our customers. So if it happens more quickly than we expect, that’s great. We have the mother of all spreadsheets to model this thing.”

Stock Performance

Adobe shares have gained 15 percent this year, compared with a 17 percent increase in the Standard & Poor’s 500 Information Technology Total Return Index. The company’s shares fell 1.3 percent to $32.62 at the close in New York today.

Investors generally buy Adobe in the months leading up to a new suite release, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon. The advent of cloud- computing subscriptions could change investing strategies as revenue won’t increase as much with each new version.

“In the dozen years I’ve been an analyst, I’ve never seen a company go through this kind of transition from on-premises to subscriptions pricing without some speed bumps,” said Barnicle, who downgraded Adobe to sector perform last month.

Companies including Microsoft, CA Inc. and Autodesk Inc. (ADSK) have moved to subscription pricing, and software-as-a-service companies bill on a monthly or annual basis instead of charging customers upfront to own their software in perpetuity.

“Adobe waited so long to do this,” Barnicle said. “It’s just very difficult for any management or finance team to model that.”

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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