A lot of big technology companies talk about their cloud strategies. But few have been as bold in their approach as the San Jose, California-headquartered Adobe Systems, the maker of Photoshop and Acrobat software. In a dramatic shift, it has dispensed with its pay-once-use-always business model and moved on to a subscription service, paving the way for the company to offer its expensive products at much affordable rates, curb rampant piracy and to expand its revenues.
“The Wall Street likes businesses that are growing and have a predictability of the business,” says Umang Bedi, managing director, South Asia, Adobe Systems. “Our second quarter results ended May 30 show that customers are increasingly seeing the value of the Creative Cloud. The company’s transition to subscriptions is proceeding well.” Creative Cloud—a bundle of integrated software for creative professionals—has also reached the Indian shores. India, today, has twice the number of creative professionals than the US, according to Bedi.
Adobe said it added 464,000 paid Creative Cloud subscribers in the second quarter, ending the quarter with 2.3 million paid subscribers. The company said it expects to have 3.3 million subscribers of its Creative Cloud suite at the end of fiscal 2014, up from its earlier forecast of 3 million. This result has not come easily, and senior Adobe management have made bold changes in recent years to reinvent the 30-year old technology company. Recently,
the Adobe India MD spoke to
Sudhir Chowdhary about the company’s reinvention and the benefits of this new business model to his firm and to the consumer. Excerpts:
Adobe Systems has transitioned from its pay-once-use-always business model to a subscription service. Tell us something about your transformation story.
Adobe started as a company about 30 years ago. At that point of time, we were really focused on doing just one job—revolutionising desktop publishing. Somewhere in the early 90s, we found one niche segment of the market which was focused on creative professionals. A creative professional is someone who is creating content in any medium—print, online, photographs & images, or video.
What we have done from the 1990s to about 2003-04 is that we really established ourselves as the defacto standard in the creative community. Today, when you think about most of the newspapers that are printed in the country, the entire layout is done using our technology. Same is the case with magazines and online content. We had something which we call the Creative Suite which you could buy it as an individual point product, or you could buy the whole suite and that is how we sold it traditionally in the market. It was a perpetual license.
At the same time about five years ago once we had established clear market leadership across all of these product categories within the Creative Suite, we realised that content was increasingly going online. Customers were telling us whether this content is working for us or not. How do I measure it? How do I monetise it? How do I take that content and port it across 20,000 different mobile devices, and so on and so on. That’s what really gave rise to a business called digital marketing.
Today we have built the largest digital marketing business on the planet. We are powering more than 15,000 brands. We run websites for them. We run their mobile sites for them. We have got an integrated suite called the Adobe Digital Marketing Suite that
today has been powering the largest brands in the world.
Literally out of nowhere this has now become a $1.25 billion business out of scratch which is growing at about 40% y-o-y on bookings and 30% year-on-year in terms of actual revenue growth. This entire business is delivered as software as a service, the new side of the business.
Pay once, use always. Am I right?
Absolutely. But there were pros and cons of that model. The pro was you spent your money once and you could use it for perpetuity till as long as your hardware supported that software. The other pro was you got the ownership of that on your books so CIOs would typically depreciate those assets. Some people depreciate software in two years and some people in three years and some people in five years. But they could depreciate that asset off their books. Third was the companies had preferred higher capital expenses. They preferred that kind of a model.
But the cons of the model were first just the sheer affordability. So Photoshop was R75,000 as a single app right and the whole Creative Suite was in the tune of R3.5 to R4 lakh. Now you have paid us that money and you have paid us 20% per year as annual maintenance charges. When you think of a market like India where piracy has been very high, piracy is not high because people want to pirate; people also can’t afford it. So we realised two things. One, there is an affordability issue in the market. The second thing that we saw was our inability to serve customers with the latest technology. What was happening is from Creative Suite 5 to Creative Suite 6 there was an 18-month gap. During that period, we were just doing bug fixes on the previous platform.
Adobe software was also at the receiving end of hackers...
Totally agree with you. The way the tool was deployed and the way it was used, a lot of concerns came up. The other side of it was that the business was flat; we are not really growing. But profitability was very high. It was very lucrative business to be in but we really weren’t moving the needle.
The other thing that we saw was what users were demanding. Users were saying “I don’t want to be creating software from my desktop. I want to create a website and I should be able to do it on my iPad. Also, I should be able to sync up my files between what’s on my desktop and on the iPad.” Basically, the creative process was changing because devices like tablets which were only being used as a consumption device suddenly got the compute power.
Talk to us about the Creative Cloud.
About 14 months ago we launched the Creative Cloud. But here is the innovation that we did on technology and commercial side. We took everything that was there in Creative Suite, which was I would call the family silver, and we put it into the Creative Cloud. That’s the first thing that we did. The second thing that we did in the Creative Cloud is that we added products that were never a part of the Creative Suite.
On our commercial innovation, we tremendously brought down the cost of erstwhile expensive products at much affordable rates.
You mean to say the latest products at dirt cheap prices?
At dirt cheap prices, absolutely! Now look at what’s its done to our business okay. We launched this last June and we have added 2.3 million paid subscribers. We added 464,000 paid Creative Cloud subscribers in the second quarter ended May 30 alone. We expect to have 3.3 million subscribers for the Creative Cloud suite at the end of fiscal 2014. The Creative Cloud suite includes Photoshop, Illustrator and Flash software.
The strong uptick in net new subscriber additions indicates that customers are increasingly seeing the value of the Creative Cloud offering. Now we are a $4 billion company out of nowhere and 25% of our revenue has become predictable. And the business which was flat at 2 to 3 points of growth has suddenly started growing at 14% to 23% in that range.
Have you also launched mobile versions of some of these apps?
Yes. Last month, we unveiled a new suite of mobile apps and complementary hardware that connect the Creative Cloud to Apple iPad. Adobe Sketch and Adobe Line enable the next generation of sketching and precision drawing on iPad. A third app, Adobe Photoshop Mix, offers a new Creative Cloud connected mobile workflow for anyone who wants access to powerful creative imaging tools on their mobile device.
How have the customers responded to the Creative Cloud in India?
Customer reactions have been very positive, which is what caused us to shut down our perpetual business. So we actually shut it down in December. Creative Cloud was launched last year. When you think about the individual segment of the market literally three months after launch 95% of all sales on our online store were for Creative Cloud, not the perpetual creative suite. Because the price points were so much lower. People really gave us very positive reactions on the software.
What are the challenges you faced in introducing the Creative Cloud in India?
Our biggest challenge was initially when we went through a learning phase. We had to take a decision of whether we apply it as a software-as-a-service platform or whether we do it as a subscription model. During our initial learning we realised that just the whole weight of Adobe software is pretty heavy and images and file sizes that transmit them on a cloud on an internet bandwidth in most markets barring the US, Singapore, Australia and Korea where you have very high bandwidth networks is very challenging.
What have been the benefits to the consumer?
Three benefits to the consumer. First they get the latest and greatest software from Adobe at any point of time, when they want it, where they want, on the device of choice. The second huge advantage for the consumer is the fact that the prices are much lower, far more affordable. The third biggest advantage for the consumer is that they have the ability now to use multiple platforms, multiple devices.