Issue 26: Adobe’s cloud ambitions

October 4, 2019

This week, we'll learn about Adobe’s transformation from a software license business into a SaaS business. Adobe’s astonishing reinvention from zero to over four million SaaS subscribers in just 2.5 years is a rare one, as companies rarely transition from licensed software to SaaS. We’ll also consider the lessons Adobe has to teach other companies about innovation and business evolution through business model evolution, experimentation, and more.

We'll also look at Benedict Evans’ take on new productivity tools, consider the role higher education has to play in preparing workers, and learn how brands can differentiate themselves in crowded marketplaces.


ADOBE: THE GREATEST TRANSFORMATION STORY EVER TOLD

...or at least the 2nd greatest, according to the HBR story included in last week’s edition (read it here).

Up until 2008, Adobe was doing well with its perpetual-license software model. However, the recession hit the company hard when corporate spending slowed. At the same time, Adobe realized that the number of creative professionals wasn’t growing at the same pace, and buyers were likely to skip new versions of Adobe software if the existing versions worked well enough.

So, in 2012, Adobe decided to disrupt its own business. It transitioned from packaged software to SaaS for its main offering, Creative Suite 6 (which included Photoshop, Illustrator, InDesign, Premier, and other content creation software). Although Adobe continued offering the CS6 perpetually-licensed software alongside the new cloud subscription, it was clear that the subscription model was its focus.

A mere 30 months — 2.5 years — after launch, subscription revenues exceeded license revenue, at $2.1B and $1.6B, respectively. This was driven by 31% quarterly growth in the number of Adobe Creative Suite subscribers from Creative Suite 6’s mid-2012 launch through March 2014. See the below classic “hockey stick graph”:

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LESSONS FOR BUSINESSES

Adobe’s successful reinvention teaches businesses looking to radically rethink their business models. Here are a few important distilled lessons.

1) It’s never too late to change your business model. 

While the perpetual license model was a cash cow by most measurements in 2011 (generating over $3.4B in revenue with a 97% gross margin), Adobe didn’t allow the existing model’s success to close off the possibility that something else might be even better for the business. 

The New York Times’ mid-2010s shift to emphasizing digital subscriptions, which have a lower per-unit cost than the physical paper (much as the SaaS model for Adobe Creative Suite subscriptions have a lower upfront cost than the old perpetual license model), is an example of how this idea can work in other industries. In the Times’ case, its digital subscriber base has grown from 800,000 in 2013 to 3.4 million in 2018.

2) Experimenting with side-by-side models can help companies better evaluate potential transformations before fully committing.

It’s interesting to note that Adobe offered CS6 as both SaaS and perpetual license in 2012 — and in fact, the perpetual license for CS6 wasn’t retired until January 2017. By offering both models side-by-side, Adobe was able to observe the uptake for CS6 as both SaaS and perpetual license, and then to make a business decision on the best model based on comparison between the two models. 

3) Revenue growth through raising prices isn’t a sustainable long-term strategy. 

Before moving to the SaaS model, Adobe was driving revenue growth by 1) raising the price of its products and 2) moving people up the product ladder. However, as the 2008 recession showed the company, this wasn’t sustainable. Even with constant product improvements, there’s only so long you can keep raising prices — so finding different ways to guarantee revenue is necessary in order to sustain profits. 

4) Listen to customer feedback...up to a point.

Steve Jobs famously said about customer-driven product development, “People don't know what they want until you show it to them.”

Looking back at Adobe’s transformation into a SaaS business, one particularly striking thing is how little the company yielded to customer complaints. Although the shift to cloud wasn’t received well by all customers or employees (Adobe’s chief financial officer, Mark Garrett, recalls that “the reaction from some people in, say, IT or in the back office was that we were crazy”), Adobe’s leadership stuck to its convictions and committed to moving to a cloud-based SaaS business. This speaks to the fact that in enterprise product management, while it’s important to listen to customer feedback, businesses need to remember that customers aren’t in the business of making them a profit. 

Today, it’s hard to argue with the success of Adobe’s cloud-based model. By planning ahead and committing to the cloud-based model while its revenues were still healthy, Adobe’s leadership in 2012 set the company up for success in 2019 and beyond.


EXTENDED READING

New Productivity
It seems we weren’t the only people with productivity on our minds last week (see InnoMon #25). Benedict Evans observes that we’re currently in the middle of a “wave of interesting new productivity software startups.” He identifies two themes: 1) every application category’s rebuilding as a web application and 2) the shift to having everything online. What a time to be alive for the productivity-obsessed among us!

Does Higher Education Still Prepare People for Jobs?
Although employers and business leaders often complain about the significant gap between what students learn in college and what they actually need to know to be job-ready, the number of people graduating from universities continues to grow. With constant disruption and job evolution in the labor market, it’s hard to argue that the knowledge acquisition historically associated with a university degree is still relevant. 

How to stand out in a crowded marketplace
Lowered barriers to entry have yielded increasingly crowded marketplaces for quite literally everything. Traditional retailers are struggling to differentiate themselves not only from digital entrants, but from their peers. For brands lost in the “undifferentiated middle,” failure to connect with customers is a big piece of the puzzle. To differentiate its brand, a company should first understand its strategy:

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By differentiating itself, a brand can significantly increase its growth:

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