Information Arbitrage: Adobe - Spry and Nimble or Microsoft II?

Note: this post was carried this morning on Wallstrip

Overview

Adobe is a cool company with some wicked cool products. And as readers know, I am all about investing with the wind at my back, and Adobe has a bunch of that with the need for a bridge between programming and design, the explosion in online publishing and products that have become the de-facto standard in a Flash-rich world. All that said, they’ve got some serious issues to deal with. Serious issues - the rise of open source, cheap, high quality alternatives, Microsoft gearing up to compete, a high price point that is pissing off loyal users, to name a few. So, my sense is that there is an epic struggle unfolding between the hip, nimble, forward-looking company that they’ve been in the past versus a Microsoft look-alike who milks their existing turf, makes gobs of money today but has a hard fueling organic growth. Adobe is a good story, a sound story, but a story with a very uncertain ending. Whether or not this risk is priced into their P/E is for you decide after reviewing the data.

Adobe vs. Microsoft - Stepping on Each Other’s Toes?

Some say no:

Robert Scoble talks today of a coming war between Microsoft and Adobe. For what it’s worth, I don’t see things this way at all… Microsoft and Adobe are in fundamentally different businesses, and have fundamentally different roles to play. Microsoft makes an operating system and expands outwards from there; Adobe provides the background technology for people to connect with their audiences regardless of media type. The new company will be much more clearly visible after the MAX conference this month. In the meantime, after checking with other folks here, I think the impression left by Robert’s piece is rather strange. He’s a nice guy, but I’m not sure of his speech.

We think yes. John Dowdell’s analysis would have resonated a few years ago when Adobe was more of a pure play, focusing solely on graphic/document management software, but the acquisition of Macromedia has expanded its pool of technologies. Also, the explosive growth of web application technologies such as AJAX demonstrates that the growing market for tools that bridge the gap between programming and design. It’s exactly this market that Microsoft and Adobe are vying for. It’s difficult to dispute that both are moving into each other’s turf.

Microsoft may be focused on operating systems, but their monopoly gives them huge leverage in changing standards. This is highlighted by the recent controversy surrounding Microsoft’s XPS file system and its attempt to completely blow Adobe’s PDF cash cow out of the market. The EU eventually stepped in at the request of Adobe.

Does this mean Microsoft has the early edge? Scoble thinks not yet, but the pieces are in place for a major battle:

Microsoft fired its big gun with the Visual Studio 2005 vs. Dreamweaver page. But, don’t count Adobe out of this fight yet, this is only the first battle in a multi-year, multi-billion-dollar battle. I was over at Adobe yesterday and they have some major things coming next year that’ll play off of Adobe’s strengths and take the battle back to Redmond.

Looking at Microsoft’s list it’s interesting to note what’s not there. Some things that come to mind?

Video. Adobe’s Flash is what YouTube used. Microsoft doesn’t have a good video story anymore because it pulled out of the Macintosh, which is where a lot of video folks spend their time.

Web standards. Yeah Visual Studio supports most of them, but weird that they didn’t call that out. For designers this is the #1 most important thing whenever I hear them talking at conferences or on blogs.

Integration into print workflows. Adobe’s strength is its Acrobat franchise. That came from print fidelity. Things look the same on screen as they do in a magazine. Microsoft is just getting onto that bandwagon with Windows Vista printing. Also, because Dreamweaver rarely sits alone, but as part of InDesign and Acrobat, it has a strong print-centric workflow (ask Printing for Less’ CEO what designers use to create printed items and he’ll tell you largely Adobe software).

So, you can see how Adobe and Microsoft are going to attack each other over the next year. Adobe comes at it from design/video/print/layout. Microsoft will come at it from the programmer’s point of view. Tools. Protocols. Source code control. Debugging.

You’ll see both shoring up their offerings where they are weak. Winners? Both designers and developers who’ll have a raft of new tools and approaches to choose from.

Scoble is a rock star. Man, that guy is smart.

Another interesting perspective is from PolyGeek, who has an excellent post responding to an Adobe employee’s take on why Adobe (with its Flash technology) will set the standard with Flex:

Flash video is has become an overwhelming success. Using anything else these days is rapidly becoming a joke.

Vista has slipped and along with it Windows Presentation Foundation/Atlas. Flex is out there and is picking up steam by the day. Any hope they might have of stealing away support for Flex is waning. There’s no doubt that WPF will have wide support because the most of the current crop of .Net developers are likely to pick it up. But as time goes by that number will wain. The Windows platform isn’t going to get any bigger than it is today.

Bloggers Been Berry, Berry Good to Me

In addition to high-end web development, blogging as caused a massive growth in online publishing. Adobe is very well-positioned in this respect with their web publishing tool Contribute. This product as been praised by the professional blogging community, even receiving special recognition from Six Apart – the maker of Movable Type:

We’ve been fans of Adobe for a long time — their blogging community on Movable Type is a great look inside one of the largest and most innovative software companies in the world, and of course we’ve worked with their teams in the past to add Movable Type and TypePad template support to tools like GoLive and Dreamweaver.

That’s why it was especially exciting to see the announcement of Adobe Contribute 4. (You might remember the tool back when it was still called “Macromedia Contribute”.) Contribute’s a great web editor that builds on Dreamweaver’s HTML publishing engine.

But unlike Dreamweaver, Contribute is designed for regular people to be able to update your website. Hey — that sounds like blogging! Contribute is now the chocolate to your Movable Type peanut butter.

Talk about tail winds - this is great stuff!

But Not All is Rosy in Adobe-Land

As if pirating wasn’t enough of an issue, Adobe now has to contend with several successful low-cost and open source tools. While open-source GIMP still falls short of user’s needs, many proponents are hopeful that future releases will improve (as is often the case with open source applications):

NewsForge on GIMP:

These packages are not Photoshop, and while they are all powerful in their own right, they do not match the powerhouse that is Photoshop.

TheWheel on GIMP:

It seems that there’s place for both applications. I won’t discuss Photoshop’s superiority — it’s factual. But still, there are certain tasks that can easily be accomplished with Gimp without having the need to pay for Photoshop.

LinuxAdvocate on GIMP:

We all know that the GIMP is more or less the de-facto standard for image editing in Linux, where Adobe Photoshop is the standard on the Mac and Windows (and some Linux boxes using Crossover Office) The question is the following: Does GIMP have what it takes to dethrone Adobe Photoshop as the standard? Right now, the answer is no. But there is that distinct possibility in the future… the world will finally have a free / open source replacement for Photoshop, which knowing the development base of the GIMP, will probably surpass Photoshop in a few years.

Now even as open source is posing a challenge, the biggest threat may come from low-cost commercial software. Much chatter has surrounded Pavel Kanzelsberger’s Pixel, retailing at $79 and able to run on Linux – a platform on which Adobe has refused to develop.

Tectonic on Pixel:

According to the results of a survey conducted early this year by Novell, Adobe Photoshop tops users’ lists as the most critical application not available on Linux. While Adobe continues to only support Windows and Mac OS X with most of its products for its own, unknown reasons, alternatives are becoming increasingly popular with the ever-growing Linux user base.

While Gimp may be a popular free choice, an exciting project from Slovakia called Pixel is a potential Photoshop-killer under development. Pavel Kanzelsberger’s Pixel uses the best of Photoshop and adds some really great ideas and features to take it one step further.

I’m obviously hoping for “better”, and the potential is definitely there. If Kanzelsberger gets it right, there could be serious trouble for Adobe, and it could end up paying the price of ignoring the Linux community. If it all comes together like it should, Pixel will be a serious competitor on Adobe-native platforms too. I don’t think that the first version will be quite up to Adobe’s standard, but future versions could be frighteningly good.

It’s Brass Tacks Time - So How do You React?

It remains to be seen how Adobe will rise to the challenge. Will it take the Microsoft route - only to see its market dominance slowly eaten way by Firefox and Open Office? Or do they get pissed, listen to their loyal users and innovate like hell? All we do know is that while Adobe will always have its fan base, many users are dissenting and dismayed at their lack of options:

Subtraction - Listen Up, Adobe:

It’s almost pointless to enumerate their many shortcomings, but here are just a few: a massive and unrealistic processing overhead required any time you launch one of the suite’s programs; a general decline in reliability and a general increase in crash frequency; a surfeit of seemingly arbitrary, low-level changes to how basic commands are invoked and executed from version to version, often invalidating years of customer habits. Everything bad that you can do to these once effective, industry-leading software programs has been committed by Adobe in the name of ‘improving’ them — not the least of which is the basically ill-advised idea that they should be bundled and sold together as a prohibitively expensive “suite.”

Gilbane Group - Acrobat Still Suffering from Schizophrenia:

On Monday, in the wee hours of the night (my email was sent at 12:27 a.m.) Adobe emitted three short press releases announcing Acrobat 8. I’m a fan of Acrobat and PDF, so I always look forward to new versions of this ungainly but hugely-popular product. Sadly release #8, at first look-see, leaves me thoroughly unmoved.

And let’s not forget the legions of Apple fans disappointed that the switch to Intel hampered performance.

Brad’s Blog - Apple Computer and Adobe Creative Suite - Same Page?

According to Adobe’s Press release on the subject, they put out some marketing stuff about “being dedicated for 20 years to the support of Apple Products” and that it’s normal life-cycle for developing its software to work on something new is 18-24 months. It also seems by the release that the whole Intel switch was a surprise to them, and “now that it’s been released” they’ll begin designing for it. Is this really Adobe saying this? Does a company as large as Adobe really wait until something is released to start making a plan to design for it?

Needless to say, in the immortal words of Jerry Seinfeld - “Not good. Not good.” This is about as mixed a bag of data and commentary as you could get. Net net, risk is high. The possibility of a moon shot is certainly resident, but the probabilities of execution risk weigh heavily on this scenario.

Thanks again to Rick Calmon for his stellar data gathering.
The author does not hold a position in the securities of Adobe.