Creative Cloud

ADOBE SYSTEMS INC.

IA16 – TEAM X6

Table of contents1. Executive Summary...................................................................................................................................... 2

1.1. Company Profile................................................................................................................................ 2

1.2. Key Performance Indicators........................................................................................................3

1.3. Main Issues.......................................................................................................................................... 4

1.4. Report Structure................................................................................................................................4

2. Industry Analysis........................................................................................................................................... 5

2.1. Overview of the Global Software & Services Industry..........................................................5

2.2. Industry Attractiveness – Porter’s Five Forces........................................................................6

2.2.1. Overview...........................................................................................................................................6

2.2.2. Buyer power....................................................................................................................................6

2.2.3. Supplier power.............................................................................................................................. 6

2.2.4. New entrants.................................................................................................................................. 7

2.2.5 Threat of substitutes.................................................................................................................... 7

2.2.6 Degree of rivalry.............................................................................................................................7

2.3. Profitability Forecast and Key Industry Trends................................................................................................................................................................. 7

2.4. Adobe’s Competitors and Strategic Groups................................................................................................................................................................. 8

3. Competitive Advantage.............................................................................................................................10

3.1. Differentiation Advantages............................................................................................................10

3.2. Differentiation disadvantages.......................................................................................................10

3.3. Cost Advantages.................................................................................................................................. 10

3.4. Is their competitive advantage sustainable?..........................................................................10

4. Business-Level Strategy........................................................................................................................... 12

4.1. What is Adobe’s business-level strategy?................................................................................12

4.2. Why the strategy? Is it appropriate for Adobe?....................................................................12

5. Recommendations...................................................................................................................................... 13

6. Appendices..................................................................................................................................................... 14

References........................................................................................................................................................... 17

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Ayumi ShibataChloe Champion

Edward HeywoodNgan Thu Bui

Omar JamilRustam Kuanshaliyev

1. Executive Summary

1.1. Company Profile

Adobe Systems Inc, a California-based software company founded in 1983, provides one of the most diversified product portfolios for creative professionals, marketers, application developers and knowledge professionals at both end-user and enterprise levels. Its products enable users to create, manage and deliver media content across a diverse range of operating systems and platforms. The products are distributed through its own sales force, value-added resellers, independent software vendors, original equipment manufacturers and retailers. The company also generates revenues from hardware manufacturers, software developers and IT service vendors via licensing its technology. Adobe Systems Inc has achieved a global footprint with operations and users across the four major continents (Americas, EMEA, Europe and APAC). As of 2012, Adobe employed 11,144 people and generated $ 4.4 billion in sales (Adobe Systems,2012).

Figure 1: Adobe Systems - Key Business Segments (Adobe Systems, 2012)

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1.2. Key Performance Indicators

Figure 2: Adobe Systems Inc. - Sales & Net Income (US $million) (FactSet Research Systems Inc., 2013)

Figure 3: Income & Expenses (US $million) (FactSet Research Systems Inc., 2013)

Adobe experienced a steady improvement in its revenue and EBITDA from 2009 to 2012. Its Net Income stayed constant over 2010-2012 period, but still lower than the 2008 figure. The company’s financing side remained sound with long term debt being stable around $1.5 billion and interest expenses accumulating to a minimal amount. But Selling & Marketing expenses have soared in recent years, which is attributed to the transformative strategies the company has been pursuing (FactSet Research SystemsInc., 2013). Regarding its main business segment, Digital Media, Adobe implemented a subscription-based model called Creative Cloud (for individuals) and Enterprise Term License Agreements (Creative Cloud for enterprise). As of September 2013, Adobe recorded 1.31 million subscribers. Adobe’s Annualised Recurring Revenue (ARR) increased to $655.0 million in Q3 2013 from $440.0 million in Q2 2013 (Adobe SystemInc., 2013).

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The majority of Adobe’s revenues came from the U.S. markets. Revenue generated from APAC increased steadily but still at a lower growth rate compared with Americas.

1.3. Main Issues

Adobe is facing challenges resulting from prominent changes in the industry and competition landscapes. The company has proactively responded to the shift from products to services (Software-as-a-Service otherwise know as SaaS) and cloud computing by implementing the Creative Cloud and the Marketing Cloud. However, competition remains intense as its competitors such as Apple, Microsoft and Aviary have all made similar moves. On the digital media side, some of its competitors who offer products through the traditional licensing model (e.g. Corel, ACDsee, Xara and Mediascape) are stealing its customers who do not welcome its switch to subscriptions. The software industry is also moving towards mobile device platforms (tablets, mobile phones, etc.), which facilitates competition from lower-end, small vendors such as independent application developers. Software piracy remains a major issue for the industry players and given the popularity of Adobe products, its adverse impact is particularly significant for the company. In its latest financial report (Adobe System Inc., 2013), Adobe also acknowledges the risks associated with its recent changes in business model.

Market acceptance for Creative Cloud is subjected to various factors including information security, regulations on privacy and user-generated content, technological infrastructure in different markets, and reliability of services. Adobe’s cyber breach in October 2013 in which 38 million customer accounts were affected once again questions the solidity of its cloud computing approach (Kuchler, 2013).

To fully implement its cloud-based strategy, the company has to maintain heavy investments in product development and service operations. It also risks losing partnership with existing distributors who resell its traditional perpetual license products. Besides, the success of the subscription model depends on renewal and upgrade rates which are currently estimated and subject to error.

1.4. Report Structure

Our report aims to critically evaluate the economic benefits and sustainability of Adobe‘s cloud-based and SaaS strategy by analysing both external and internal factors. In the next sections, we look at the Global Software & Services industry and Adobe’s direct competitors in the digital media segment, then its business strategy implied by Creative Cloud, and the rationale and competitive advantages of such a transition. Our

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report ends with an acknowledgement of other issues and recommendations for the company.

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2. Industry Analysis2.1. Overview of the Global Software & Services Industry

The global software & services industry (for the industry definition, see Appendix 1) generated a total revenue of $2,596bn in 2012, which was mainly driven by the IT services component (48.3% contribution) (MarketLine Industry Profile, 2013). Although the Software sector contributed only 11.3%, it experienced a robust compounded annual growth rate of 7.2% in 2010 and 2011. This growth slowed down to 3.6% in 2012 but is forecasted to return to 6.3% annually for the 2012-2017 period (Framingham, 2013).

Figure 4: Global software & services industry value: $ billion, 2008-2012 (MarketLine Industry Profile, 2013)2.2. Industry Attractiveness – Porter’s Five Forces of Competition Framework

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2.2. Industry Attractiveness – Porter’s Five Forces2.2.1. Overview

Figure 5: Five forces driving competition in the global software & services industry, 2012 (MarketLine Industry Profile,2013)

The software & services industry is fragmented with the existence of both large and well-established players as well as smaller ventures. The degree of rivalry is moderate thanks to diverse product offerings and robust growth. Individuals, enterprises and government entities constitute a diverse group of buyers. Suppliers tend to be incumbent major firms who have significant power over the industry players. Regulatory factors and competition imposed by large, multinational players who have already established their presence are the main entry barriers. Nonetheless, strong growth and high flexibility for product differentiation help alleviate rivalry and encourage new entrants (MarketLine Industry Profile, 2013).

2.2.2. Buyer power

Given the diversity of buyer groups, the level of buyer power also varies. For individual end-users and SMEs, their buyer power is relatively insignificant. Nonetheless, large enterprises or government entities whose IT contracts are often obtained through bidding processes and span over several years have much stronger buyer power. Losing one of those clients has a damaging impact on not only the player’s revenue but its reputation. On the outsourcing side, buyer power is considerably lower as buyers completely rely on market players’ services for their business operations. Reputation and brand name play an important role in the buyers’ selection process for such services (MarketLine Industry Profile, 2013). We conclude the buyer power for this industry is moderate.

2.2.3. Supplier power

The key supplier for this industry is human capital with technical expertise. It is estimated that know-how was worth 46% of the IT services market in 2012. The

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industry players heavily rely on their human resources and staff turnover as any disruption to employees’ services results in high switching cost. Hardware and middleware components tend to be purchased from sole suppliers who in turn impose substantial power on the industry players. Some large companies who successfully backward integrate their hardware and software business lines can become less reliant on external suppliers (MarketLine Industry Profile, 2013). Overall, supplier power in the industry is strong.

2.2.4. New entrants

New entrants can start at a small scale. Their specialist services are gaining popularity and outsourcing demand. Large companies still benefit from a cost perspective given their economies of scale and standardised products. Brand names established by large players act as a barrier to entry, especially with enterprise long-term contracts. Technical expertise requirements is another major barrier to entry. However, the existence of web-based and free software business models (fremiums) has proved that intensive initial capital outlay is not always necessary. Additionally, diversification potential for the current products still makes the market appealing to new entrants. Regulation is another barrier but only applies to a certain type of services e.g. data processing for financial institutions (MarketLine Industry Profile, 2013).Thereby, new entrant potential for this industry is moderate.

2.2.5 Threat of substitutes

The closest substitute for products and services offered by the industry players is in-house development of software and technical expertise. However, training staff and developing software in-house has been proved a more expensive alternative than outsourcing to several industries (MarketLine Industry Profile, 2013). Threat of substitutes is considered moderate overall.

2.2.6 Degree of rivalry

The industry remains highly fragmented with the top four players (Google, IBM, Microsoft and HP) holding less than 10% market share (measured by revenue 2012). Strong and consistent growth in the industry over the past five years mitigates the level of rivalry (MarketLine Industry Profile, 2013).

We believe the degree of rivalry in this industry remains moderate.

2.3. Profitability Forecast and Key Industry Trends

The strong growth in the software & services industry is forecasted to continue until 2017 with an emphasis on specialist services and tailored solutions. The key development for the industry moving forward is the shift from commoditised products to service-orientated offerings. Cloud computing represents such a shift. The PwC’s Global 100 Software Leaders report identified two key trends: the software-as-a-service (SaaS) model and the emergence of mobile device platforms that shift buyer power from large enterprises to individual end-users. In order to adapt to such dramatic changes,

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software vendors need to rethink their product development, delivery, pricing and post-sale services. Market players should also capture the growth from emerging markets in terms of demand as well as human and technical inputs (McCaffrey, 2013).

2.4. Adobe’s Competitors and Strategic Groups

Regarding Adobe’s main business segment, Digital Media, ACDsee, Quark and Corel are its main competitors.

Figure 6: Overview of Adobe's Competitors (ACDsee, 2013), (Quark, 2013), (Corel, 2013)

Product & Price rangeAdobe’s Creative Cloud is similar to the ACDSee 365, CorelDraw and the QuarkExpress package in offering different design and image editing tools in one package. Creative Cloud offers 16 software products, compared to 5 for ACDsee and CorelDraw, and 1 for QuarkExpress (see Appendix 2).Their prices vary considerably with Adobe pricing Creative Cloud at $49.99 on a monthly basis (1 year minimum contract). ACDsee 365 is offered at $79 as a one off annual fee. Corel provides the design package CorelDraw Graphics Suite X6 for $39.99 (licensed for $799.99). Quark offers QuarkExpress for $1,300 (see Appendix 2).Adobe has competitive advantages of including various software products for editing and enhancing media contents despite having the lowest entry cost. On the other hand, its competitors offer one complex program in which all design features are embedded.

Choice of distribution channelsApart from the traditional retail channels, Adobe successfully introduced InMarket, an app based store enabling devices to purchase Adobe products with ease. The Creative

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Cloud function allows all other inclusive software to be installed when needed (Ankeny,2010).Corel, Quark and ACDsee distribute their software in stores and online. But ACDsee‘s and Quark’s CEO suggest similar implementation of cloud-based storage services in the foreseeable future (Tung, 2008).

Figure 7: Adobe vs. Competitors in Strategic Group Map

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3. Competitive Advantage

Regarding Adobe’s main business segment – Digital Media, the company has two competitive advantages:

Adobe has the most diverse product portfolio among its competitors and has superior popularity.

Adobe is one of the earliest adopters of cloud-based services and the subscription model in its peer group. It entered the SaaS space in April 2012 with the launching of Creative Cloud, giving it a significant advantage in the market for cloud solutions (MarketLine, 2013).

3.1. Differentiation Advantages

The traditional licensing model makes it difficult for software companies to get customers to pay for yearly updates and increases the tendency for piracy to occur due to high entry costs. Adobe’s Creative Suite stands out from its competitors by making sure its products are of high quality, comprehensive and of professional standards by ensuring that all programs are regularly updated to the latest version at no extra cost (Shankland, 2013). With the cloud in place, customers are given the flexibility and freedom to work from any device (Adobe Systems, 2013).

3.2. Competitive Disadvantages

The subscription based service has also caused outrage among a group of pre-existing consumers. Certain customers want to have the freedom to keep using their current version, believing that they will suffer a price increase in the long run and do not like the idea of not being able to edit their files without paying a monthly fee (Shankland,2013).

3.3. Cost Advantages

Adobe ensured that its customers are committed to their services for a 12-month period regardless of whether they use the products imposing an increase to $70 a month if the subscription is cancelled, encouraging customer loyalty. This is important because it creates a higher switching cost for customers. Nonetheless, the new service initially requires continued investment in operations and infrastructure for cloud storage. In the short run, Adobe may suffer from cost disadvantages compared with its competitors who stay with the traditional model (Adobe System Inc., 2013).

3.4. Is their competitive advantage sustainable?

In order for a competitive advantage to be sustainable it needs to be valuable, rare, costly to imitate and nonsubstitutable. The Creative Suite is taking advantage of opportunities that have arisen due to the growing demand for cloud technologies. The Creative Suite is a rare product because no current competitor can offer 16 services at such a low cost. Despite jumping on opportunities, Adobe still faces concrete threats

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including intense competition caused by the backlash of the subscription model. Competitors such as Corel offer 30 day trial periods whilst Xara is lowering its prices and offering free updates (Shankland, 2013). Software piracy poses another threat to Adobe as well as fluctuations in exchange rates as Adobe generates substantial proportion of its revenue in foreign currencies. Hence, the competitive advantage achieved with Creative Cloud will not be sustainable in the long run if the company does not make further effort to innovate.

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4. Business-Level Strategy4.1. What is Adobe’s business-level strategy?

Adobe’s current strategy is focused on the transition from product licensing to Software-as-a-Service (cloud-based model), pay per use and term subscription models (Adobe Systems, 2012). There are a number of key areas that are involved in this business strategy:

Human resources: Adobe have adopted a customer centric approach by implementing best practices observed from a range of customer preferences, industries and solutions (Adobe Systems, 2012).

Technological development and investment: they have increased the magnitude of their investment into HTML5 by leveraging its new acquisition, Nitobi, to implement within their Dreamweaver and Edge products. They have put forward their Acrobat products in the document services market especially through the use of its recent acquisition, EchoSign, a product for making and signing electronic contracts (Adobe Systems, 2011).

Outbound logistics: although Adobe historically distributed its software via third parties, it has recently been increasing its customer reach by delivering its products via its cloud-based software solution and tablet-based applications (Adobe Systems, 2011).

Marketing and sales: Adobe markets its products predominately through the internet with 74% of their advertising and marketing budget being spent in this area. Adobe regularly releases betas of its products in an attempt to increase product awareness (Upadhaya, 2012). This also serves as a feedback mechanism for the company, allowing them to tune the product according to the suggestions they receive.

After sales service: Adobe has excellent customer service including phone, email and online chat assistance during normal business hours. Adobe offers the option of purchasing additional support and training for corporates (Upadhaya,2012).

Training: Adobe offers a range of training programs (spronsored workshops and fee-based education programs) (Adobe Systems, 2012) to increase their customer’s understanding of how to effectively use their products, decreasing adaptation times for individuals and firms.

4.2. Why this strategy? Is it appropriate for Adobe?

The industry as a whole has adopted a similar shift to SaaS models as is illustrated by PwC’s ‘Global 100 Software Leaders’ report (McCaffrey, 2013). Thus it is an appropriate strategy for Adobe not just to innovate but also to remain an attractive proposition to its consumers. By changing their business model, they have been able to provide access to their products to more cost sensitive users. Users who had older versions of their products under the licensing model are now able to obtain the latest versions of their desired product at a fraction of the price that the old model allowed. Users also benefit from the latest updates deployed in real time to the Creative Cloud. Adobe has

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significantly increased the value added it provides to its customers through offering attractive subscription prices and a wide range of products (Adobe Systems, 2012).

5. Recommendations

Adobe’s recent business transition illustrates its responsiveness to industry dynamics and its innovative capabilities. Nonetheless, there are critical issues with its cloud-based subscription model as well as further requirements for its business transformation to guarentee its sustainability as a market leader.

The success of its subscription revenue model entirely depends on renewal rates. Customer retainment is driven by the product‘s performance, quality of cloud services, and the security of information and user-generated content. Adobe is still investigating the cyber breach of October 2013 where millions of customer accounts were affected (Kuchler, 2013), which raises scepticism about its infrastructure and expertise in cloud computing. The company needs to stabilise its cloud platform, further improve its product offering in terms of variety and quality, and more actively engage with its customers (Sarrazin, 2013).

The emergence of mobile devices is another prominent trend in the industry which has not been fully capitalised by Adobe (McCaffrey, 2013). Indeed smaller vendors such as app developers are taking advantage of its negligible presence in this market. In order to effectively expand into this market, Adobe needs to simplify (e.g. lighter version with essential functionality) and increase the compatibility of its products with different mobile operation systems.

The subscription model has another limitation of restricting customers‘ flexibility to pay for what they actually use. Some customers express that they do not use all the software included in the Creative Cloud, in which case they overpay for the subscription. Adobe needs to introduce a pay as you go model alongside its exsiting models to win back customers from its competitors and give them a more diverse range of payment options.

Acquisitions are another alternative for the company to improve its business comprehensiveness but should not be exploited. It should focus on purchases that potentially enhance its product or operational capabilities rather than aim at eliminating competition given the fragmentation of the industry.

The variety of Adobe’s product portfolios can sometimes backfire as new customers find them too complex and are often confused when choosing one. Besides making its products more technically effective, Adobe needs to enhance their user-friendliness, which can be achieved via tutorials and customer engagement.

(Total Word Count: 3001 – does not include captions of graphs or tables)

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6. Appendices

Appendix 1: The Global Software & Service industry:

1. Defining the industry:

The global Software & Service industry is comprised of the Software sector, the IT Services sector, and the Internet Software & Services sector. The Software sector includes three sub-groups which are application software, systems software, and home entertainment software (MarketLine Industry Profile, 2013). Although Adobe Systems Inc’s main business line (digital publishing applications) belongs to the application software sub-sector, the company’s recent expansion in digital marketing makes the Internet Software & Services sector also become relevant for the scope of our analysis.

2. Geography segmentation:

The Americas account for the largest share (36.2%, equivalent to $940.8bn) of the global software & services industry’s revenue in 2012. Asia-Pacific and Europe contribute 30.2% and 25.2% respectively (MarketLine Industry Profile, 2013). Nonetheless, emerging markets including Asia-Pacific (excluding Japan), Latin America, and Central Eastern, Middle East, and Africa are expected to grow at 8.8% compared to 5.0% annually for developed regions (North America, Western Europe, and Japan) (Framingham, 2013).

Figure 8: Global software & services industry geography segmentation: % share, by value, 2012 (MarketLine IndustryProfile, 2013)

3. Market players:

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The leading players include popular names such as Microsoft, IBM, Oracle, Hewlett-Packard Company, and Google Inc. IBM held the largest market share (3.5%) of the global software & services industry in 2012 (measured by revenue) (MarketLineIndustry Profile, 2013).

Figure 9: Global software & servies industry market share, by value, 2012 (MarketLine Industry Profile, 2013)

4. The Software Sector (Fois & Lysonick, 2012):2.3.4.

4.1. Product categories:Products are sold in both ready-to-use and custom software packages that are tailored to individual enterprises.

- Application software: those that are used directly by the end-users to increase productivity and automation level in business processes.

- System software: the infrastructure foundation that connects hardware, software and network facilities together.

- Middleware and tools: intermediary software that enables interaction between system foundation and application software, as well as between different software.

- Electronic games: paid and ad-funded games providing visual interactions between users and a video display.

4.2. Revenue models:- Software products and licenses model: the direct sale of software products

with annual charges for support and maintenance services.- IT associated services model: revenue generated from human capital and IT

expertise e.g. IT consulting, integration services, specialised technical support, outsourcing or hosting services, etc.

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- Paid web-based model: a.k.a. cloud computing. Revenue is generated via a periodical “pay-as-you-use” framework with the use of the internet for product delivery to end-users.

4.3. Market player types:- Independent Software Vendors (ISV)- Hardware Manufacturers- IT Service Providers- Telecom Operators, Internet Players- Video-games Vendors

Appendix 2: Adobe vs. Competitors in Digital Media – Product range and pricing:

Adobe Creative Cloud

ACDSee CorelDraw QuarkExpress

Photoshop CC ACDsee Pro 7 CorelDraw QuarkkExpressIllustrator CC ACDsee 17InDesign CC Canvas 15

Dreamweaver CC ACDsee Video Converter Pro 3

After Effects CC ACDsee Photo Editor 6

Adobe Premiere Pro CC

ACDsee Mac pro 3

Adobe Muse CCAcrobat XI Pro

Adobe Audition CC

Bridge CCEncore

FireworksFlash Professional

CCInCopy CCLightroom

Media Encoder CCPrelude CC

SpeedGrade CC

Adobes Creative Cloud

ACDsee 365 CorelDraw Graphics Suite X6

QuarkExpress

Monthly Price ($)

$49.99 (contracted for 12 months minimum)

N/A $39.99 N/A

Annual N/A $79 $299.99 $1,300

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Price ($)

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