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Adobe Looks Precarious

Posted on Thursday, Mar 25th 2010

Adobe has two significant threats developing: Apple and Google.

Adobe’s (NASDAQ:ADBE) relationship with Apple has changed drastically, first from a symbiotic relationship to a competitive one and now to a bitter one. The iPhone doesn’t have Flash, and even the iPad doesn’t seem likely to have it. Adobe is now betting on Google’s Android to fuel its mobile strategy. At the recent Mobile World Congress, it demonstrated Flash on Google’s Nexus One. Let’s take a closer look.

Back in 2008, Adobe’s Flash Lite version for iPhone suffered from performance issues, and Steve Jobs recently called Flash a “CPU hog.”  Apple is now working towards using HTML5 for video and animation support as this technology consumes fewer CPU cycles and less power. Flash is one area where Apple has disappointed its loyalists.

In the recent earnings call, when asked about Flash on the iPhone, Adobe CEO Shantanu Narayen said, “We’re committed to bringing Flash to any platform with a screen. This has nothing to do with technology. It’s an Apple issue and you’ll have to check in with them.” Adobe and Apple’s relationship has visibly soured.

Meanwhile, Apple’s Aperture has been competing directly with Adobe’s Lightroom. Adobe recently updated the beta version of Lightroom3 to give users the ability to import and organize video files. This comes as a response to the latest version of Aperture 3 released in February, which also included video integration. Adobe also announced that it will be unveiling Creative Suite 5 next month. Adobe’s creative business accounted for about 58% of its total revenue of $2.95 billion in 2009, and Apple sits in a strategically strong position to threaten the entire franchise. Most creative professionals are die-hard Apple fans, and if Apple enhances its software offering in the area, they will most certainly give it a fair shot. Apple tends to develop excellent software, and with a couple of billion dollars of revenue potential at stake, it may attack Adobe where it really hurts if the relationship is not mended ASAP.

On another front, Google is also a competitor for Adobe, and only time will tell how strong Adobe’s relationship with the company will remain. With the Omniture acquisition, Adobe now competes with Google Analytics, a free product. If Google enhances the free product substantially, it will pose a direct threat to Omniture, known to be a cumbersome, long-implementation-cycle nightmare. Furthermore, Google recently acquired an image editing service Picnik, which, once again, if enhanced, can go up against Photoshop as a free alternative. The real threat from Google, however, is on Omniture, not on Photoshop.

In its first quarter results, Adobe reported a 9% increase in revenue to $858.7 million driven by stability in its creative business and its Omniture acquisition. Net income declined 19% to $127.2 million or $0.24 per share from $156.4 million or $0.30 per share last year. The company ended the quarter with a cash and investments balance of $2.7 billion. Long-term debt was $1.49 billion, amounting to a net cash balance of $1.18 billion. Q4 coverage is available here.

For the second quarter, Adobe forecast revenue of $875 million to $925 million, beating the average analyst estimate of $862.2 million. GAAP EPS is expected to be between $0.23 and $0.30. Following its strong guidance, the company’s stock jumped to around $37 with market cap of about $19 billion. It hit a 52-week high of $38.20 on December 16.

Based on what I have discussed above, I think that unfortunately, Adobe has a precarious future ahead. I would not invest in the stock at this point. If anything, I would short it. Most analysts, however, have given the stock a Buy or Hold rating. I think they have not done their homework.

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Disappointing commentary sramana. I’m disappointed to see an article written with such authority and poorly analyzed. You assume that HTML5 and picnik can be a threat to adobe. do you even know how foolish it is to compare Flash player with HTML5 and picknik with photoshop? Only an amateur will even attempt such a comparison.

And you also assume that with Flash not on iPhone is an end of the world scenario for Adobe. What makes you think that iPhone can survive Android onslaught in the coming years. What seems more likely is that iPhone will become Macintosh and Android phones will become windows of smart phone market. Have not seen the recent trend and the strategies being played out? Dont you see how turned off people are with Apple’s behaviour with ap store. What makes you think that someone will not take Apple down with a slew of anti trust cases.

And talk of Apple trying to take on Adobe on CS front is again ridiculous. Do you know how many times Apple and MSFT have tried doing so and fallen flat on its face?

Except for Final Cut Pro, Apple is no comparison to Adobe in app s/w. Apple is good at what it does – which is making devices. Dont assume that they can do just about anything right.

You seem to be basing your analysis on the whiff of wind blowing at the moment without giving it a thought that this who hue and cry about flash not being on iPhone is not as big a deal as it is made out to be.

PS: I’m not an adobe employee, jut happen to follow the co very closely

vam Thursday, March 25, 2010 at 5:15 AM PT

Read the article. I have said the threat is from Apple on Creative Suite and Google Analytics on Omniture, not Picknik.
The relationship souring with Apple is causing much broader problem for Adobe, which will spill directly into Creative Solutions.

Please don’t put words in my mouth and then say you are disappointed.

Sramana Mitra Thursday, March 25, 2010 at 7:55 AM PT

I do not anticipate Adobe will be displaced and become obsolete any time soon. However, they have not made any seemingly sound move to convince the shareholder if they are agile and smart enough to meet the changes in the marketplace. The apparent display of complacency is bound to hurt them in the long-run.

Rini Thursday, March 25, 2010 at 9:40 AM PT

No, but the stock is a precarious bet. If Apple launches a full blast attack on their creative professionals suite, the revenue impact of that will be very difficult to mitigate. That’s my point.

Sramana Mitra Thursday, March 25, 2010 at 9:47 AM PT

I agree with your point of view. I also think that Adobe is a bit expensive given the current climate and future uncertainty.

frank smith Thursday, March 25, 2010 at 12:52 PM PT

Part of the problem inherent in software that has no peer (such as Adobe Creative Suite), is that they can charge anything they want. The $2500 price tag (every 18 months) is unsustainable in a field that is collapsing from too many practitioners (whose average salary is $35K – $42K) and a business community that is perfectly fine with building websites and business cards online with no creative fees. The low end of the market that used to feed so many designers has all but disappeared. Adobe can’t sustain the inflexible price levels in a market that is experiencing deflation.

Ellen Lytle, M.A., M.Des. Tuesday, March 30, 2010 at 10:49 AM PT

VAM clearly has an axe to grind. Ignore.

Flash is a dying technology. Apple won’t support it on the iPad, iPhone nor iPod, and this is causing major websites to abandon it in droves (NPR, Wall Street Journal, Virgin Airlines, The New York Times, Time magazine, etc.) Google is moving away from it (e.g. YouTube HTML5 Video Player).

A lot of consumers hate Flash for various reasons (e.g. it sucks up RAM, wastes CPU cycles, often cripples graphic presentation, etc.) Flash blockers are popular browser plug-ins. *That* says a lot about the future of Flash.

FWIW: Apple hates Flash because, for years, Adobe neglected it on the Mac platform. Mac version was slower, less reliable than Windoze version (caused many browser crashes). Apple is fed up with that history and is out to kill Flash. That is the real reason it will never be on iPhone/iPad/iPod.

For more info, see:

http://www.appleinsider.com/topics/Flash_Wars.html

Hawkeye Tuesday, March 30, 2010 at 12:11 PM PT

Brightcove just announced HTML5 streaming support for the IPAD. If the backend flash providers are supporting it, the infrastructure will be in place for it. While Adobe does not make much obviously on the flash player, it has a huge halo effect.
Death by a thousand cuts…

Pano Tuesday, March 30, 2010 at 2:46 PM PT

Looks like some mac fanboys here too. A lot of arguments against Flash player assume that Flash is just a video player and compare it with QT and what not. That is so not true. Flash is almost a holy grail tech which has Photoshop’s graphics engine, Adobe InDesign’s text engine, physics engine, DRM, GPU engine, soon to be analytics engine, et al. No company/technology is going to match its capabilities anytime soon. Do you guys know even Macintosh rendering engine is licensed from Adobe? Noticed the clipboard format on Mac?

Then there is an issue people raise about it being a CPU hog. Have these people noticed that the same runtime runs fine in Internet Explrorer? Point is that Flash is CPU hog on Mac only because Apple wants it that way. Apple has been incredibly unsupportive of flash by not sharing information. And Apple has a perfectly valid strategic reason for doing so but to suggest that it is because of technical reasons is completely rubbish.

I completely agree that none of the iP** devices are going to have Flash anytime in forseeable future and reason is simple – it will take away Apple’s differentiating factor. Flash is a technology that unifies the multimedia/web experience on all devices/platforms and that is exactly what Apple does not want. How will Apple differentiate if iP** looks like any other device?

As far as pressure on CS segment due to pricing is concerned – a valid point but not something that cannot be worked out and I see signs of it from early beta programs. Watch out for that.

All this is not to suggest that Adobe has no problems, it has big ones alright but not those which are highlighted in the post. I feel Adobe is a good acquisition candidate for any other company which wants to give a open and consistent web experience. Google immediately comes to mind and they have recently been getting chummy buddies.

Sorry for the long post and sounding so anti-Apple but I am a bit. Apple is becoming much worse than MS in many ways and is not good for the whole ecosystem. They just don’t play fair and don’t reach out to everyone – only care about deep pockets, be it users or businesses. They make great devices and have managed to create path breaking business models but they severely limit your choice.

vam Monday, April 5, 2010 at 5:17 AM PT