Transitioning to the cloud: Adobe hits it out of the park

Adobe is a case study in moving from traditional software delivery to the cloud. The bottom line seems to be enjoying the change.

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On a regular basis, I get asked for examples of companies that have moved from traditional licensing models to subscription-based and cloud-delivered ones. The number of companies to have made this transition successfully is actually pretty limited -- whether the barriers are technological, cultural or market perception-based, there are far more examples of cloud vendors disrupting traditional ones than there are of traditional vendors successfully transitioning to the cloud.

Adobe, however, is one example of a company that has navigated this change with aplomb. Indeed, case studies have been written about what the company did to avoid the pitfalls of customer cannibalization, a move from perpetual to subscription licensing, and a need to have a more direct relationship with customers.

There was significant pain to be worked through on the way -- Adobe developed a new digital marketing business and changed to a subscription model of pricing. The pain it suffered in the process is not insignificant, as the HBR case study states:

"In 2012, Adobe transformed its core creative software business, now in the digital media business unit, by launching Creative Cloud (CC) where customers paid a monthly subscription fee. By May 2013, CC had attracted almost 700,000 paid subscribers and was far exceeding Adobe’s expectations, replacing Photoshop as Adobe’s most highly rated software in terms of customer satisfaction. As Adobe transitioned customers to CC and its subscription model, it had continued to offer customers the choice of buying its packaged creative software through resellers and retailers. Against this backdrop, Adobe hit a larger than expected bump following its MAX user conference on May 6, 2013, when it announced that it would no longer sell its packaged creative software and that all future innovation would be focused solely on CC. Although most MAX participants and industry observers  met the news with equanimity, some customers complained they were being forced to 'rent' the software -- which could eventually cost them more -- and might lose their work if their subscriptions lapsed. They asked Adobe to continue offering both options, as done by almost all other players, including Microsoft."

So Adobe's recent financial figures were a very real validation of the company's approach. While headline revenue from the creative products rose 44%, deeper down in the details of the earnings report were some pretty impressive metrics:

  • 798,000 new paying Creative Cloud (CC) subscribers in the quarter
  • 4.252 million CC subscribers in total
  • Over 30% of CC total subscribers are new to Adobe
  • CC revenue up 44% year-on-year to $733 million
  • Marketing Cloud revenue up 22% year-on-year to $377 million
  • 51 trillion customer data transactions via the Marketing Cloud in past 12 months
  • Document Cloud revenue was $199 million

The CEO of Adobe, Shantanu Narayan was the brave leader who first decided to take Adobe down the uncharted waters of a move to the cloud, and this performance is a very real endorsement of his approach. While some of Adobe's performance can be put down to the sheer volume of content being created across designers, photographers, videographers and mobile applications, the fact is that Adobe has had the prescience to give customers valuable offerings across all of those use cases.

Narayan commented on the fact that this move towards digital being seen as the core way of delivering business transformation plays nicely into Adobe's strategy:

"The solutions that we are providing...are playing to what is a very key need in the marketplace, which is everybody is dealing with digital transformation, everybody is trying to bring their businesses online. So there is no question on the marketing side as it relates to the kinds of solutions we offer. But the demand is only getting greater in organizations around the world."

Instead of just targeting the purely creative roles within an organization, Adobe has broadened its franchise to cover off more parts of the C-suite:

"We used to target the chief revenue officer, the chief digital officer, the chief marketing officer within the enterprise. That has now expanded to being a C-level issue all the way up to the CEO in terms of the customer journey. The opportunity is dramatically expanding, because this is becoming front end and center, not just for the marketing function but also at the C-level function."

While the move to the cloud is a painful one, it brings the significant benefit of reducing the occurrence of software piracy. The reality is that huge numbers of Adobe's and Microsoft's core product users don't pay for the products. This isn't the case with cloud-delivered software. Narayan reflected on this fact:

"When you look at the number of new users who are part of the Creative platform, which is 30% of the people who are doing business with us, there is no question that our surveys and anecdotal evidence speak to the fact that people who may have formerly pirated or used our products casually are paying for the service because its far more affordable. We are seeing increased growth in international markets where there was more piracy. The reality is we still haven’t offered the Creative Cloud product in China as Creative Cloud. So all of that is upside for us in terms of combating piracy. There is so much opportunity in the developed markets that’s where we focus. We continue to think as we roll it out in other markets around the world, it’s going to impact [piracy rates]."

Adobe, and in particular CEO Narayan, need to be congratulated for their transformation. It was easy, only a few years ago, to predict that Adobe's market penetration would crumble as more and more vendors offered cloud-based tools. Adobe presciently moved proactively and the spread of its product-base, the breadth of its customer-base and its bottom line financial performance show that the gamble is well and truly paying off.

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