The Financial Side of the Cloud from Adobe's Perspective

(commentary)

I finally had time to look through all the materials that Adobe presented at Adobe Max, as well as a series of messages from key Adobe managers, evangelists, and defenders. 

One surprising aspect of this were the specifics on the financial side. Let's put some historical numbers in context: Adobe sold 8.4 million suites (CS3 through CS6) and 4.4 million individual products (again, CS3 through CS6). The numbers for CS6 only are 4.1 million and 1.5 million respectively. Of that, Adobe estimates that about 10% is to individuals working at home (enthusiasts, hobbyists, retirees, semi-pro photographers, etc.). Total revenue in 2012 was about US$2 billion. Remember, that with packaged software, Adobe was often selling at a discount to retailers and resellers, so not getting all the money you probably paid for your copy.

Adobe's assumptions are basically these: (1) they will reach 3.5 million subscriptions with Creative Cloud by their fiscal 2015 (up from the current 479k); (2) perpetual software sales will drop eventually reaching near zero by fiscal year 2016; and (3) the changeover will actually lower Adobe's revenue for fiscal 2013, 2014, and 2015, with only 2016 showing them having more revenue than 2012. There's one more critical assumption in their forward projections: 50% of the Creative Cloud licensees are expected to be individuals.

So Adobe is expecting to lose users for awhile (4.1m CS6 owners versus a bit over 1m CC renters at the end of 2013, 2m in 2014, and 3.5m in 2015). Implicit in this particular growth curve is another assumption: that a number of perpetual suite owners finally give in and rent Creative Cloud (or, I suppose, that some huge number of new creative professionals suddenly land on planet Earth and demand software). 

What that means is that all those petitions, user protests, discussion rants, blog complaints, et.al., are going to fall on deaf ears. As long as Adobe sees an up-tick in Creative Cloud licenses they're going to believe they've made the right move. The 50% of their market they believe are corporate, teams, or large enterprise are probably going to go with Creative Cloud. Individuals who have a healthy business and use these tools are likely to go along, as well, if not immediately, when some feature changes and the companies they sell to require they use it. It's that 10% non-pro group and the 25% education group that are most upset about Adobe's changes, and the ones least likely to jump on board the cloud (at least in the short term). 

Personally, looking at Adobe's projected numbers, I see a lot of risk on Adobe's part. Most of that is centered on one thing: 50% individuals. That means that half their Creative Cloud revenue is dependent upon people putting a monthly charge on their personal credit card. At the end of 2012 the average credit card debt was US$7000 (and US$15,000 if you only consider those that maintain carryover debt each month). While that's come down from a peak earlier in the Great Recession, it still is a very high number, and any economic slowdown puts continued credit charges at high risk.

The monthly nature of Adobe's software charges has a wicked potential downside for individuals. Let's say that you were able to pay the monthly charge because you had work coming in that more than paid for it. Then you lose a client or two, or you're disabled temporarily, or you have another financial setback of some sort and have to cut off your subscription. As I've noted earlier, that means you're also cut off from your work until you resubscribe. This has the potential for becoming a Catch-22 for some once they fall in that hole.

Still, the bottom line here is that Adobe is committed to Creative Cloud. No amount of protest right now is going to change their minds. I suspect they'll need to see what happens through the first full transition (remember, prices are discounted for the first year) before they actually get a clear understanding of actual versus estimated, which is going to put us well into 2014 before Adobe does any serious re-evaluation.

I believe Adobe knows the risk they're taking. I also believe that some at Adobe are considering what to do about the individual photographer market they've upset. To that end, I have a proposed solution: create a new standalone "Photoshop" for Lightroom. That product doesn't need all the things that the current program has. Indeed, it should be more of a container for "extensions" that deal with pixel data (e.g. plug-ins). Give it the fixed Color Space of Lightroom and 16/32 bit data, give it the layers, alignment, and pixel-level tools, but leave everything else up to filters, scripts, and actions (i.e. fully define how the product is extended by plug-ins). Such a product is simply an extension of Lightroom, thus you sell it as Lightroom Pro (Lightroom + the extension). 

Adobe knows how to do this type of project. It's exactly how they created Lightroom in the first place: get key developers together with enlightened photographers, then define the workflow, which in turn defines the feature set and interface. Then start coding. To bad they didn't start this project before the hoopla about Creative Cloud set in. [Apparently Scott Kelby suggested something similar on one of his video sessions; plus apparently Jeff Schewe is now asking about something similar on Luminous-landscape discussion groups. I don't take any ownership in the idea itself; frankly, I thought it was an obvious development project when Lightroom first appeared.]

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