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Blair Reeves

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Adobe and Transformation

I’ve written a bunch lately about enterprise software and why its future looks bright. (Check out Tech Has Grown Up and Enterprise Software and the Deployment Age if you’re interested.) I’m gonna continue with that theme in this post, in which I’m going to hit a pet interest of mine: Adobe.

I think Adobe is one of the best-executing tech companies out there today. Its transformation over ten years from a license-based professional packaged software company for creatives into a first-in-class, multi-segment enterprise SaaS solutions vendor is singularly impressive. The pace of their innovation, to say nothing of their rocketship business results, are almost unparalleled. I’m not just talking about the stock price – when you actually understand what they had to do as a company to get where they are today, you have to be astonished. Neither the tech nor HBR-reading chattering classes seem to give Adobe the recognition it deserves for this turnaround. The latter group of graybeards mostly doesn’t understand the magnitude of what this transformation entailed, and the former is too in thrall to the GAFA glitz to care.

Here’s a look at what this transformation into a cloud vendor looks like:

Adobe full-year segment revenue (all figures in $MM)
2012 2013 2014 2015 2016
Creative Cloud $117 $472 $1,268 $2,265 $3,370
Marketing Cloud $556 $663 $798 $937 $1,180

I’m going to give my own high-level view here of how this transformation took place, why it’s so remarkable, and why anyone in enterprise software has a lot to learn from it. This post wound up being longer than I intended, and there’s still so much to say. But here goes.

I should say first that Adobe’s transformation is really deserving of a book-length treatment. I actually half-considered writing that book at one point, but honestly lack the time, resources or probably access to do so. I’ve also been a competitor of Adobe’s for a long time now. Since this is a blog post, and not a book, and most of my audience aren’t marketing tech dorks, I won’t bore y’all with background on the Omniture/Coremetrics rivalry. Let it just be said that it was intense, long-remembered, and I still have my Core t-shirt.

In the mid-2000s, Adobe wasn’t stagnant. Indeed, it was seeing healthy growth, but trouble was on the horizon. Most people know Adobe as the Photoshop company; indeed, lots of people aren’t even aware they do anything else. Photoshop was then, and remains today, one of the most-pirated pieces of software (certainly professional software) in the world. I suspect Adobe wanted two things: (1) to protect its core Creative Suite revenue drivers for the company in an era of growing piracy and shift to cloud software, and (2) add new organic business segments that would build on Adobe’s core competencies in digital creation and provide the basis for a step-change in the company’s overall growth.

So naturally, they went out and pretty much did both at the same time.

Becoming a Marketing Vendor

Adobe’s 2009 acquisition of Omniture for $1.8 billion was arguably the starting shot in the explosion of marketing tech M&A that then commenced. If you don’t work in that industry, this might seem irrelevant to you, but in a huge swath of the enterprise world (and certainly in marketing circles), this was an earthquake-level move. It represented something like a 6x multiple on Omniture’s annual revenue (Omni was already public at the time) and placed Adobe’s flag in the Salt Lake City-area tech scene. Adobe would follow this up over the next several years by acquiring Day Software, Demdex, Efficient Frontier, Neolane and several more marketing and advertising tech vendors, often at big multiples. These all became, of course, foundational pillars of its Adobe Marketing Cloud, but they all fundamentally revolved around Omniture (now Adobe Analytics), and still do.

Adobe recognized a couple of key things: first, as so much of our lives move online, companies of any kind will require more and better data about consumers’ behavior there. There are some clear linkages here to the creative content that Adobe’s core strengths were in – i.e., how is my content performing? – but it actually goes way beyond that. They saw that the very practice of engaging with consumers was going to completely change, and that no company really owned that solutions space yet. Entering a fundamentally new business as an enterprise solutions vendor would not be easy (Adobe had no real experience doing it), but they went for it anyway.

Omniture was valuable to Adobe not just for its book of business (Omni was the leading enterprise web analytics vendor of the day). The far more valuable long-term asset was the human talent and know-how that came with the company. Non-tech readers, I need to emphasize this: moving from a traditional, packaged software delivery model to software-as-a-service (SaaS) is hard. It means completely reworking all the technical stuff, like how your software runs, how you keep it running and how you give people access to it; and that’s before you even get to the organizational and human parts, like selling and servicing the product(s), which also totally change.

Critically, Omniture (like Salesforce and a handful of other major SaaS firms) began doing all of this long before AWS and the cloud infrastructure boom really blossomed. Like we did at Coremetrics and later Demandware, Omniture operated its own servers, code deployment services, scaling and cloud monitoring; they basically learned DevOps as they went and grew a sales operation completely around this new model. This well-tuned machine was really what Adobe was buying: not just $300 million in ARR, but a new core competency to make software solutions work at scale in the cloud. For that, I’d say they got a bargain at $1.8 billion.

Adobe likely agreed, because not even a year after buying Omniture, Adobe announced it was investing $100 million to build a major new corporate campus in Lehi, a suburb of Salt Lake City, its first branch unit outside San Jose. Just recently, Adobe announced it is almost doubling its presence there to around 2,500. (Meanwhile, its number of personnel in San Jose has mostly remained flat.)

The Lehi business unit was deeply involved in “cloud-ifying” numerous new solutions Adobe has acquired over the years, like Neolane (the French campaign management platform) and Adobe Experience Manager (or AEM, neé CQ5) and moving some of this workload over time to AWS and Azure. This Utah talent pool in cloud software has proven invaluable to Adobe, just as it has spawned a whole ecosystem of cloud tech in the “Silicon Slopes” – including Omniture founder Josh James’ new company, Domo.

In 2012, Adobe announced the Adobe Marketing Cloud – a full rebranding and repackaging of its acquired solutions around tracking, reporting, measuring and targeting customer behavior across digital channels. It was a dramatic streamlining of SKUs and options, meant to represent a more modular approach to buying enterprise solutions. Under the covers, it got pretty complex very quickly (number of server calls, dimensions, report suites, lots and lots of services hours, and many more), but the “market-ecture” was masterful. It was easy to understand and immediately grasp.

Adobe is probably better than any other enterprise company at crafting narratives around its solutions. The Adobe Marketing Cloud was a masterclass in doing that. Adobe’s marketing team combined its usual eye-popping graphic design with marketing stories that resonated deeply among a new class of software buyer: business users, marketing analysts and an emerging class of data-oriented digital marketers who felt poorly served or outright ignored by the antiquated tone and approach of “analog” marketing services vendors.

For years, I kept a graph of Adobe’s quarterly results that tracked total Marketing Cloud revenue. I split out SaaS revenue (since AEM was actually on-prem software for most of its life) versus cost of revenue, which encompassed the big costs in provisioning and maintaining all that cloud infrastructure. Over just a few years, those lines slowly diverged. Adobe got consistently better at adding customers faster than it had to add infra costs.

Adobe’s sales organization is legendary. Almost anyone in marketing tech will tell you that it’s wise to avoid head-to-head competitive deals against the “green monster,” because they’ll discount aggressively and early. They have clients everywhere. If you’re trying to sell into the llama hair dye industry, Adobe probably has a customer reference ready for it. Over time, a whole constellation of Adobe partners has sprung up across the globe who actually handle many Marketing Cloud implementations, giving Adobe a cut of the deal without having to spin the cycles internally to dedicate resources to it. It’s a virtuous circle.

The Marketing Cloud approach was so successful that it became the standard for the industry. IBM and Oracle both tried aping it, going so far as to introduce their own eponymous Marketing Clouds, and flatly failed. Salesforce has had a bit more success, but their “Marketing Cloud” isn’t a true apples-to-apples substitute for Adobe’s. Salesforce and Adobe, now both true enterprise cloud companies, engaged in a bidding war in 2016 to buy Demandware, another native SaaS success story. (This was after I’d left and gone to SAS.) Salesforce won, and Demandware is now their fast-growing Commerce Cloud, which is eating the ecommerce platform market for lunch.

In marketing tech today, Adobe is the best-in-class vendor, full stop. Their Digital Marketing segment (the Marketing Cloud) is now nearly a third of the company and still growing fast. The gamble worked.

The Creative Cloud

Creative software like Photoshop, Illustrator and Lightroom are the biggest revenue drivers for Adobe and always have been. In the 2000s, Adobe’s leadership had likely surmised that SaaS was the best way to continue to invest in new updates and features for this software while protecting against piracy, which was already a major problem.

In 2011, Adobe announced the Creative Cloud, where customers would access the key components of their trusted, heretofore on-premises Creative Suite applications and files. They announced that 2012 would be the last year when new releases were developed for Creative Suite – all future development would be exclusively in the Cloud. Needless to say, customers loathed it. The internet was on fire with indignation. 30,000 Adobe customers signed a Change.org petition asking the company to change its mind. Open letters denouncing Adobe were written, and oaths were sworn never to go back.

Adobe stood firm, and of course, most of this indignation evaporated. Customers switched. In that table above, the tripling of Creative Cloud revenue from 2013 to 2014 represented the first year in which Creative Suite customers had to migrate to get their hands on the latest and greatest updates. Its growth hasn’t slowed down.

Adobe’s Creative Cloud has had its share of challenges. Just a day after it was released in 2013, the source code was hacked. Later that year, millions of customer accounts were compromised, resulting in not a few identity and credit card thefts. There was a major file-syncing defect that resulted in a big feature withdrawal. Much of this is now recognizable as common early pitfalls facing large-scale cloud solutions – ones which the Marketing Cloud largely avoided. (The comparison isn’t completely fair, of course, given that Creative Cloud has millions of customers and Marketing Cloud has many fewer.) Nevertheless, today, you can go to Adobe.com and be up and running with a professional-grade version of Illustrator in literally just a few clicks, which is a remarkable state of affairs. Piracy still exists, of course, but has been dramatically reduced: users face both dramatically lower monthly costs for individual module licenses and much crappier versions of the pirated software. For most, the choice is clear.

In its move to the cloud, Adobe consciously chose a short-term impact on its biggest revenue stream. The booming revenue growth in Creative Cloud today obviously offsets the giant drop-off in Creative Suite sales and translates most of it into ARR. This migration of revenue is a tremendous feat. When you combine it with a company that was simultaneously adding a whole new pillar to its business in the form of Marketing Cloud, it becomes only more impressive.

Lessons to be learned

What can we learn from this story?

What I find most admirable is how Adobe’s leadership picked a strategy and committed to it utterly. They stopped paying a dividend in 2005, presumably to free up cash flow for an expensive series of acquisitions and capital expenditures to come. Adobe outlined a clear strategy for becoming a marketing vendor and committed not only massive financial resources, but time and patience, into letting this strategy work. This is one thing, probably the most important thing, that inspired executive leadership does – it develops good strategy and then persuades the board and investors to let it work. With investor confidence, Adobe’s leadership placed a big bet on marketing, and it paid off.

They also correctly read the trendlines in their industry and moved decisively to adapt. Customers complained, but Adobe didn’t listen, because they were right. This is a key thing to learn in enterprise Product Management – listening to customer feedback is important, but you have to remember that customers aren’t in the business of making you a profit. Adobe correctly stuck to its guns, learned as it went in adapting to cloud, and has gotten better as a result. They have now developed the capacity for building, deploying and distributing cloud solutions to both enterprises and consumers. You can count on one hand the number of companies that have done the same and still have enough fingers to hold your drink.

Salesforce and Adobe are now widely viewed as best-in-class enterprise SaaS vendors. Salesforce, of course, is a native cloud company, whose achievements are obviously impressive; but Adobe’s are unique, because they involved an intentional transformation with no clear roadmap for how to get there. All transformations seem messier from the inside than they do from the outside, but as an outsider who has witnessed failed attempts at transformation, native enterprise cloud executing at scale, and transformations in progress, Adobe stands out as a case study.

So like I said, I’m still waiting on someone to write this book. There are a number of other enterprise software firms today facing similar challenges as Adobe did. The problem now isn’t just that there aren’t any Omnitures left to acquire (especially at a 6x multiple? Ha!). It’s also that the talent to make this leap is scarce and expensive, and the investor patience required is hard to come by. As I’ve written before, some companies will make it, and others simply won’t. (I have my bets – buy me a drink if you’re curious.) In any case, this is why enterprise SaaS is one of the hottest areas in tech right now, and probably the most durable long-term.

Just remember that you heard it here first, folks, and not from the HBR. 😉

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Comments

Dean J Shaw says:

Excellent analysis! I had never given Adobe as much thought as you’ve done here. It really is an amazing success story that few other can match. Vision, commitment, execution.

Ray Pun says:

Great summary of the transformation journey! I joined Adobe in 2010 and experienced much of what you described as part of the digital marketing business. Since he drove the strategy and led the company as CEO, I think Shantanu Narayen should write the book.

JT says:

This is wonderfully written and all true. (In my time as a solutions consultant, going up against Adobe could feel like a death march.)

I’d be interested to hear your thoughts on Adobe’s forays into media with TubeMogul.

As for this line–“customer feedback is important, but you have to remember that customers aren’t in the business of making you a profit”–amen!!

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