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Summary:

Falling average selling prices, and millions of non-upgrading users made Adobe’s transition from Creative Suite to Creative Cloud inevitable.

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Adobe’s decision to go all-in with a cloud version of its Creative Suite and dump the packaged software that accounts for most of its $4.1 billion annual revenue really isn’t as revolutionary as some portrayed it. Here’s why.

First, the new Creative Cloud subscription version, as GigaOM commenters pointed out, must still be downloaded and installed locally. That makes it different from the traditional Software-as-a-Service model pioneered by Salesforce.com. Such downloads are no mean feat because, depending on the version purchased, the suite includes Photoshop, Illustrator, Dreamweaver and an array of other products depending on the version purchased. That’s a lot of bits to suck down.

But the difference now is, users must keep paying to use the software — they can’t sit on a six-year old copy of Photoshop. While Adobe said it will continue to support the current Creative Suite 6, all new features and perks will flow to Creative Cloud only.  Sanford Bernstein Senior Analyst Mark Moerdler estimates that 6.2 million of a total 12.8 million Creative Suite users are on aged versions while 4.1 million are on the latest Creative 6 version. And about a half million are using the year-old Creative Cloud, he told me in an interview.

Instead of charging a couple hundred dollars for a packaged product –Creative Suite 6 can “list” for $1899 depending on version, but people who upgrade from any previous version can get it for $600 — the new “cloud” version will cost between $20 and $50 per user per month (again depending on the upgrade). If you do the math, that nets out to be between $240 to  $600 a year. But the move to a subscription won’t be a wash for Adobe: it will be getting its license fees over the course of a year, but it will be getting them as long as the users use the product.

The risk of course is that users without fast broadband links will be left in the cold. And, if users are shelling out money every month, they’re really going to expect valuable feature enhancements and updates to come fast and the update process itself  to be unobtrusive.

Legacy software players — move or die

Adobe has seen its share of woes over the past decade. Apple’s decision to stop supporting Flash hit the company like a ton of bricks. Flash had been nearly ubiquitous in animating web pages and Adobe was working to make it more relevant in the mobile apps world. Apple’s decision to go in another direction with iPhone made that difficult. Adobe “saw its up-and-coming Flash technology, the anchor of much of its design product line a few years ago [get] banned from the most important technology platform to come in decades,” IDC analyst Al Hilwa told me via email.

Then the recession hit Adobe’s high-end and most expensive creative software, as ad and marketing agencies and publishing companies cut spending to the bone. But, in Hilwa’s view, Adobe managed this painful transition well and has made a good start moving its desktop user base to the cloud.

Moerdler is similarly bullish. Adobe, he said, figured it was getting $30 per user per month in revenue now. “So, with Creative Cloud they entice you with a $29.99 first year deal that goes to $49.99 next year for the suite — or for the team version $49.99 per user per month now and $69.99 per user per month later.”

Update: Adobe provided specific pricing for Creative Cloud which is $49.99 per month for annual membership with upgrades from Creative  Suite versions 3 through 5 going for $29.99 per month for the first year and for Creative Suite 6 upgraders it will be $19.99 per month for the first year.

In a research note predating the shut down of packaged software upgrades, Moerdler said Adobe is confident of winning over 4 million Creative Cloud users by 2015.

“Management believes the Creative Cloud will attract subscribers as it offers superior value (frequent updates, low price point, cloud storage, community). In addition, the viral nature of the Creative Cloud, the team edition, and the existing pool of free members will help drive additional subscribers.”

Shift to new delivery model dampens short-term earnings

This transition means Adobe won’t get big one-off license fees paid up front from enterprise customers, but get that revenue instead spread over the course of the software’s useable life span. Smoothing out those payments has actually been the goal for many software companies, including Microsoft, for years. They first tried to even things out via their multi-year enterprise licensing plans and then in their moves to SaaS. Still the transition to subscriptions from lump sum payments means that revenue must be deferred rather than booked all at once. That means growth in online subscriptions can look like sinking earnings, at least in the early stage of the process.

No doubt Adobe has struggled. But it is willing to drop old practices in hopes of finding something that works.

“This is a huge shift and Adobe is walking the talk,” Constellation Research CEO Ray Wang said via email. “More important, they have a disconnected mode, a community and all the tools for the creative class.”

He noted that Adobe has faced increasing competition with freeware but struck back with this new delivery model. “They disrupted themselves when they could,” he said.

The question now is whether Microsoft and other traditional software players — which are hedging their bets between packaged and cloud-based gear — will follow suit.

This story was updated at 11:18 a.m. PST with a more complete price range for the Creative Suite upgrades from Adobe and a link to the Adobe pricing site.

  1. Reblogged this on Permanently Grumpy (A Weblog) and commented:
    Guess I’ll have to budget for this monthly now.

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  2. Michael W. Perry Wednesday, May 8, 2013

    A year ago, I was against this shift, complaining loudly that it kept me from being able to buy Muse. Now–at least if Adobe keeps the price at current levels–I’m supportive.

    The dynamics of their old CS model worked against timely updates. Features get held back for the next major upgrade. Features that aren’t quite ready for that everything-at-once CS date, don’t get included. With a subscription model, features can be added as soon as their ready. Since I’m getting into ebooks in a big way, that’s a major plus. Getting better ebooks out faster should mean enough added income to pay that subscription fee.

    My hunch is that subscriptions will mean Adobe’s client base will become more professional. Those who dabble with its products, upgrading Photoshop every two or three versions, will find another vendor. On the other hand, those who stay on-board will be much happier, particularly with the entire creative eco-system Adobe is creating. I’m already wondering if, for some of my projects, I can use those features to make life easier for both myself and my reviewers/proofreaders. Saved time is saved money. Getting Word out of the work flow would be particularly great.

    I’ve been a mostly-In Design customer for Adobe. My hunch it that owning the entire Adobe stable, will mean I take advantage of other products to create better results. That same process should also help Adobe’s internal decision-making. No longer will one product be denied a feature in another, lest it hurt the sales of the latter. If a Photoshop feature makes sense for InDesign, it’ll come to In Design.

    –Michael W. Perry, Untangling Tolkien

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    1. I’ve been a CC subscriber since it was announced, and you are absolutely right about crossover to other products in the suite. Prior to CC our shop primarily used InDesign and Photoshop, but since subscribing we’re now using many more Adobe products on a daily basis, including Lightroom, Typekit, Ideas, PS Touch, Muse, Dreamweaver, and others.

      What I really like about the model is that it’s an all-you-can-download price, so if I want to explore how an Adobe product might help my business, it’s as simple as clicking ‘Install’. I’ve been to several Adobe events, including the launch series for CC, and it’s clear that the company and its employees are incredibly excited about CC.

      Perry
      KidPub Press / Bookility

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    2. Something thats is mostly overlooked in recent discussions about Adobe’s Creative cloud is the new business model of Adobe.
      Where as in the past Adobe had to innovate their software in order to sell new versions of their Creative suites, nowadays, with the creative cloud concept, the need to innovate is vastly decreased because of the fact that they will get their money anyway. The CC subscribers can’t go anywhere without forfeiting the ability to open and edit their work.

      The cloud concept will bring Adobe a huge profit on many levels, they have regular income, they can reduce research and development costs, no more dvd production costs etc..

      So the expectation of many CC subscribers to annually get new features could well turn out to be a big disappointment.

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  3. Well, as a matter of fact, it could be a big gamble oversees as it raises issues in some European countries.

    For example, it raises issues for public institutions who just legally can’t dive in adobe cloud system as is. It raises security issues for some companies which follow specific rules. And it seems it could also raise issues related to the moral rights of creators in a few countries — some experts are currently investigating.

    In other words, that’s a huge gamble as it means infuriated states or companies could sue adobe in Europe.

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    1. @chuckdaili this is an interesting point. i’ll follow up w/ adobe on this.

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  4. With the move to downloadable software instead of physical media and packaging, there is even less of an excuse for the price differentials between the USA and the UK / Europe. And the Australians get an even worse deal! Whilst I can imagine there’s some up-front cost in providing the servers and connectivity for Creative Cloud, I don’t see that being a sufficient excuse for charge those outside the USA so much more for very long. This, more than anything else, is what has suppressed the numbers of people and companies regularly upgrading their Creative Suite software, and doubtless made pirated versions a lot easier to justify in people’s minds. Creative Cloud has had some impact on piracy in its first year, if only because the initial costs have made it more palatable than a boxed upgrade – but I fear that will be undone now that Creative Suite is going away.

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  5. Peter Richardson Wednesday, May 8, 2013

    The price differential for non US customers is a huge issue and one that has been fueling a lot of resentment at what is increasingly viewed as Adobe’s cavalier attitude to it’s customer base. The fact that they refuse to even mention, let alone address, these concerns adds insult to injury.

    I know a lot of people in the creative industry who are working longer hours for less money and view the thought of being locked into a system of direct debits to Adobe with both alarm and resentment.

    The thought that these payments will be on an upward trajectory really isn’t going to win hearts and minds.

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  6. Adobe needs to get its act together on customer experience of the creative cloud billing. Try to cancel a subscription and you’re about to enter a world of pain. There’re at least 2 interfaces for managing your subscriptions, and they do almost the same thing, and come from the 90s. The support people on the phone are a bit clueless (they do offshore phone support). If you want to cancel creative cloud you need to call 1 month before it expires the year subscription, otherwise it will auto-renew and there’s nothing you can do about it. Seems absurd in this day and age that you cant cancel a service through a web interface, and need to call a human to do it, specially for a “cloud” service.

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  7. CS doesn’t stand for Cloud Suite. It stands for Creative Suite. It is the non-cloud version.

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    1. Thanks @conscience — for picking up that error. it’s fixed.

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  8. You write:
    “The question now is whether Microsoft and other traditional software players — which are hedging their bets between packaged and cloud-based gear — will follow suit.”

    How funny noone seems to care what the customers think. I’m using the Adobe Suite as a Freelance designer and there is no way I will let them force me to a CC model. The simple reason is: I can’t get access to my artwork when I retire. As long as I work and earn money and can tax reduct my expenses I may accept this model, though hesitantly.
    But making me buy until the end of my life – because otherwise I can’t access my own artwork I have created in years and paid with thousands of Dollars.
    And this is why I have to stop this experiment right before it begins. I will use my old software as long as it works and then I hope in the meantime some smart competitors breaks Adobes Monopoly. I’m very much counting on Corel and Google here.

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  9. Nice post! It’s very smart thinking from Adobe and I think it’ll pay off hugely for them in the long run. As for Microsoft and the others, delivering productivity applications via the cloud is the obvious way to go. Quite frankly, myself and a few mates have been discussing this idea of software firms like Adobe and the rest adopting the SaaS business model and charging users a premium subscription fee to access the apps since mid 2012.

    It’s a trend that I think will catch on real soon and will become the standard method by which software companies communicate and deliver products and services to their customers. I call it the Spotify way of thinking.

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  10. CC isn’t a pure SaaS product. It’s a hybrid: a thin client is downloaded onto the desktop. The only cloudy aspect of CC is the storage (similar to dropbox) and the authentication call that is pinged every month or so. It’s great that for $600 per annum, I can have access to all the creative suite programs. But at some point, CC’s going to cost me more than buying the CS for $2000+ upfront and hanging on to it for a several years as a legacy product.

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