Why Adobe’s big cloud bet really isn’t a huge gamble at all

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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.

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