How Adobe Got Its Customers Hooked on Subscriptions

When Adobe Systems Inc. started the transition from a product-sales model to a cloud-based subscription model less than five years ago, the move looked risky. Skeptics figured it would eat into the rich profit margins of the company’s pricey design, photography, and video software. At the time, prices on its popular Creative Suite package, which bundled together Photoshop, Illustrator, and other programs, started at $1,300 and went as high as $2,600, depending on the version. Meanwhile, some customers openly rebelled against the idea of renting cloud-based versions in perpetuity. About 50,000 signed a petition demanding the company abandon the scheme. Revenue shrank 8 percent in 2013 and was pretty much flat the next year.

There aren’t many doubters today. Adobe’s revenue was just shy of $5.9 billion for the fiscal year ended in November, up from $4 billion in 2013; about 80 percent of that came from subscriptions and other recurring sources. Melissa Webster, program vice president for content and digital media technologies at researcher IDC, calls it a great example of “smart paranoia.” Says Webster: “If they didn’t reinvent, someone might reinvent them out of business.”

When Adobe began thinking about leaping to the cloud, less than 5 percent of its revenue came from subscription products. “Every single quarter we started from scratch,” says Chief Financial Officer Mark Garrett. The downside of the sales model became painfully clear during the recession, when revenue dropped 18 percent in a single year. A pilot program in Australia followed, then an initial subscription offering, then the big step: announcing it would stop selling its Creative Suite products. Customers could keep using their existing software, but if they wanted to get updates and product support years into the future, it would be the cloud or nothing. It was a no-retreat, “burn the boats” strategy, Garrett says: It could work only if customers, and Adobe itself, had no choice.

That said, Chief Technology Officer Abhay Parasnis argues the shift also depended on making Creative Cloud better than Creative Suite—adding capabilities for users to work on mobile devices, for example. “This was a brand-new product,” he says, “a new experience.” Moving to the cloud meant users could share files and collaborate on projects, and Adobe could roll out features and improvements as they’re developed, instead of saving them for a major software release every 18 to 24 months.

Zsolt Vajda, a freelance designer in Budapest, cites some of these factors—particularly the ability to collaborate without worrying about who was using which version of the software—to justify his early embrace of Creative Cloud. And, he says, “buying each component of Creative Suite, if you’re starting out, could be very expensive.” Paying $50 a month for the comparable cloud package feels more manageable for a small company or an individual (though it adds up to $1,800 over three years).

Garrett says more than a third of Creative Cloud subscribers are new to Adobe, a figure that may well include those who previously turned to pirate versions of the software. Despite early complaints, Adobe says it’s managed to convert a large portion of its customer base—if not always enthusiastically. “I am seeing it as complete capitulation, honestly,” says John Schnall. His New Jersey animation studio doesn’t need the latest software to achieve Schnall’s hand-drawn style, but clients increasingly expect his company to have Creative Cloud access, he says. Schnall says it’s possible he’ll come to love the new programs, but it’s not a choice he would have made on his own.

Creative Cloud is Adobe’s core product, generating about 55 percent of revenue, but the company’s future may depend more on its other cloud offerings. Document Cloud, with Acrobat as its centerpiece, is designed to help companies go paperless. Experience Cloud, built partly through the acquisitions of Omniture Inc., a maker of analytics and other software, and the video-advertising company TubeMogul, offers a set of online marketing tools.

“Connecting the creative pipelines to digital marketing in a more seamless way is a great opportunity,” says IDC’s Webster, noting there aren’t a lot of software platforms that allow the different actors in what she calls the “content supply chain” to plan, organize, and manage their work. Adobe is “in a unique position,” she says.

When Adobe announced its move to the cloud in 2013, photographer Brad Trent was among those who strongly objected, supporting the petition with an epic blog post arguing that pro-level customers would get no new value from the switch. “I was ranting pretty hard,” he says. His views haven’t really changed; he wonders, for instance, what incentive there is for Adobe to continue to innovate. Under the old business model, the onus was on the company to demonstrate that each iteration of Creative Suite was an improvement on the previous one, to get customers to part with more than $1,000. That’s less of an imperative when the customer is paying $50 a month. Nevertheless, Trent has grudgingly signed up for a Cloud version of Photoshop.

“As a business move for them, I get it,” he says. “But you can’t get off. It’s like they’ve hooked everybody on digital heroin, and you’re gonna be on it for the rest of your life.”

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