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Adobe Systems Incorporated (ADBE): Transition to New Model Pays Off for Industry Leader

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Adobe Systems Incorporated (NASDAQ:ADBE) suite of content creation and publishing software is the unquestionable leader in the industry. However, its old model of receiving one-time payments for hard copies of software is both outdated and holding back revenue growth. As a result, the company has successfully transformed its product to software as a service by utilizing the cloud. This transformation paves the way for future growth.

Industry standard

When you think of web design software — you think of Adobe Dreamweaver. When you think of photo editing software — you think of Adobe Photoshop. And when you think of document management — you think of Adobe Acrobat. These programs, along with Illustrator, InDesign, Soundbooth, Flash Player, After Effects, and a host of other high-quality creative software programs are responsible for Adobe’s long history of profitability and consistently-high margins.

Adobe Systems Incorporated (NASDAQ:ADBE)Not only are Adobe’s suite of products the highest quality in the industry, they are also the standard tools used in education. For instance, a class that uses photo editing software will teach its students to use Photoshop — since that is what they will use in the real world. So the network effect — the advantage gained by having such widespread adoption — has paid dividends for Adobe Systems Incorporated (NASDAQ:ADBE) through the years.

A necessary transition

Despite having a superior product and a large user base, Adobe Systems Incorporated (NASDAQ:ADBE) is still vulnerable to competition. Adobe’s model of selling packaged software caused long upgrade cycles — you have to make a major update in order to distribute a new version. As a result, one user might have one version of Photoshop while another might have a different version installed. This creates inconsistency across the user base in terms of features and usability.

In addition, competitors like Microsoft Corporation (NASDAQ:MSFT)‘s Expression Studio and Apple Inc. (NASDAQ:AAPL)’s Aperture were priced lower and therefore more appealing to users with less sophisticated needs. Luckily, Microsoft recently deprecated Expression Studio and Apple’s software is not nearly as sophisticated or robust as Adobe’s product — but it still poses a challenge for acquiring users with less sophisticated needs.

In order to rectify its shortcomings, Adobe Systems Incorporated (NASDAQ:ADBE) has committed to a fully-online distribution of its entire Creative Suite of products. As a result of moving its product to the cloud, Adobe can ensure timely updates for all users in addition to providing a lower entry price for new customers (customers will now pay a monthly fee).

So far, the transition has worked out much better than expected. Although there has been a slight dip in revenue due to the transition, recurring revenue is becoming a much larger portion of overall revenue.

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