Adobe Reaches for the Stars by Putting Its Head in the Cloud


If you thought the backlash against Apple's ( AAPL ) great Final Cut Fiasco of 2011 was a PR debacle (see: Apple Gets Justified Smackdown as Final Cut Pro X Goes Under Fire ), then you should see what's going on with Adobe ( ADBE ).

This week, Adobe, best known for making Photoshop and other software products, told the world that the Creative Cloud just ate the Creative Suite.

Going forward, Adobe will not sell boxed versions of its Creative Suite products like the aforementioned Photoshop.

Buyers will have to purchase software subscriptions, meaning that you can only use a piece of software as long as you pay Adobe a monthly fee for access to its Creative Cloud.

This is a massive paradigm shift for the software industry, and quite a controversial one as it effectively institutes significant price increases for many customers.

The proponents of Adobe's move, many of which sell training for Photoshop and other Adobe products, applauded the company's high-end $50 per month "Complete" package, which includes access to a mountain of Adobe software products that costs thousands of dollars at retail, as well as regular upgrades and enhancements.

It really is a lot of stuff. Just check out all these icons:

Photoshop, Premier, InDesign, Lightroom, Dreamweaver, Acrobat -- it's all in there.

Now if you're a power user that uses a lot of Adobe products and wants regular updates, that's actually a good deal.

But what about people like little old me, who use just one Adobe product?

Here's my electronic receipt from my purchase of Photoshop CS5 in early 2012:

Click to enlarge

I paid $223 including tax as part of a promotion. And prices like these aren't uncommon for Photoshop. The regular sticker price is about $600, but many people simply purchase upgrades every few years for $250 or so. (We won't be discussing software pirates that upgrade every year for free...)

Now let's assume that you were on a two-year upgrade cycle that cost you $250 for each new version.

Under the Creative Cloud, that two-year cost goes up to $360 ($120 for the first year, which is discounted 50%, and $240 for the next year).

That's an effective price increase of 44%.

And if you upgraded every three years, you're seeing an effective price increase of 139%, as three years of Creative Cloud access to one app is $600. That price only seems attractive if you pay full price at retail for Photoshop (about $600), and upgrade constantly ($250 a pop).

But wait! There's yet another twist: Remember that if your subscription lapses, you can't use the software anymore!

Under the old version, you could use the software as long as your computer could run it! Theoretically, I can still be running the Photoshop CS5 for which I've already paid five years from now.

Is the benefit of having regular software updates and enhancements worth the increased price and time limit of usage?

In general, Adobe users seem pretty ticked, but we'll have to see a few earnings reports from the company to see if customers actually take their money elsewhere to use competing products from the likes of Apple and Avid Technology ( AVID ), or even switch to open sourced software like GIMP?

Heck, what about Google ( GOOG ), which recently acquired NIK Software, whose specialty is image-processing software? This could be an opportunity to turn the NIK Software assets into a direct Photoshop competitor.

And of course, net-net, Adobe may come out ahead by earning more money from each paying customer, even if it does lose the people who are truly dissatisfied with the new setup.

So what's the end game here?

It's simple: Adobe trying to make a whole lotta money, something that seems downright offensive to a lot of people.

Do I like the new pricing structure?

Nope. But whatever.

There's a lot of things I don't like about life. I paid $4 for a bunch of asparagus the other night!

But let's get back on topic. The $20 per month for a single app deal extracts a lot of money out of customers that only want one product.

Plus, Adobe's going to see a serious long-term benefit if it gets people accustomed to using a lot of Adobe applications.

Buying two Adobe products takes the cost up to $40 per month, at which point going for the $50 Complete plan starts looking very attractive. And if people have access to everything, maybe they'll start dabbling with new applications. Once someone's used to using four, five, or more software products from the same company, they're not leaving -- especially when it's basically an all-or-nothing deal.

Adobe management has said it's been surprised at how successful Creative Cloud has been, and that makes sense because it's a great deal for power users -- the type that would sign up right off the bat.

But now that the Creative Cloud has gone from option to requirement, it's a whole different ball game that could turn out highly lucrative... or highly embarrassing.

It's certainly a bigger challenge than other rental-based content business models.

With services like Netflix ( NFLX ) and Spotify, people have been indoctrinated into a rental-but-not-ownership model at a very reasonable rate. Adobe is asking people to accept a major switch in how software is distributed that, for some people, comes at a significantly higher price.

Adobe management has said it's been surprised at how successful Creative Cloud has been, and that makes sense because it's a great deal for power users. But now that the Creative Cloud has gone from option to requirement, it's a whole different ball game. It really could go either way.

Also see:

Will the Fast Rise of Tablets Help or Hurt Apple?

Google and Facebook Make Their Moves, for Better and Worse

Apple: Is the Rebound Real?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks , Technology

Referenced Stocks: AAPL , ADBE , AVID , GOOG , NFLX



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