Adobe’s Creative Dominance Is Supported by Steep Switching Costs

Senior Equity Analyst

Dan Romanoff

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Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud, but comes in lower-cost and free versions. We think the company is properly focusing on bringing new users under Adobe’s umbrella and believe that converting these users will become more important over time.

CEO Shantanu Narayen provided Adobe with another growth leg in 2009 with the acquisition of Omniture, a leading web analytics solution that serves as the foundation of the digital experience segment that Adobe has used as a platform to layer in a variety of other marketing and advertising solutions. Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento and Marketo acquisitions in the second half of fiscal 2018 and Workfront in 2021, we expect Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

The Document Cloud is driven by one of Adobe’s first products, Acrobat, and the ubiquitous PDF file format created by the company, and is now a $2.0 billion business. The rise of smartphones and tablets, coupled with bring-your-own-device and a mobile workforce have made a file format that is usable on any screen more relevant than ever.

Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.

Business Strategy & Outlook

For Adobe overall we assign a wide moat, arising from switching costs and network effects. Based on the company’s segments, we believe digital media has a wide moat from switching costs and network effects, digital experience has a narrow moat arising from switching costs, and publishing has a narrow moat from switching costs.

Digital media represents approximately 70% to 75% of revenue. This segment contains Creative Cloud, which is nearly 50% of revenue, and Document Cloud, which is approximately 10% of revenue. While both product groups generate strong revenue growth, growth in Creative Cloud is materially higher. Creative Cloud is composed of the iconic products Photoshop, Premier, Illustrator, InDesign, After Effects, Fireworks, XD, and Dreamweaver, among others, and a variety of mobile versions of these products and additional discrete mobile solutions. Document Cloud consists of the Acrobat family of products, including Scan and Sign.

Since its introduction in 1989, Photoshop quickly became the industry leader and eventually the industry standard for image editing software. Rather than remaining complacent, Adobe has consistently invested in the solution, introducing new features and adding applications that could be sold to existing users of Photoshop. These features and products were both internally developed and as a result of acquisitions. Notably, Fireworks and Dreamweaver came from the 2005 Macromedia acquisition, while InDesign and PageMaker came from the 1994 acquisition of Aldus. More recently, Adobe acquired Allegorithmic for 3D texturing, Workfront for workflow management, and Frame.io for video workflow. Over the years, Photoshop, Illustrator, Premier, InDesign, and After Effects were the company's most popular products, and beginning in 2003 were available as the Creative Suite bundle. While that bundle no longer exists, we believe these same products drive the bulk of demand in Creative Cloud. Other products serve more specialized needs or tend to be in more emerging technology areas within graphics, such as 3D illustrating.

The high switching costs moat source is the primary driver of the wide moat surrounding Creative Cloud. While there is a wide variety of competitive products, Adobe Creative Cloud is so pervasive within the creative world and the educational system that replacing it would be an insurmountable barrier, in our view. Further, because nearly all creative professionals use it, it makes it so all other creative professionals must use it. While the Creative Cloud has its issues, particularly premium pricing, and any one organization or freelance professional might be willing to switch, they would find it difficult to work within an entire industry that has standardized around it. Similarly, it helps ensure that when Adobe releases or acquires a related new solution it too becomes widely adopted.

Creative Cloud also benefits from a network effect in our view. By virtue of the widespread penetration of Creative Cloud, creative professionals have significant incentive to become well versed in the solutions therein. For example, Photoshop has become so ingrained in the creative world that design curriculum at major universities incorporates all critical Creative Cloud applications. As more prospective employees learn Photoshop, enterprises have even more incentive to deploy Photoshop within their organizations, perpetuating the positive flywheel effect. Further, the rapid adoption of Photoshop within the creative professions more broadly (advertising, graphics, web design, content creation, and so on) allowed Adobe to fill in adjacent needs with new products, further entrenching itself within the creative world. Because of its popularity, there are hundreds of plug-ins from third-party developers available for Photoshop alone. These add even more features to the Creative Cloud, attracting even more users.

Within Document Cloud, Adobe created the portable document format, or PDF, as an evolution of its original product, PostScript. In 1990, there was no file format that was readily usable across operating system platforms, but by the mid-1990s, there were several products vying for widespread adoption. Adobe's PDF won, thanks in part to distributing Acrobat Reader for free to PC OEMs, and has become the standard. Adobe developed an enterprise Acrobat product (currently Acrobat Pro DC) as a PDF editor and workflow solution. Currently we believe there are no truly competitive solutions to the PDF file format, even if there is a wide variety of PDF editors in free and paid versions. By any measure, Acrobat Pro DC remains the gold standard in PDF editors, but it is also the most expensive solution. We believe the company's creation of the PDF file format, its first-mover advantage with Acrobat, and significant installed base have created a narrow moat based on switching costs for Adobe's Document Cloud.

Digital experience represents approximately 25% of revenue. This segment contains Advertising Cloud, Analytics Cloud, Marketing Cloud, and Magento Commerce Cloud. The Magento Commerce Cloud was added with the Magento acquisition in June 2018. Adobe does not break out revenue associated with each product group within the Digital Experience Cloud but instead groups them as Experience Cloud.

Adobe does not have a first-mover advantage within digital experience. Rather than building this area out organically, the company acquired its way in. Indeed, the main thrust of this segment came in 2009 when Adobe acquired Omniture for $1.8 billion. In the latest 12 months leading up to the acquisition, Omniture generated $345 million in revenue, representing 35% growth over the comparable prior period. Other more significant acquisitions in the segment have included Neolane in 2013 for $600 million, TubeMogul in 2016 for $629 million ($212 million in last 12 months, or LTM, revenue), Magento in 2018 for $1.8 billion, and Marketo in 2018 for $4.8 billion ($240 million in LTM as of June 2016 before it went private). Through acquisitions and eventual organic feature and product development, Adobe has established itself as a leader in various categories that fall under the digital experience umbrella, including digital marketing analytics, campaign management, and customer engagement, among others.

We applaud Adobe’s vision and bold foray into the digital marketing space. In our view, marketing professionals prefer an independent platform for analytics and other solutions, as opposed to relying on the tools and data provided by the hyperscale internet service providers. However, unlike with Photoshop where no serious competitive threat exists, there are a wide variety of large competitors in the various marketing analytics, campaign management, customer engagement, advertising platform, and related areas. We believe Adobe’s tightly integrated and robust platform is seen as a strong suite by the marketplace, but the space is nascent and evolving rapidly, with often blurry lines between solutions. While there seems to be an emerging leadership group containing, Adobe, salesforce.com, Oracle, and SAP, the solutions offered by these companies are not perfect substitutes for one another. Further, there are many small privately held companies that innovate and continue to provide leading point solutions with no unified platform. Adobe is clearly using M&A to bolster its position and deliver a broad suite of marketing-related solutions to companies in a digital age. We believe there are switching costs to leaving the platform, especially given the breadth of solutions the company has to offer.

In our view, there is no more-comprehensive marketing platform. This approach makes sense to us in that Adobe is leveraging its already strong position within the creative professional market. We believe switching costs drive a narrow moat for Adobe's digital experience segment. While we believe in the strong and comprehensive solutions under this umbrella, we note Adobe did not create the markets involved, does not have a first-mover advantage, and does not enjoy any quasi-monopoly status with products here. Further, the company competes against other large cap software peers for marketing platforms--notably salesforce.com, Oracle, and SAP. Additionally, we believe that as a result of the explosion in demand for a more data-driven approach to marketing and advertising, there has been rapid evolution in the underlying technology, and myriad solutions for potential customers, which is why we do not believe Adobe enjoys a wide moat in this segment.

Wide

Economic Moat

Adobe

Adobe, Inc. engages in the provision of digital marketing and media solutions. It operates through the following segments: Digital Media, Digital Experience, and Publishing and Advertising. The Digital Media segment offers creative cloud services, which allow members to download and install the latest versions of products, such as Adobe Photoshop, Adobe Illustrator, Adobe Premiere Pro, Adobe Photoshop Lightroom and Adobe InDesign, as well as utilize other tools, such as Adobe Acrobat. The Digital Experience segment provides solutions, including analytics, social marketing, targeting, media optimization, digital experience management, and cross-channel campaign management, as well as premium video delivery and monetization. The Publishing and Advertising segment includes legacy products and services for eLearning solutions, technical document publishing, web application development, and high-end printing. The company was founded by Charles M. Geschke and John E. Warnock in December 1982 and is headquartered in San Jose, CA.

Earnings data Q4 2023

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LOS ANGELES, CA / ACCESSWIRE / December 8, 2023 / The Schall Law Firm, a national shareholder rights litigation firm, reminds investors of a class action lawsuit against Adobe Inc. ("Adobe" or "the Company") (NASDAQ:ADBE) for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission. Investors who purchased the Company's securities between July 23, 2021 and September 15, 2022, inclusive (the "Class Period"), are encouraged to contact the firm before December 19, 2023.

IMPORTANT DEADLINE REMINDER: The Schall Law Firm Encourages Investors in Adobe Inc. with Losses In Excess of $1,000,000 to Contact the Firm

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LOS ANGELES , Dec. 7, 2023 /PRNewswire/ -- The Law Offices of Frank R. Cruz announces an investigation of Adobe, Inc. ("Adobe" or the "Company") (NASDQ: ADBE) on behalf of investors concerning the Company's possible violations of federal securities laws.

The Law Offices of Frank R. Cruz Announces Investigation of Adobe, Inc. (ADBE) on Behalf of Investors

Adobe Inc (NASDAQ:ADBE) is expected to report double-digit percentage growth in its sales and profits for the fourth quarter compared to the same period last year when it reports its latest financial results after the stock market closes on Wednesday, December 13. For 4Q, the digital marketing and creative software company expects to report revenue in the range of $4.975 billion to $5.025 billion and adjusted earnings per share between $4.10 and $4.15.

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If you suffered losses exceeding $100,000 investing in Adobe securities between July 23, 2021 and September 15, 2022 and would like to discuss your legal rights, call Faruqi & Faruqi partner Josh Wilson directly at 877-247-4292 or 212-983-9330  (Ext. 1310). You may also click here for additional information: www.faruqilaw.com/ADBE.

ADOBE SHAREHOLDER ACTION REMINDER: Securities Litigation Partner James (Josh) Wilson Encourages Investors Who Suffered Losses Exceeding $100,000 In Adobe To Contact Him Directly To Discuss Their Options

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LOS ANGELES, CA / ACCESSWIRE / December 4, 2023 / The Schall Law Firm, a national shareholder rights litigation firm, reminds investors of a class action lawsuit against Adobe Inc. ("Adobe" or "the Company") (NASDAQ:ADBE) for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission. Investors who purchased the Company's securities between July 23, 2021 and September 15, 2022, inclusive (the "Class Period"), are encouraged to contact the firm before December 19, 2023.

NEW YORK , Dec. 4, 2023 /PRNewswire/ -- The Gross Law Firm issues the following notice to shareholders of Adobe Inc.. Shareholders who purchased shares of ADBE during the class period listed are encouraged to contact the firm regarding possible lead plaintiff appointment.

SHAREHOLDER ALERT: The Gross Law Firm Notifies Shareholders of Adobe Inc. of a Class Action Lawsuit and a Lead Plaintiff Deadline of December 19, 2023 - (NASDAQ: ADBE)

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LOS ANGELES, CA / ACCESSWIRE / December 3, 2023 / The Schall Law Firm, a national shareholder rights litigation firm, reminds investors of a class action lawsuit against Adobe Inc. ("Adobe" or "the Company") (NASDAQ:ADBE) for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission. Investors who purchased the Company's securities between July 23, 2021 and September 15, 2022, inclusive (the "Class Period"), are encouraged to contact the firm before December 19, 2023.

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LOS ANGELES, CA / ACCESSWIRE / December 1, 2023 / The Schall Law Firm, a national shareholder rights litigation firm, reminds investors of a class action lawsuit against Adobe Inc. ("Adobe" or "the Company") (NASDAQ:ADBE) for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission. Investors who purchased the Company's securities between July 23, 2021 and September 15, 2022, inclusive (the "Class Period"), are encouraged to contact the firm before December 19, 2023.

FINAL DEADLINE THIS MONTH: The Schall Law Firm Encourages Investors in Adobe Inc. with Losses of $1,000,000 to Contact the Firm

If you purchased or acquired securities in Adobe between July 23, 2021 and September 15, 2022 and would like to discuss your legal rights, call Faruqi & Faruqi partner Josh Wilson directly at 877-247-4292 or 212-983-9330  (Ext. 1310). You may also click here for additional information: www.faruqilaw.com/ADBE.

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LOS ANGELES, CA / ACCESSWIRE / November 30, 2023 / The Schall Law Firm, a national shareholder rights litigation firm, reminds investors of a class action lawsuit against Adobe Inc. ("Adobe" or "the Company") (NASDAQ:ADBE) for violations of 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission. Investors who purchased the Company's securities between July 23, 2021 and September 15, 2022, inclusive (the "Class Period"), are encouraged to contact the firm before December 19, 2023.

DEADLINE ACTION ALERT: The Schall Law Firm Encourages Investors in Adobe Inc. with Losses of $100,000 to Contact the Firm

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