Adobe Part 1: Why Adobe Shifted to a Subscription Model

Creative Cloud
Photo Credit: Adobe

This is part 1 of a 2-part series on Adobe. For part 2, click here.

In 2011-12, Adobe made the decision to replace priority licenses with a software-as-a-service model. Customers would no longer buy its iconic software suite and own it for life. Instead, customers would pay a monthly subscription to access the suite in Adobe’s Creative Cloud.

The cloud-based model for distributing its software presented challenges early on, included thousands of disgruntled customers. However, the service quickly gained strength, steadily increasing revenue.

By the end of 2016, the company’s revenue surpassed what it made through the priority license. Further, the new business model enabled Adobe to innovate continuously. It provided a framework for quick feedback from customers and created opportunities to invest in emerging technologies like artificial intelligence and virtual reality.

A Brief History of Adobe

In the early 1980s, John Warnock and Charles Geschke launched Adobe Systems Incorporated. As experienced leaders within Xerox, they recognized the opportunity to solve real-world challenges in the intersection between media, graphics, and personal computing.

They had one major business objective in mind: revolutionizing the way the personal computer represented fonts. These humble beginnings lay the groundwork for what would eventually become the graphic design juggernaut.

As a designer and developer today, it’s hard to imagine what life was like before the launch of iconic products like Photoshop, InDesign and Illustrator.

Acquisitions like Macromedia and Magento have helped Adobe cement its position as the leading provider of design software.

Why Did Adobe Switch to a Subscription Model?

For many companies, innovation is about R&D, finding new opportunities to build on top of existing platforms. For others, innovation is an attempt to avert an already-established crisis. Business model innovation in particular, the reform of the fundamental financial model of the company, tends to come far too late.

But Adobe was not short on cash, nor was it bending to new competitive threats. The company’s leadership recognized the potential of the new internet-driven software-as-a-service trend and capitalized early.

In the old model (the perpetual license), customers purchased Adobe’s products, but rarely upgraded. The high costs of upgrades, released on an 18-month cycle, didn’t square with the incremental benefits of the new version. As a result, Adobe’s products became stale and the potential for competitive disruption started to grow.

By choosing a subscription model, they could roll out upgrades faster, see how customers used each product and make improvements in a shorter time frame. The new continuous upgrade cycle also enabled Adobe to incorporate emerging technologies in an ever-accelerating technology landscape.

The subscription model also opened the door to higher lifetime revenues from customers. There’s a reason nearly every new entrant in the software market chooses the SaaS model. After the dismantling of the perpetual license business, Wall Street responded very positively. In an interview, soon after the change, Scott Morris, the senior director of product marketing for Creative Cloud said:

“There’s a stacking effect. When we bring customers in, they stay in. Then when we bring in new customers, we layer the revenue on top.”

The move did bear some risk, particular in the form of blow-back from loyal customers. But by taking action early, Adobe created the framework to innovate and stay relevant in a shifting market. They took a calculated risk so they could remain on the cutting edge. In the years since, revenue has continued to grow steadily.

How Business Modeling Propels Innovation

Every company faces constant competition. Even leaders within their markets can quickly be toppled by fledgling upstarts. Incumbents must be prepared to innovate from a position of strength. By changing the business while the old model was still strong, Adobe positioned itself to innovate and grow its market share into the future. By switching to subscriptions, they created a channel for instant delivery of their new technical innovations.

Is your business model driving your success or exposing you to outside threats? At Operatic, we help our clients drive innovation through strategy, business modeling, and operational implementation. Let us help you think through your business model and deliver your next great innovation.

Learn more by contacting our team at hello@operatic.com.

Travis Hardman

Principal
I founded Operatic to help visionaries bring new ideas to market. We work with everyone from small startups to multinational corporations, developing and refining early-stage products, turning nascent ideas into thriving businesses. We provide support in business modeling, lean product development, computational design, and software development.

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