Why Adobe Wants Creative Cloud To Replace Its Money Maker Creative Suite

Adobe (NASDAQ:ADBE) announced at its annual MAX conference that it will abandon its Creative Suite (CS) entirely to focus its efforts on developing Creative Cloud (CC), which will replace the CS. While CS has been Adobe’s flagship product for over a decade and is offered to a user as a packaged software with one time perpetual license fee, CC is a subscription service that requires a user to pay a fixed monthly fee along with free upgrades to its latest version.

According to our estimates, CS is Adobe’s biggest revenue driver and makes up 54% of its estimated value. This segment generated approximately $2.3 billion in revenue in 2012, and we expect this to grow to $4.2 billion by the end of our forecast period. In this article we look at how CC stacks up with CS. Additionally, we also analyze how this transition to a new licensing scheme effects Adobe’s outlook.

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Creative Cloud Vs Creative Suite 6

The main Creative Cloud offering will cost $50 per month for a one year commitment. A variant for customers with collaborating employees will cost $70 per month for a full-year commitment. CC will also be available at a discounted price of $30 per month for students and teachers.

Adobe usually released CS updates at intervals ranging from 12 to 24 months so one upgrade would arrive over a typical three-year period. According to our estimates, a design standard version of CS-6, which includes Photoshop, Illustrator, InDesign, and Acrobat Pro, cost $1648 for a user who used it for three years. The main CC will comparatively cost a user $1,800 for three years. But for that extra $152, the customer also gets access to a host of additional applications such as Premiere Pro, Flash Pro, Edge Animate, Dreamweaver etc, and various online services such as 20 GB online storage.

While CC might not be a cost effective solution for users who tend to buy one version of the suite and use it for several years without upgrading, it will save money for professionals, who pay hundreds of dollars upfront and upgrade the software at every cycle by paying additional fee.

Adobe stated that since the first launch of CC in April 2012, its installed base has increased to 500,000 paid members and 2 million free and trial members. Additionally, Adobe expects to reach 1.25 million paid subscription by the end of this year. ^[1] This translates into recurring revenues of close to $750 million per year. We expect more users to adopt CC and this revenue to increase in the future. We therefore believe that Creative Cloud will continue to drive growth at Adobe going forward.

Creative Cloud Will Bolster Adobe’s Revenues

With a license based model, Adobe received bursts of income every two-three years when the latest Creative Suite was released. However, with the subscription fee structure, Adobe will have recurring stable revenue over the period of the software’s use.  Moreover, since some users tend to use software over a longer period of time without upgrading, Adobe will now be able to monetize these users over the extended period of usage.

Additionally, pirated copies of latest Adobe products are easily available across multiple file sharing services, which affects Adobe’s bottom line as no revenue is reported for these copies. According to the BSA, a steadily expanding marketplace in the developing world drove the commercial value of software theft to $63 billion in 2011. ^[2] With subscription services, Adobe will be able to curb the use of illegal serial numbers as users will have to go online each month to validate their licenses. Additionally, since most of the upgrades and enhancements will be available as a push service from cloud instead of downloadable service packs, this will further help curb piracy.

We currently have a $37 Trefis price estimate for Adobe, which is 12% below its market price.

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1. Adobe Staff pushing the Cloud, April 17 2013, www.adobe.com [↩]
2. Global Software Piracy, globalstudy.bse.org [↩]