Adobe’s Creative Cloud Subscriptions Can Drive Growth

by Trefis Team
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Adobe ( NASDAQ:ADBE) launched its Creative Cloud (CC) subscription service last year to address the growing needs of the creative software market. The creative software market includes tools for website designing, printing and desktop publishing, video editing and other multimedia needs. While competition from companies such as Corel, Quark, Microsoft and Apple is intense, Adobe’s creative products continue to dominate the industry. According to PWC, Adobe is amongst the top 100 software leaders in the world. [1] Adobe generates nearly 50% of its revenues from creative software, and has an installed base of over 12.8 million creative professionals.

While the initial user backlash against the CC subscription model seems to have subsided, the software has caught the fancy of Creative suite users. As a result, its subscriber base has swelled to over 1 million within one year. We expect that CC will continue to gain traction in the coming years as more of creative professionals adopt CC. In this article, we will explore factors that will drive adoption of CC in the near future.

Check out our complete analysis of Adobe

Factors Driving Creative Cloud

Currently, Adobe has over 12.8 million licensees for its point and suite software. [2] While conversion from these licensees to CC will fuel rapid adoption of the cloud platform, some of the other factors that will contribute to the growth of CC user base are as follows:-

  1. Proliferation of Internet and smart connected devices: – Global Internet penetration is on the rise. First time users in many countries are logging onto the Internet using smart connected devices. According to eMarketer, the amount of time people spend on a mobile device is growing 14 times faster than desktop usage. This growth in web traffic is driving the demand for creative software that can present visually rich information to digital consumers, and thus improve user experience.
  2. CC enables close collaboration: – With the advent of technology, creative teams are spread out over different geographies and time zones. These distributed teams require close collaboration to deliver campaigns and projects that match specifications and deadline. Creative cloud subscription bundles all the necessary tools into one service, and leverages cloud computing to drive collaboration. We believe that this will fuel team and enterprise term licenses (ETLA) for CC in the coming years.
  3. Subscription service to increase individual license base: – Adobe is pricing CC aggressively. While the complete CC subscription is priced at $50 per month for a one year commitment, individuals can also subscribe to single app plan for $20. [3] This price is substantially lower than the perpetual licensing agreement that costs hundreds of dollars upfront, and in software updates. With a subscription service upgrades are free that reduces the total cost of ownership, and a user always has access to latest creative software. We believe that this will fuel individual subscription growth in the future.
  4. Integration of CC with Marketing Cloud to drive adoption: – Adobe recently integrated its Marketing Cloud with Creative Cloud to offer complete digital asset management tool. [4] This tool offers a one stop shop for end-to-end integration for planning, creating, distributing, testing, and optimizing digital assets. This tool not only improves the workflow management but also the collaboration between marketers and creative professionals. According to Ovum, Adobe’s digital marketing platform currently leads the race to become the enterprise digital marketing platform provider of choice. [5] As Adobe’s digital marketing platform gains traction among marketers, we expect enterprise wide adoption of CC to gain momentum.

Creative Cloud To 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. [6] With the subscription services, Adobe can curb the use of illegal serial numbers as users now have to go online each month to validate their licenses. Moreover, since most of the upgrades and enhancements will be available as a push service from cloud instead of downloadable service packs, this will further curb piracy.

Adobe expects to reach 4 million paid subscriptions by the end of 2015. [7] This translates into recurring revenues close to $2 billion, and a cash flow of $700 million per year. Adobe has over 12.8 million point and suite software licenses, and we expect many of these licensees to adopt CC in the future. Therefore, we believe that Creative Cloud will drive revenue growth at Adobe going forward.

We are in the process of updating our Adobe model. At present, we have a $42 Trefis price estimate for Adobe, which is 20% below its market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. PwC Global Software Leaders, May 2013, www.pwc.com []
  2. Q3 Earnings Transcript, September 17th 2013, www.seekingalpha.com []
  3. Membership plans : Pricing and subscriptions : Individual, www.adobe.com []
  4. Digital Asset Management, www.adobe.com []
  5. Ovum reveals IBM and Adobe are ahead in the race to become the enterprise digital marketing platform provider of choice, August 21 2013, www.ovum.com []
  6. Global Software Piracy, globalstudy.bse.org []
  7. Earnings Transcripts Call Q3 2013, September 17 2013, www.seekingalpha.com []
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  • commented 12 months ago
  • tags: LNKD FB MSFT AAPL ADBE
  • "We expect that CC will continue to gain traction in the coming years as more of creative professionals adopt CC."

    Of course it will gain traction over the coming months. If all of your files are in Adobe and you don't have the option of discs anymore, what choice do you have? It's not like their userbase or the marketplace independently chose this path. It has been forced on them.

    I know some people really love it, but it seems to me like most of them just didn't have a choice. If you are semi-pro or casual, you don't have the option of buying new discs; and if you are professional and don't want lost time and comissions due to switching to a new software (learning, converting, etc.), you are strongarmed into it. This is highway robbery. I, and many creative professionals I know, am leaving Adobe altogether because of this nonsense. There are too many good options out there that don't force me to pay for the software 12 times over just to access my last purchased version.

    How does this article not even mention the hacking of the Adobe servers last month?
    Adobe Logo
  • commented 12 months ago
  • tags: LNKD FB MSFT AAPL ADBE
  • Thinking of signing up for the @adobe Creative Cloud? Some of these horror stories might change your mind. http://forums.adobe.com/community/creative_cloud

    Remember to change your passwords and check your bank account for the next several month to make sure the hackers that got all that sensitive data from Adobe don't access your accounts.

    New Adobe Survey. If you are not happy with CC being the only choice, let them know. http://deploy.ztelligence.com/start/survey/survey_taking.jsp?PIN=16BNF7XXXKLNX