In the 1990s corporations across America started to look for solutions that would allow them to transmit electronic documents among people within their organization as well as to their customers and suppliers. Up until that time there were no standardized methods for sending and storing digital records and dozens of software companies were competing to find the answer.
The solution came when in 1993 Adobe introduced what it called a Portable Document Format, or PDF, which quickly became industry standard; mostly as a result of Adobe partnering with Microsoft to distribute their PDF reader with every Windows operating system. Today, PDF is common vocabulary.
11 years earlier, from the garage of John Warnock’s house in Los Altos California, he and his colleague Charles Gesch began developing one of the world's first page description languages called PostScript. Originally developed for three-dimensional graphics, the PostScript system aimed to standardize digital page images for printing.
By 1985 Warnock and Gesche were being urged by another Silicon Valley entrepreneur named Steve Jobs to develop PostScript as the primary language for laser printers. To no surprise the urging worked and that same year Apple Computer began licensing Adobe PostScript for its Apple LaserWriter printer.
Warnock and Gesche’s company - named after Adobe Creek in Los Altos - continued their partnership with Apple by introducing a vector-based drawing program called Adobe Illustrator to be used on the Apple Macintosh. Illustrator soon became the dominant vector-based software program and Adobe started to expand to other areas of digital software, releasing Photoshop in 1989, Adobe Acrobat in 1993, and Premiere Pro in 2003.
Beyond internal development Adobe began acquiring other digital marketing apps to expand their reach. In 1994 Adobe acquired Aldus which came with the video editing software After Effects and the page design software Page Maker (later called InDesign). In 1996 they acquired Frame Technology and Ares software, and in 2005 purchased Macromedia in an all stock deal valued at $3.4 billion, which added Dreamweaver, Fireworks, Flash, HomeSite, and a number of other software products.
To increase the accessibility of Adobe’s offerings they introduced in 2003 the Adobe Creative Suite, giving users access to Adobe’s core products for a yearly fee. With their profit margins soaring as a result of almost no capital being required to run the business, Adobe’s revenue grew to $1.9 billion by 2005, then almost doubled to $3.8 billion by 2010, making them one of the most profitable companies to ever come out of Silicon Valley.
As technology progressed, however, and cloud computing became more integrated into digital offerings, Adobe’s license based model began to look outdated. Adobe’s CEO Shantanu Narayen, an Indian born Berkely graduate, knew the shift to a cloud based subscription model was bound to come, but with it would come a substantial hit to Adobe’s earnings. Despite this, Adobe shifted their Creative Suite licensing model to a cloud based subscription in 2013 and renamed the offering Adobe Creative Cloud.
As suspected, the earnings hit came. From 2012 to 2013 Adobe’s operating income fell from $1.17 billion to $449 million, a 61% drop, and by 2014 earnings fell further to $433 million.
Nonetheless, Adobe’s competitive advantage stayed strong and by 2016, just 3 years after the switch to Creative Cloud, Adobe’s operating income had risen to $1.49 billion, and they had secured their position as a cloud based giant.
More recently, Adobe has expanded beyond their digital media offerings and in 2018 they completed their largest acquisition in history by purchasing Marketo for $4.73 billion.
With the Marketo purchase Adobe expanded their second largest growth segment - dubbed Digital Experience - by offering enterprise wide marketing solutions used for content management, marketing analytics, and advertising.
By integrating with Adobe’s artificial intelligence system Adobe Sensei, their Digital Experience segment is able to offer more advanced insights than almost any other marketing platform and by 2019 Adobe’s Digital Experience products have grown to 29% of their total revenues, bringing in over $3.2 billion.
Together Adobe’s Digital Media and Digital Experience segments brought in revenues of $10.9 billion and operating income of over $3 billion. Adobe now controls over 57% of the design and editing software industry, according to IBIS World.
Adobe’s competitive strength within the digital marketing arena will only grow larger over the next decade as more companies adopt digital marketing efforts and become more reliant on their products.
Adobe’s most recent announcements come as a result of Apple updating their Mac product line to run on Apple’s own silicon chips, which will involve Adobe developing new versions of their software to run on the Apple silicon, something they’ve already started to do with their iPad applications.
Further increasing their competitive advantage is the stronghold Adobe has on their existing users who, because of the subscription model, continue to pay monthly for access to Adobe’s Creative Cloud and have virtually no alternative options, giving Adobe an ever widening moat.
In 1982 Steve Jobs attempted to purchase Adobe for $5 million and although Warnock and Gesch turned him down the two Silicon Valley giants have grown in tandem together, something that will undoubtedly continue into the future.
Please note: Olympus Wealth Management is a Tulsa based investment fund which may or may not own holdings in Adobe and readers should not take the above statements as a recommendation to buy or sell Adobe stock but instead as an informative article meant to increase one’s knowledge of the company.