This Company Has a Cloudy Future

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Adobe Systems (NASDAQ: ADBE) is abandoning its packaged-software business and using the software-as-a-service (SaaS) model for its web design tools. They plan to use their Creative Cloud subscription-based service to deliver products. Adobe has been scrambling since Steve jobs penned his famous, "Thoughts on Flash" memo. Adobe has been losing the web creative class (web designers and developers) ever since.

To add insult to injury, Steve Job's HTML5 fetish has rapidly become mainstream among the web creative class Adobe covets. Adobe's lack of innovation caused their user-base to embrace open-source software, inadvertently accelerating the post-Flash Internet world we see today. Adobe's SaaS play is a feeble attempt to be relevant and profitable.

A very competitive creative marketplace

Adobe has not created any new products worthy of the cloud. Adobe Muse was a step in the wrong direction. Adobe Edge is, "too little, too late." Not to mention that there are many affordable or free HTML5 editors. Tumult Hype is superior to Adobe Edge -- and you can actually buy it for less than $60. The Escapers Flux is a powerful HTML5 web design application that you can purchase for under $140 -- and you actually own it. These are just two products on the market that are vastly superior to anything Adobe currently has in its stable of products. 

It will be next to impossible to sell a $20 a month subscription to a web designer who spent the last three or four years learning how to code using $50 text editors like Sublime Text -- especially when Sublime Text does more for less. Where is the value for the user? For Adobe to "make it" as a SaaS company they must create useful tools that empower web designers and developers without forcing them in a gated community they can't afford to be in.

I just don't think Adobe can do it -- they haven't done it since Photoshop. Adobe is no longer the only option to create and edit multimedia, animation, and graphics. Most use open source HTML5 animation frameworks to do what Flash did. Many use open-source or cheaper alternatives for image editing. The downright scary aspect of Adobe is its biggest competition, the word "free." Adobe Creative Cloud will compete with comparable open-source software -- free software. This fact alone makes Adobe's subscription gamble risky.

Know your customers

Many consumers prefer the ease of using web services, constantly updated software, no software installation and support are key selling points. Corporate America has gone subscription in a big way. Consumers and corporations use SaaS applications for everything from entertainment and email to logistics and customer relations. But Adobe's user-base -- web creatives -- are not your average "consumers," nor do they have the deep pockets of a corporation. 

Adobe fails to realize web creatives will start using Gimp and HTML5 frameworks more and more because they can't, and won't, tolerate Adobe's new found greed and ignorance. Web creatives who were burned using Adobe's proprietary Flash software may not be so quick to pay rent to use more proprietary software that may get shunned. The Saleforces and ExactTargets of the world can be greedy -- their user-base are big corporate entities that can justify high SaaS subscription costs of sending fifty zillion emails or extensive customer relationship managements tracking. A freelance web creative working part-time with no healthcare and newly honed coding skills just will not pay another monthly bill.

Leaders don't follow

Many talk of a "post-PC" world, but none are talking about the "post-Desktop-Application" world. Adobe's announcement that they will cease selling packaged software and become a SaaS is a major shift, not just for Adobe, but for everyone. Microsoft and Autodesk (both have limited SaaS offerings) won't be far behind nixing prepacked software since Adobe has shifted to a subscription model. Adobe has seen the power of being a digital landlord. As customers have become accustomed to web-based services, the SaaS industry has exploded. Netflix, ExactTarget, and, Workday are just some of the companies land-lording the Internet. Adobe wants in -- in a big way. .

Buy the leaders

If you want to profit from the SaaS space, go where users don't mind subscriptions. ExactTarget (NYSE: ET) has a strong user-base that does not mind renting software. Granted, ExactTarget applications don't require the power or precision that Photoshop does, but ExactTarget does not need to worry about pirated software eating profits or angry user petitions. ExactTarget goes to great lengths to make users happy. Great online education, relevant user conferences, and responsive support create an environment where customers have no qualms paying high monthly fees to use ExactTarget applications.

Another play on the SaaS trend is Red Hat (NYSE: RHT). Red Hat has benefited greatly from Cloud computing, and will continue to grow as more software transitions away from the desktop. Red Hat has figured out how to profit in an open source world. As more companies make the cloud a major component of their business, Red Hat's preeminence will make it the "go-to" firm to aid those wanting to leave the desktop behind.

Symantec (NASDAQ: SYMC) is a great play for SaaS profits. Security, storage, and systems management solutions — these scream "SaaS." Symantec was "Cloud" before "Cloud" was cool. Not to mention Symantec is a tech company that actually pays dividends — novel. If you want SaaS profits, they are available from companies that literally are the SaaS space — unlike Adobe.

Final words

Would a carpenter rent his hammer? Would a plumber rent his slip-joint pliers? Would a CEO rent suits? No, and I don't think web creatives will rent their software, Adobe will find out, just like the cable companies that customers are strapped and just won't pay yet another unnecessary bill; especially web creatives -- unless you add real value. They don't want to be digital sharecroppers; this is just what Adobe is asking them to be.

That, coupled with the growth of open source software, better standards, and self-education does not bode well for Adobe as they try to morph into a web creative Rent-A-Center. Adobe's user-base simply cannot sustain Adobe becoming  Salesforce. If you want to buy a SaaS, buy a SaaS, not a wannabe. Adobe changing the world through digital subscriptions will be a hard sell -- I know I'm not buying.

The New Technology Revolution

The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.

John Moore has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus