Note: This artice initially included comments Adobe Australia MD Paul Robson made regarding the research and development costs of producing software. However, Delimiter has determined that there are several possible interpretations of Robson’s comments. Hence, we have removed this section of the article and invite readers to consider the transcript of the executive’s opening statement themselves (PDF).
news Adobe appears to have given a number of misleading and highly contestable answers to key questions posed to the software giant by the Federal Parliament’s inquiry into IT price hikes in the Australian market last week, in a move which builds on questions currently being debated about the company’s future relationship with its customers.
It has long been the case that many of Adobe’s popular products — such as its Photoshop, InDesign and Illustrator stand-alone products and its Creative Suite bundle — cost dramatically more when sold in Australia compared with the same products sold globally, even when the products are distributed online with no physical boxed copy. For example, in April 2012, Adobe revealed that locals would pay up to $1,400 more for the exact same software when they buy the new version 6 of its Creative Suite platform compared to residents of the United States, meaning some Australian residents can afford to fly to the US to buy a US version of the software and fly back, for the same price they would pay in Australia for the software.
However, over the past six months, Adobe has refused to back down from its approach to the issue in the face of strong criticism from customers, customer advocacy groups and local politicians. The company has repeatedly stated that the cost of operating in the Australian market is different from those of other markets such as the US. In addition, during a recent visit to Australia, its chief executive Shantanu Narayen flatly refused to answer direct questions on the issue, instead repeatedly emphasising that the company saw the future of its products as being its leased version of Creative Suite, termed Creative Cloud, rather than the traditional Creative Suite software which still makes up the vast majority of its revenues.
Last week the managing director of Adobe’s Australian division, Paul Robson, attended the Federal Parliament’s IT price hike inquiry to discuss the company’s Australian pricing strategy. Robson did not voluntarily attend the inquiry but was compelled to do so after Adobe repeatedly declined to attend. The PDF transcript of Robson’s appearance is available here (PDF).
However, in his testimony, Robson made a number of statements which appeared to be misleading.
For example, asked whether it was economically and ethically justified to charge Australians substantially higher prices on the basis of geographic market segregation, Robson replied that what customers were seeking was “personalised” experiences from technology companies.
Robson further stated: “When we look at relevancy around personalisation, that is in relation to the redirection of customers when they access our website. When customers access the Adobe.com website they can choose to see whichever website they wish to see. We automatically try to get them to look at the Australian site, for a number of different reasons. There is local content. There is information in relation to local user groups and communities that use our technology that they can learn from and contribute to. There is information that is relevant to the local market in relation to Australian based pricing and other content and information.”
“That content is a richer and more personalised experience for an Australian customer than they would get if they accessed a webpage that was in another language or for another country.”
However, when customers visit Adobe’s Australian website, it is apparent that Robson’s comments about receiving a personalised experience directed at Australian customers appear to be misleading. For example, when customers seek to use the Australian website to source local training partners for training with Adobe’s products, they are directed to a page which by default has training partners listed globally — not specifically in Australia.
Similarly, Australians seeking support from the Adobe Australia website are directed to the company’s global support page. Customers seeking Adobe user groups from the Australian site are directed to the global user group site, and customers seeking other Australians to discuss Adobe products with through the company’s own forums are directed to Adobe’s global forum site; there does not appear at a cursory inspection to be a specific Australian section of the site.
Robson also appeared to have misled the inquiry with respect to the proportion of its customers who are choosing its monthly subscription-based Creative Cloud software, which has recently had its Australian price broadly harmonised with its US pricing, compared with the percentage of customers who are choosing traditional versions of Adobe software.
In the inquiry, the Adobe executive said that overwhelmingly, customers were choosing to buy Creative Cloud over traditional product licensing. “76 per cent of our customers are now purchasing Creative Cloud instead of the traditional perpetual licensing model,” Robson said.
However, Adobe’s most recent set of financial results do not support this claim. In the financial results for the three months to the beginning of March this year, the company’s Creative Cloud subscriptions appeared to have brought in some $233 million in revenue, according to detailed breakdowns of its revenue found on its investor relations data sheet (PDF). This represented only around a quarter of the company’s total revenue in that period of around $1 billion. While Adobe does sell a number of other complex services (such as its enterprise-focused LiveCycle software and its Marketing Cloud platform), this implies that Creative Cloud does not yet represent the majority of its revenue.
Furthermore, the company stated in other associated financial briefing documents (its investor handout PDF) for the same quarter that it anticipated that it would complete the bulk of the transition of its business to a Creative Cloud subscription model sooner than it had previously expected; implying that it had not yet made that transition.
It appears that Robson may have been referring only to software purchases made on Adobe’s website. “Creative Cloud is quickly becoming mainstream, with the overwhelming majority of Creative purchases on Adobe.com now being Creative Cloud subscriptions,” Narayen said with respect to the company’s Creative Cloud uptake at the financial results session (PDF). However, this would not take into account the fact that the bulk of Adobe’s software is sold through partners.
Robson also appeared to have misled the inquiry with relation to another matter.
At one point it was pointed out to the Adobe MD by Nationals MP Paul Neville that the components which went into the Creative Cloud platform — such as Photoshop, Illustrator and so on — are largely the same software components that go into Adobe’s traditional Creative Suite platform. “How is it that you can do that internationally for roughly the same price between the US and Australia and yet you cannot do it on the software that goes into that Cloud package?” Nevill asked.
Robson replied: “The software is the same, the delivery mechanism is different. The Creative Cloud does not require the media to be created or the box to be built from cardboard, wrapped in plastic, put on a pallet, put on some form of transportation, shipped to the country and shipped out to retail partners that require bricks and mortar, staff and training to then sell it on to end customers. There is a cost associated with traditional boxed product that you simply do not have when you deliver products and technology via the Cloud.”
However, Robson did not mention or address the fact that it is possible to download the full Creative Suite platform directly from Adobe’s website, with customers no longer being required to buy an actual physical boxed copy of the software. In this sense, the delivery mechanism is the same between Creative Cloud and Creative Suite. Updates to Creative Suite are also delivered online.
Robson later repeated the same statement in response to a question from Labor MP Ed Husic mentioning a number of specific Adobe products. “All the products that you made mention of have a physical box product equivalent that is sold through a distribution channel in this marketplace that has ongoing costs. The cloud-based delivery of those technologies has pricing in line with the pricing you see around the world,” said the Adobe executive. However, again Robson did not mention the fact that Adobe also makes available its traditional software for purely digital download, via the same mechanism as the Creative Cloud.
A number of fundamental questions about the nature of Adobe’s future relationship with its customers also came up in the inquiry. Narayen and Robson have both repeatedly stated in public that the future of Adobe’s business is in providing Creative Cloud subscriptions, rather than in selling traditional versions of software which can be installed once and used forever.
Labor MP Stephen Jones pointed out to Robson that every version of Microsoft Word he had bought in the past enabled him to open a document which had been created in an earlier version of that software. In addition, he did not have to pay a monthly subscription to access that software; once he bought it, he could always use it to open documents. This will not be the case with Creative Cloud; once customers stop paying the monthly subscription for the software, they will not be able to use it to open their files.
Robson replied: “And that is not vastly different from the entire history of the IT industry, where if you upgrade technology you lose the ability, in many cases, to access prior technology.”
However, Robson’s answer appears to be misleading. Jones was referring to the commercial model for using software such as Photoshop, and how it will change as the Creative Model comes into force. However, Robson replied by discussing the technical model for software upgrades in the history of the IT industry, where technical upgrades have made opening older files or access legacy technology.
If you are at all interested in this issue with respect to Adobe’s pricing behaviour and approach to its product development, I encourage you to read the full transcript of Robson’s appearance before the IT price hike inquiry. In addition, you may also find it interesting to have a gander at Adobe’s recent financial results briefing to get a feel for where the company as a whole is going.
When I filmed the video of Adobe chief executive Shantanu Narayen in Sydney in mid-February, I think much of the shock factor of the video (and the reason it attracted some 300,000 views on YouTube) was the sheer denial factor inherent in Narayen’s approach. It was a very simple contrast: Customers are expressing a clear wish for one thing from Adobe (harmonised prices on traditional Adobe software), but the company refused to even acknowledge that that was an issue, and is instead pushing customers towards a completely different model (monthly subscriptions).
What Robson’s testimony before the IT price hike inquiry shows us is that this was no one-off event for Adobe; it’s a deliberate strategy, and one which will be disturbing for many customers.
If you look at the historical buying patterns of Adobe customers, they have been along fairly standard lines. Customers pony up for an expensive copy of Photoshop, or Creative Suite if they need the extra functionality, and justify it as a one-off cost that they know they won’t have to repeat for a long time. Then, usually in about 3-5 years, when Adobe comes out with a new format or feature which they can’t get around doing without, they hunch their shoulders again and square up for another expensive upgrade.
While this has been great for customers — Adobe software tends to have a long shelf-life, even if it is expensive up-front — it’s not been great for Adobe. The company has suffered because the quality and comprehensive of its products has meant customers don’t buy upgrades from it often.
Adobe’s solution will eventually be to stop providing stand-alone copies of Photoshop or Creative Suite, and lock all of its customers into monthly Creative Cloud subscriptions only — there will be no other option. This outcome is clearly written between the lines in Adobe’s online marketing material and financial briefings right now.
Of course, this is a terrible outcome for customers. It will make the company’s software incredibly expensive for customers over the long-term, and it will mean that if for any reason customers decide they don’t want to fork out every month for the software any more, it will suddenly stop working.
You can understand this strategy in companies such as Google or Salesforce.com, which actually provide software through a web browser as a service. However, that’s not what Creative Cloud is. Creative Cloud is essentially Adobe’s traditional software, bundled with some basic online services which its customers probably don’t want or need, and charged for on a monthly subscription basis. There’s very little “cloud” about it — Creative Cloud may be the most spectacularly mis-named software in existence.
This is why Adobe is pushing so hard back at the IT price hike inquiry and the ongoing customer complaints about its software right now. It is actively keeping its prices high on its traditional software so that customers will choose the Creative Cloud instead and sign up to its recurring revenue vision.
The unfortunate thing for many is that it’s working. The company’s Creative Cloud revenues are growing rapidly, and Narayen’s right — eventually all of its customers will be on the platform and its total revenues will ultimately be higher. At that stage, all Adobe has to do, as countless technology companies have before it, is gradually add “features” and increase the price gradually as a result. Subscription pricing is a great model — all you have to do is increase the individual pricing slightly and scale means total revenue will jump dramatically.
Of course, not everyone will be jumping on the Creative Cloud bandwagon. Many customers will investigate alternatives so that they don’t have to keep paying forever for Adobe software, ranging from simply not upgrading to Creative Cloud (after all, the latest version of Creative Suite has enough functionality that it should last for many years) to buying alternative software. But that doesn’t make Adobe’s actions OK here. I’d like to see the company take a less bullish approach to its customers in forcing them onto Creative Cloud and a less antagonistic approach to government concern about the way it’s acting in Australia. Given Adobe’s position in the software market, the company’s current actions feel like a company enjoying close to a monopoly position which is throwing its weight around a little too much.
Image credit: Adobe