How Adobe Became Silicon Valley’s Silent Reinventor
BY SILICON VALLEY standards, Adobe is a lackluster company. Nudging 40 he’s middle aged. He doesn’t grab the headlines with mega-mergers or have a boastful CEO. “I feel very comfortable not being over there banging my chest,” admits her boss, Shantanu Narayen, in a rare interview. All the while, Adobe has quietly managed to adapt to the era of cloud computing. He’s done a better job of maybe even reinventing himself than Microsoft, the tech industry’s best-known comeback kid. that of Microsoft CEO, Satya Nadella, is said to have taken a close look at Mr Narayen’s work, and not just because he attended the same high school in India as the Adobe frontman, albeit with a few lower grades. Since 2007, when Narayen took the reins, Adobe’s market capitalization has grown from $ 24 billion to $ 276 billion. Over the past decade, it has outperformed Microsoft and Salesforce of Mr. Nadella, another rival enterprise software maker.
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To most ears, Adobe is synonymous with desktop publishing. Founded in 1982, it has set key standards, especially PostScript, which tells printers where to dot, and PDF, the “portable document format” which enables printed documents to be distributed online. She has also developed digital content editing programs. One, Photoshop, has become a verb. Adobe’s expensive software was installed on desktops and updated with new versions every year or so. In the late 2000s, this model itself seemed in need of an update. Smartphones have unleashed the creativity of people away from their desks, and cloud computing has made it possible to bring software as a service to the Internet.
Rather than clinging to the lucrative business of inheritance, Mr. Narayen seized the opportunity to “reinvent himself”. Putting Photoshop and other popular but complex apps, like Illustrator, entirely in the cloud would have been technically too tricky. But Adobe still found a way to use the cloud to improve its products. Today, Adobe’s two original software companies have evolved into two subscription “clouds”. The smallest “Document” cloud provides services ranging from the mundane (converting a PDF in a word processing file) to the mission critical (management of digital documents of government agencies). All experienced a boom during the switch to remote work induced by the pandemic. The other much larger “Creative” cloud allows users to edit all kinds of digital content, from websites to videos. Since this content no longer resides on hard drives but in data centers, it can be worked on from different devices and by several people at the same time.
Adobe’s transformation would not be as successful without further innovations, however. One is what the company calls its ‘data-driven operating model’ (DDOM), jargon to use the data generated by its digital services to improve it and develop new ones in a perpetual feedback loop. Adobe has mastered this both internally and by developing a third cloud, which allows other companies to optimize their digital offerings. This “Experience” cloud allows, among other things, its subscribers to follow the behavior of online buyers and guide them as best as possible to make a purchase.
Another innovation was its management structure. Some tech companies, like Apple, are adopting top-down micromanagement. Alphabet, the parent company of Google, is almost anarchic in its bottom-up approach. Adobe is a healthy mix. Mr. Narayen defines the destination, and the managers of the three clouds draw the exact route. Make DDOM and working on the Experience cloud, for example, he set a goal that is both precise and demanding: Adobe’s data platform must be able to deliver content in less than a tenth of a second. How this goal was achieved was up to the engineers.
Adobe’s three clouds, operating model and management style explain why it offers, in the words of Mark Moerdler of Bernstein, a broker, an “unusual combination of software investment”: high margins and good growth. Its latest quarterly results are emblematic. Revenue rose 22% year on year, to $ 3.9 billion, while operating margin edged up to 46%, according to Bernstein.
Opportunities for more data-driven growth abound. On October 7, Adobe completed the $ 1.3 billion acquisition of Frame.io, a video editing service. Artificial intelligence, which extracts models of digital information, will underpin many new services (such as Adobe’s recent offering which is transforming PDFs in web pages, which can then be viewed more easily on smartphones). Similar algorithms could help professional content creators be more productive and make Photoshop more accessible to beginners. The “creative economy” has only just begun. And then there’s the much-publicized “metaverse” of interconnected virtual worlds, which will be teeming with digital objects that Adobe tools will help create.
Head in the cloud, feet on the ground
As Mr Narayen would be the first to admit, the software industry is fraught with risk. “The software follows a kind of S-curve,” he observes: performance ends up moving sideways if “you don’t invest in the right opportunities”. Creative and Document clouds, which together generate 73% of Adobe’s revenue and 80% of its gross margin, are a ripe target for competitors. Startups like Figma, a fully cloud-based online service designer website, rely even more on online collaboration than Adobe. With 14 years under his belt as a boss, succession talks are in the air. It would be as big a transition as moving from Steve Jobs to Tim Cook at Apple, says Brent Thill of Jefferies, an investment bank. Anyone can guess if it could be that successful.
Investors have indeed cooled a bit on Adobe lately. Its market value is down $ 40 billion from its peak in September, a steeper drop than most other tech giants. Yet the company has proven time and time again that it can thrive by embracing change rather than fighting it. This has made Mr Narayen the darling of investors and analysts, as well as a role model for tech bosses like Mr Nadella. Nothing boring about it. ■
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This article appeared in the Business section of the print edition under the title “Silicon Valley’s quiet reinventor”