Adobe Creative Cloud: Is this Ship on the Rocks Already?

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My recent Streams of Thought column on Adobe's Creative Cloud change of course struck a nerve with readers, not just for its analogy to a seafaring incident (the sinking of the Loch Ard near Melbourne, Australia), but also for the uncertainty that surrounds Creative Cloud. Does this mean the end of perpetual licenses (purchasing the software, either on physical disc or electronic software download, or ESD)? Is Adobe moving toward a subscription model?

And how could Adobe avoid an outcome similar to that of the Loch Ard?

I'll look at a few obstacles to avoid, but first let's answer a more pressing question: Why would Adobe's decision to begin a subscription-based model be a good thing?

The answer lies in a comment Adobe chief executive officer Shantanu Narayen made at an analyst and press briefing at the CS6/Creative Cloud launch in late April in San Francisco, California.

When asked about the benefits of Creative Cloud from a technology standpoint, Narayen said that Adobe customers have more rapid access to program updates -- one of the key benefits Adobe touts for Creative Cloud subscribers -- compared to those who have purchased perpetual licensed CS products.

Narayen went on to say that Adobe sees an additional benefit: the subscription model eliminates the burden of Adobe product teams needing to coordinate upgrades to arbitrary quarterly revenue cycles. Narayen's comments ring true as a benefit for Adobe's financials: if the company can smooth release cycles into more consistent revenue recognition per quarter, the engineering side can also drive innovation at a faster clip without resorting to the 18 to 24 month release cycles that were part and parcel of its physical disc business model.

Having said that, what dangers will Adobe need to spot in the waters ahead to successfully navigate the transition from one deep body of water (physical sales) to another (digital subscriptions)?

Don't offend the core perpetual user base. Adobe needs to transition users to the cloud-based, digital-only model of application delivery without losing the core CS buyer who continues to buy a perpetual license (the physical media version) perhaps by offering an electronics software delivery (ESD) at a reduced price, as several other major software companies do. The idea here is to ease the perpetual license customer in to the "app store" mentality that provides a transition in to the subscription model.

Conversely, Adobe needs to proceed cautiously in the direction of recurring revenues, avoiding the potential strong-arm tactic that would force Creative Suite users into the Creative Cloud camp. We've discussed the carrot-or-stick approach in several articles at StreamingMedia.com and Streaming Media Producer, but it bears repeating here: Adobe's decision to potentially keep some non-point applications as Creative Cloud-only applications could deteriorate goodwill, especially since the company is keeping the Master Collection designation for the physical media CS6 shipments.

As the name implies -- or has implied in the past -- the Master Collection is an all-inclusive set of Adobe's point products and supplemental (non-point) products. At the time of this writing, though, at least one supplemental product (Muse) will not be included in the CS6 physical media version of Master Collection, and it appears that others may follow (Story and Edge are two others that come readily to mind).

Pricing matters. Adobe needs to hone its pricing model for monthly subscriptions. Currently there's a two-tier pricing structure: an annual contract of $49.99 per month or a month-by-month at $74.99 per month.

Run those numbers out and you find a month-by-month charge of $899.98 per year (plus tax, one would assume). While that's a bargain for Master Collection users, even for two years of use, it's not as good a bargain for those who might consider purchasing a less-complete CS6 suite, such as CS6 Design Standard -- which retails a perpetual license for $1,299.00 -- or even the combined CS6 Design & Web Premium suite (a combination/nod toward the fact that web delivery is valid for both the design and video worlds) which retails as a perpetual license for $1,899.00.

In other words, after two years of using Creative Cloud -- the typical time for a major update release from Adobe -- the CS6 Design Standard user would have paid more than $500 above the cost of buying a license outright. An early termination fee also applies if one has chosen the annual contract, akin in a number of ways to the early termination fee charged by a wireless phone provider for customers who chose the "free" phone at the beginning of a contract.

Don't require 30-day re-verification of applications. Adobe needs to address the fact that Creative Cloud subscribers who will not be online for more than thirty days will face a barrier that's unique to the Creative Cloud subscription model: a requirement for each application to "phone home" for continued validation. So every thirty days, regardless of whether on a month-by-month or an annual paid subscription, Creative Cloud users need to revalidate. A number of examples spring to mind where a legitimate customer would be forced to curtail usages based solely on Adobe's desire to equally curtail piracy.

Don't price gouge or withhold products. Adobe should take care not to gouge on pricing for stand-alone application subscriptions, especially for those products that cannot be purchased under perpetual license.

Adobe Muse is a good example of this point. It will only be available as part of the Creative Cloud membership (at $49.99 per month for an annual subscription) or as a stand-alone subscription (at $14.99 per month).

If Adobe were thinking strategically it would charge $4.99 not $14.99 for an app that's not even considered a point product. The same is true for Story Plus, the replacement for Adobe Story. Think app store prices, Adobe.

Finally, it makes no business sense to withhold applications -- such as Muse, Story, or even the upcoming Edge product -- from perpetual license users. This brings us back around to the first danger: don't offend the core perpetual license user.

In conclusion, the point is this: at the start of any voyage, the small details matter, so Adobe would do well to heed the potential dangers lying under the surface of its potential ocean of revenues.

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