Over the past 38 years, Adobe has built itself into a ~$245 billion market cap company by introducing and then dominating a new category: creative software. Over the next decade and beyond, we see this market evolving and enabling the emergence of multiple billion dollar startups that build upon Adobe’s foundation. These include several companies already well on their way such as Canva, Figma, and others.
In this article, we: i) introduce a framework for evaluating Adobe as a platform company; ii) analyze Adobe’s history and the factors that enabled its rise, iii) describe the technology & behavioral waves catalyzing innovation, and iv) suggest areas of opportunity for emerging startups. More specifically, we highlight video workflows, analytics capabilities, and document alternatives as 3 key areas of opportunity, and also link a growing repository of startups in various creative software categories. Please feel free to read the entire article, or skip to the section(s) that are most interesting to you.
Over the past few years, much attention has been paid to the “unbundling” of companies including eBay, Craigslist, and Linkedin. The basis of the unbundling concept is that while the aggregation of multiple products and services initially results in network effects and scale economies in the first wave of a technology market, it also limits personalization, customization, and quality of experience. This creates an opportunity for new startups to displace the incumbent by providing more customized solutions as the market matures.
While the unbundling approach has worked well for startups attacking certain incumbents, it has limitations as a framework. This is particularly true for platform companies upon which new startups rely on in order to successfully build and distribute products. In these markets, innovation takes a more layered approach, with newer companies building upon a foundation laid by an incumbent. Rather than unbundling, we call this an evolution of a platform, and we believe that this is the best framework for evaluating Adobe, its innovation track record, and the startups innovating in this market today.
In comparison to better-known software giants in Silicon Valley, Adobe has flourished relatively quietly for much of its 38-year history. What began as a small publishing software company has now expanded into a conglomerate providing an extensive suite of products across its Creative, Document, and Experience Clouds. Today, Adobe employs over 22,000 employees and generates over $11 billion in revenue annually, with a market capitalization of ~$245 billion. 1
Along the way, it has made numerous transformative acquisitions, including Macromedia ($3.4 billion), Omniture ($1.8 billion), and Marketo ($4.8 billion). Its acquisition of Behance ($150 million) also enabled it to build the leading online platform to showcase and discover creative work. It has also successfully expanded into new pockets of creative software, which eventually yielded large business lines. Adobe’s ability to consistently innovate through organic and inorganic growth, while successfully transitioning leadership between different CEOs over multiple decades, is one of the tech industry’s great overlooked stories. The company’s Creative Cloud launch and move to a subscription-based pricing model at the end of 2013 precipitated a quadrupling of its market cap since that time. 2
Adobe’s Stock Price Has Skyrocketed over the Past Two Decades
As we explain below, we believe Adobe is entering a new phase, where new startups are building upon its platform and legacy. The growth of this new generation of startups is driven by technological and behavioral inflections. Rather than replace Adobe’s products, these startups are innovating upon Adobe’s foundation to build a new generation of creative software.
Adobe was founded by Chuck Geschke and John Warnock (above) to enable more accessible publishing and printing software.Throughout its first decade, Adobe aggressively targeted designers and creative professionals, creating new categories of software across graphics, photo, video, and publishing. Along with Apple, Adobe helped bring about the desktop publishing revolution, launching products such as Illustrator, Photoshop, and Acrobat. Over the past two decades, Adobe then made several transformative acquisitions, enabling it to expand into web-based products (Macromedia), enterprise analytics (Omniture), e-commerce software (Magento), and marketing automation software (Marketo).
We believe that Adobe’s success has been driven largely by the following three characteristics:
1) Successful Partnerships: From the very beginning, Adobe has secured successful partnerships through a thoughtful and strategic approach to choosing the right partners. Adobe’s first product, PostScript, was a page description language, which allowed users to print to external printers. Adobe understood that the proliferation of its software was dependent on high-quality hardware, and it strategically chose to partner with the best hardware company for creative users, Apple. In 1985, Apple debuted the LaserWriter printer with Postscript, and it was the first printer to use the language. Combined with a third partnership with Aldus Software, the trio established the desktop publishing revolution, and elevated Adobe’s positioning within the corporate ecosystem. Taking this further, Adobe capitalized on this position and cultivated deep partnerships with other large technology companies, such as IBM and Microsoft, ensuring it is deeply entrenched as the defacto creative software suite.
2) Ability to Bundle Products: Adobe has consistently been able to bundle its products into an integrated suite, while ensuring that value was strong enough for customers to pay a premium price for the bundle. In its early years, Adobe quickly amassed a wide variety of capabilities and was able to bundle new offerings with existing products to accelerate adoption. The company understood that the customer of that time wasn’t seeking point solutions, and instead wanted an integrated software solution that could solve multiple needs. Adobe has built on this strategy over time, culminating in the launch of its full product suite in 2003. What has been most unique about Adobe’s bundling approach is its ability to charge premium prices for the full subscription offering. For example, Adobe’s Creative Cloud offering is currently $80 per month for the base business license, or almost $1k per year. Adobe has an estimated 15 million paying subscribers today, evidencing the power of its integrated suite and the fact that Adobe is the standard. The network effects of Adobe’s products also enhance its lock-in.
3) Successful Acquisitions: Throughout its tenure, Adobe strategically selected acquisitions to enter into new markets, often choosing to buy versus build, and then subsequently successfully integrated those acquisitions. Adobe’s acquisition strategy is differentiated due to the fact that the company is not afraid to make large, bold bets, at same time dedicating the time and resources over a long period to ensure that these bets pay off. For example, Adobe’s $1.8 billion acquisition of Omniture in 2009 was seemingly off strategy and non-complementary. Why was a creative/design software company making such a large bet to acquire the leading player in enterprise analytics? Adobe understood that the future of marketing was uniting content creation with marketing analytics. Disciplines that were historically the purview of different enterprise departments would merge, and the rise of web/mobile analytics would enable a much tighter feedback loop within content creation and design. More than ten years later, the deal is seen as a brilliant strategic move that enabled Adobe to build its Experience Cloud.
Adobe Has Made Several Successful Acquisitions over the Past Two Decades
4) Transition to Cloud-based Company: In 2012, Adobe released Creative Cloud and fundamentally changed the way its products were offered, updated, and priced. While risky at the time, it enabled Adobe to transform the types of users they targeted and more importantly, stay relevant as more cloud-based competitors emerged. Growth in subscriptions for the Creative Cloud over the two years following launch can be seen below.
How did Adobe accomplish its transition to becoming a cloud company, and why did they succeed where many large companies have stumbled? They succeeded through a series of strategic moves led by CEO Shantanu Narayen. These included the acquisition of Omniture, which enabled Adobe to immediately become the leader in enterprise cloud analytics. It also included the $150m acquisition of Behance, which provided the company with a large community of designers who desired to showcase creative work. By 2018, Behance had over 10 million users, 10x the number when it was acquired by Adobe.
Adobe was also willing to absorb the financial impact of switching from a one-time license of ~$1800 to a per-month subscription of $50 for its Creative Cloud software, which results in an initial revenue shortfall. Adobe did this over five years, first introducing Creative Cloud in April 2012, and not retiring its license option until January 2017.
Finally, Adobe displayed pragmatism in listening to the market where its products were not well-received. By far the most notable example was Adobe Flash. In 2010, Steve Jobs posted his letter “Thoughts on Flash,” which criticized Flash and stated why Flash would not be allowed on iPhone, iPod Touch and iPad. While Adobe’s CEO Narayen initially fired back at Jobs, Adobe eventually decided to discontinue Flash and focus resources on HTML5. Through this move, Adobe displayed pragmatism, realizing that there was more money in building and acquiring SaaS apps than supporting media software on hardware devices.
Adobe has undoubtedly built a powerful suite of products that has garnered it a leadership position in design and marketing software. However, as Adobe approaches its fifth decade in business, that same product foundation has limitations, which provides opportunity for new startups to innovate as customers demand new features.
As mentioned earlier, we see an evolution occurring within Adobe’s core markets, driven by several key inflections. These are a combination of technological and customer adoption inflections that have introduced new business models, technologies, and work norms into the creative process. We believe the following three movements are catalyzing innovation in Adobe’s core markets:
1) Improvements in AI & Automation:
Applications of artificial intelligence are impacting nearly every industry and enabling new startups to transform industries while requiring significantly less physical and human resources than were historically required. Hemant Taneja describes this philosophy well in Unscaled: How AI and a New Generation of Upstarts Are Creating the Economy of the Future. The creative industry is a prime example of where this phenomenon will occur over the next decades.
Exponential Growth in Computing Power (Source: The Economist)
As we look at the design process specifically, there is now an appetite to automate manual and / or repetitive work, and enable the user to focus on the core creative aspects of their work. As Kai Brunner writes in The Automation of Design, “automation frees time for the heuristic facets of design to evolve toward crafting experiences for deeper social connectedness, more efficient collaboration and broader creativity.” Not only can such automation reduce the time and work required in the creative process, but it also has the potential to improve the final work product.
However, Adobe’s creative suite was built on the concept of manual design work, and automation cannot be easily integrated into every step of Adobe’s design workflows. True innovation at this level requires a complete rethinking of the building blocks, with automation and artificial intelligence applied to very specific workflows from the ground up. We’ve seen a parallel example of this level of automation within web design, beginning with web templates. Squarespace, Wordpress, and Frameworks all allow individuals to quickly launch a well-designed website by automating repetitive tasks. Sergio Nouvel aptly describes this as “Commoditization by Templates” in Why Web Design is Dead.
Taking this one step further, the next iteration of automation in web design will be artificial intelligence making decisions within the design process. Instead of simply making templates available to the user, software will create the website itself with a few inputs. This includes designing the text, choosing imagery, and even integrating an e-commerce store. While still in nascent stages, services such as the WIX ADI and Eyequant suggest future possibilities as the core workflows of web design are re-imagined.
While Adobe has attempted its own foray into AI applications with Sensei, we think this inflection point represents an attractive future opportunity for startups redesigning specific workflows with an AI-first approach. The AI opportunity is so attractive because not only can AI significantly reduce the manual time and effort required in the design process, but it can also dramatically increase the quality of the end product. Experts believe that AI will initially play a role in areas such as design production, choosing stock photos, and automating customer service interactions. However, over time it will play a key role in many facets of the design and production process, freeing up designer time to focus on problem solving and strategy rather than complex manual tasks. In this context, new startups have the benefit of being able to rethink the entire foundation of design and creative software from a bottoms-up perspective.
The expansion of the AI design market will be gradual. For example, Adobe first released Sensei in 2016, and the product is still evolving. It will take time for software to reach parity with the skills of top designers. And like any discipline, design experts will likely be resistant to the concept of software being able to automate their advanced skills.
2) Democratization of Design
Along with quality and cost improvements, a second movement we’re currently witnessing is the democratization of the creative process, driven by two coinciding movements. Firstly, while Adobe has largely focused on creating tools for creative professionals, the rise of social media enables almost anyone to reach a larger, global audience, creating a demand for accessible tools across various categories. Content “creators” now range from small businesses, to freelancers, to social media influencers, all of which have the need to create content in order to capture audiences and promote their businesses. However, these creators do not require large corporations or studios to create and distribute content that is being consumed by hundreds of millions of followers. Instead, they are leveraging new tools to create, edit, and distribute content across various media platforms. There has been an explosion in the number of creators, and the “long tail” of this market is now just as interesting as the “pro” market where Adobe began (see right).
Secondly, the increase in demand for design tools has coincided with the advent of automation, described above, which has allowed functionality previously only available to highly-trained professionals to become widely available to non-expert workers. We write about this phenomenon in our investment theme, The Rise of the Citizen Professional, where we detail how computing power and the learning ability of software are disrupting “expert” roles. We also describe a prime example of these two trends in the design market, Canva, which enables individuals and teams to design and publish anywhere, leveling the playing field for high-quality design.
Since its founding in 2012, Canva has focused its vision on democratizing design, and it is appropriately described as the “design platform for non-designers”. Canva recognized early on that existing design tools are too complex for non-designers, and launched an easy drag-and-drop interface with access to templates, graphics, and photos to enable simple design creation. Over the last 8 years, the company’s growth has exploded and Canva now has ~30 million monthly active users across 190 countries.
“As the world becomes an increasingly visual place, the existing tools provided by Microsoft and Adobe no longer meet the needs of companies where everyone has to create high quality graphics and express their ideas visually” - Melanie Perkins, CEO and Co-Founder of Canva.
We think Canva is the first of several companies that will drive the evolution of the market from Adobe’s bundled cloud packages to simpler, less expensive point solutions. As mentioned above, Adobe has been focused on the professional market, and as a result it often requires years of training. While it offers a powerful suite, its products are also expensive, complex, and difficult to parse apart. This provides an opening for startups to provide more nimble tools for non-professional designers, with an emphasis on ease-of-use. This widens the total addressable market to individuals who were not willing to pay for Adobe, or who were overwhelmed by its features, but who would be willing to experiment with tools in a commitment-free setting.
With regard to the non-professional design software market, Adobe faces the classic Innovator’s Dilemma, which will likely prevent it from effectively winning the market. The Innovator’s Dilemma describes how companies logically focus on profitability by charging higher prices to the most advanced customers at the expense of investing in new technologies. New markets are perceived to be too small for the incumbent and their cost structures are too burdened to optimize the margins. Adobe’s current business is highly profitable (36% EBITDA margins), due to the fact that Adobe’s core enterprise and professional design customers have a high willingness to pay. Targeting non-professional users with a suite of inexpensive products would cannibalize Adobe’s existing market, likely negatively impacting the company’s near-term revenue and stock performance.
This presents the ideal opportunity for new entrants to offer point solutions beginning in smaller markets and niche segments of Adobe’s business. While these markets may appear small today, with the right cost structure and entry point, they could be the wedge that allows startups to scale more broadly into larger markets over time. Canva began with its drag-and-drop functionality for simple design work, and has since launched a video editing tool, a presentation suite, and Canva Apps, allowing developers to build on top of Canva. Perhaps more importantly, Canva also introduced a new distribution model, allowing users to find it more easily through sharable templates and social media posts. Adobe did not take advantage of search-based or naturally viral distribution, and as a result Canva now has a defensible lead against the incumbent. New startups not only have the benefit of addressing user groups that now fall outside of Adobe’s scope, they can also scale rapidly from there into more mature markets with better distribution models.
3) Demand for Enhanced Collaboration
The democratization of design has coincided with a final movement towards enhanced collaboration in design. Within the context of creative workflows, new platforms have invited users of varying skill levels to collaborate, and transitioned it into a multi-functional effort. The process of design work is therefore growing into a “way of thinking.” As a result, we are now seeing an evolution away from the solo, desktop-software world where Adobe has dominated into a new era where collaboration is the norm upon which all platforms are built.
In the same way Canva embodies the inception of the democratization movement, we are experiencing the collaboration evolution with the rise of Figma, which was also founded in 2012. Figma is a cloud-based, collaborative design platform, which offers a browser-based alternative to existing desktop software. Projects are saved in the cloud with built-in version control, allowing for seamless collaboration across team members in real-time. Aside from being web-based and free for individual users at the onset, one of the most important differentiators for Figma is that the user can focus on just UX / UI design, rather than “trying to tackle everything Adobe is doing.”
However, the rise of Figma marks only the beginning of what we believe is a larger movement toward collaboration within design work, especially as it relates to non-designers, who fall outside the purview of Adobe’s core users. The design process now encapsulates marketers, product managers, and engineering teams, and we see a continuing opportunity to enable cross-functional productivity. Companies like Zeplin (collaboration between designers & engineers) and Pixelic (Figma for non-designers) are a few examples of startups in this space, and the need for collaborative functionality will only increase now given the impact of COVID-19. As we describe in our article The Behavioral Change Economy, the movement towards remote and distributed teams has accelerated dramatically, resulting in a surge of demand for new software tools. This presents a unique, once-in-a-lifetime opportunity for startups.
We believe we are only in the beginning stages of seeing new entrants building on Adobe’s legacy, and that we will continue to witness an evolution of the creative software for many years to come. In the near-term, there are a few areas we are most excited about as we look to immediate opportunities:
1) Video Workflows: Video has largely emerged as a mainstream media form in the last ~15 years, beginning with the success of YouTube and now continuing with the rise of TikTok. By one estimate, online videos will make up more than 82% of all consumer internet traffic by 2022. While Adobe offers some video editing functionality, it is not well positioned to launch new products tailored to video workflows and new monetization models. We believe this category has the potential to be as large or even larger than the photo editing market over the long term, and to yield several sizable exits.
2) Analytics Capabilities: Adobe forayed into analytics with the acquisition of Omniture in 2009, and has been largely focused on digital marketing analytics for large enterprises. Its analytics function is one of many that sits within the Experience Cloud and the value proposition is tied to a strong integration with the rest of the Adobe marketing Cloud. We believe there is an opportunity to connect data across different platforms, and also expand capabilities in areas such as social media, mobile, or product analytics. Furthermore, the rise of machine learning could yield powerful, less cumbersome, and more cost-effective software for small-to-medium sized clients.
3) Document Alternatives: Lastly, while Adobe has successfully acquired or transformed various aspects of it’s Creative & Experience Cloud businesses, we have seen less innovation within the Document Cloud, specifically as it relates to Adobe Acrobat and the PDF. The PDF was launched in the early 1990s, and still remains relatively similarly in form and function. There are already several open source alternatives for reading PDFs, and we believe how people work with PDFs will continue to evolve, such as going from editing in Acrobat Reader to building better experiences that are web-compatible.
Adobe has been a rare success over the last 4 decades, and no one should underestimate their ability to continue to prosper. However, we believe this is an exciting time to witness the evolution of an entire category of software applications. New startups are best positioned to capitalize on the movements we are now seeing in automation capabilities, democratizing technology, and enhanced collaboration. These startups build upon Adobe’s platform to offer cheaper, less complex, faster, and more collaborative tools, either replacing Adobe, or often just as a new tool in the designer’s toolkit. They can also leverage more scalable distribution models, where Adobe is particularly vulnerable.
Lastly, rather than a static landscape map, we have created an Airtable here of emerging startups in the creative and design software categories. We plan to update this table in real-time as new entrants emerge, and encourage readers to add entries as well. We will review them periodically and look forward to a continuing dialogue with contributors as this list continues to evolve.
We are excited to see how new entrants in these categories continue to challenge Adobe, and whether Adobe seeks to acquire select companies over the next decade. If you are building or investing in these areas, email us at firstname.lastname@example.org and email@example.com. We look forward to hearing from you.