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It's Adobe's game to lose, CEO says

Bruce Chizen discusses open source, the importance of video and increasing competition from the likes of Google.

It isn't always easy being on top.

Adobe Systems may have a clear lead in the market for so-called creative software: things like photo editing, Web page design and layout tools. But the world has changed. People no longer assume that packaged software from big companies is best, and an ever-growing number of applications are available for free.

CEO Bruce Chizen says it's Adobe's game to lose. A new version of the company's Creative Suite bundle is coming later this month. But Chizen sees Google and a handful of other competitors zeroing in on Adobe's key markets by offering free Web-based tools. That's why the company has plans to launch a free, online version of its flagship Photoshop application in the next few months.

In the last of a two-part interview, Chizen talks about competitors both old and new, some surprises hidden in the Macromedia acquisition and why video is the next big thing for Adobe.

Q: When you were asked last year why Adobe did the Macromedia deal, you said: Flash. A one-word answer.
Chizen: Yeah, I got a lot of other things along with that. I got great, innovative, aggressive people that helped instill Adobe with more of that. We got a great video platform, which quite frankly was a surprise. I didn't really understand the power of Flash video until after the fact. The Flash media server was a big surprise. Having a Web layout tool that was market-leading, with Dreamweaver, was a big win for us. We tried for years with Go Live. As good of a product as it was, we could never be core to the Web, we were always peripheral.

The onus is on us to deliver a solution. If we don't, Google will. The way I would describe it is, I'm concerned about Adobe getting there in time to address our users' requirements. So Google could get there first, but there are others.
Will Dreamweaver become more of an integral part of Creative Suite?
Chizen: Yes, in the next version. You will be able to double-click on an image in Dreamweaver and launch Photoshop, make the changes in Photoshop and the image automatically changes in Dreamweaver. We will continue to draw the connection from creative tools to Flex.

As far as other things from the Macromedia deal, we got Flex and ColdFusion as a way to add value to business processes, and we got a bigger play in mobile. We knew that the way people would access information was going to become more non-PC than PC, but the Adobe Reader was not the right fit. We had a couple of false starts but couldn't really get there. And Flash Lite was taking off. The fact that device makers were paying for it, as opposed to us forcing them to install it, is pleasing. We're on 200 million non-PC devices. Every Sony Playstation 3 has Flash Lite.

Do you compete with Microsoft in the electronic forms area, with Office 2007?
Chizen: Yes. We compete with Microsoft, but we don't bump into them that much. Most of our users are in financial services, manufacturing, health, pharmaceuticals and government, where they have to go outside the firewall and they need the reliability of Adobe Reader and that's where Microsoft falls apart. You can't get the reliability and insist that everyone use Windows XP, or XP Service Pack 2, or Vista. Our customers want their users to have access to their forms and business processes regardless of operating system, regardless of browser and they need it done in a reliable way, which limits the use of HTML. So it's really a unique value proposition that we have. If you go to Ameriprise or Fidelity, they use Adobe Flex and Live Cycle. Even people like Yahoo, if you look at Yahoo Maps, that's all Flex/Flash. Even Google Finance is Flash.

We do something that is truly unique. There's a lot of users who don't need us. But where we do something unique, it truly is unique and it's hard to do it any other way. The only company that can really do stuff that imitates what we do is Google, just because of the pure talent and resources they have.

I was surprised to hear you mention Google as the only company that can do some of what you do. Can you explain a bit more about what you mean?
Chizen: When I say some of what we do, they can create Web sites that are compelling without using our tools in part because they can afford to do it, and have the knowledge to do a lot of hand-coding, because they have such a breadth and wealth and depth of talent that others can't afford.

But wouldn't Microsoft fall into that category?
Chizen: If you look at their Web site, and they use a lot of Flash, they use a lot of PDF. The fact they are not even using a lot of their own technologies suggests to me that, while they can produce great tools, their ability to use their tools to express what they do on their own Web site is not as great as for someone like Google.

What about Google competing with you on some of your hosted applications?
Chizen: If we don't get there, they will. Shame on us if we don't get there before them. People come to us for those tasks, they rely on us, they expect us. If they want to have those solutions delivered to them through the Web, through a business model where they don't have to pay, we had better do that or we are going to lose that customer.

It's no different than when we introduced Photoshop Elements a few years ago. There's the Photoshop customer, (but) everyone was concerned about what we were going to do for the low-end customer. Well, if we didn't have an offering today, the world would be a lot different. The onus is on us to deliver a solution. If we don't, Google will. The way I would describe it is, I'm concerned about Adobe getting there in time to address our users' requirements. So Google could get there first, but there are others. There will be a market opportunity and there's a number of people who could get there. I better get there, Adobe better get there, before anybody else gets there, with Google being a likely, but not the only, candidate.

So Google has risen on your horizon (as a competitor) in the past year?
Chizen: Well, when they acquired Picasa, they pretty much tipped their hand. And then they acquired Writely, and with the Google Apps, if we are asleep, they can just keep offering applications. I think Adobe's release of the video Remix product sends a strong message that we are not asleep. Is it true that the majority of Creative Suite users are nonprofessionals?
Chizen: It is. I characterize them as noncreative professionals, so they are not in the Web creation business, the design business, the newspaper business...etc. They are at work as a salesperson who wants to help their Powerpoint presentation, or they are at home. And even with Creative Suite, as of last year, 40 percent of the people buying it were not creative professionals. I found that fascinating, but not surprising based on the number of people who ask me for a copy of the product for free. I always ask them: what are you doing with it? Well, I really want Photoshop because I'm thinking of doing a layout or helping the kids with the yearbook, or I was thinking about doing a Web page. The analogy I always use is to think about people who buy a Mercedes or a Lexus or a BMW to drive to work 10 miles. People want the brand, they want the marquee and some of that is our customer. They are the Tiffany buyer, it's the upscale buyer and they want the best.
Even with Creative Suite, as of last year, 40 percent of the people buying it were not creative professionals. I found that fascinating, but not surprising based on the number of people who ask me for a copy of the product for free.

Are you concerned about the upward pressure from open source?
Chizen: No. I mean, it's always a concern, but the open-source community, at least in our area, hasn't been able to figure out how to ensure that same level of quality and innovation that we are able to do. If there is one killer feature in the new version of Photoshop that is not in the open-source product, people will want Photoshop. I think that's what differentiates our customer from someone doing word processing or spreadsheets. In fact, we are cooperating with the open-source community and Mozilla and we want to do more of that.

At the Web 2.0 Summit, you said, in essence, we like to share but we have to draw the line someplace, right?
Chizen: We spend 19 percent of our revenue on R&D. I have to pay for that somehow, plus I'm in business to make money. I have shareholders.

So how would you classify where Adobe is, in open source, versus other companies like IBM, which has been really aggressive in the open-source world?
Chizen: Well, part of it is that the bulk of their business is infrastructure, not applications, so they don't care about giving away applications software. If someone said (to IBM), 'hey, you should give away content management systems and make the whole thing completely open source,' they probably wouldn't do that because they want to make some money on that software. Any area where you are looking to generate revenue and profits, you can't afford to go open-source. Nobody has proven, that I am aware of, that you can go fully open-source and make money in the long term. Red Hat is in the services business. But we are not in the services business, we're in the software business.

How are things going on the business software front, with things like Live Cycle and ColdFusion?
Chizen: Pretty much as expected. This past year, we were a $200 million business (in this area). Had we been a standalone enterprise software company, the world would be writing about us. Unfortunately, in a relatively larger $3 billion company, that's still a small number. It was 8 percent of our business last year. We've had a number of things working against us. (With Live Cycle) we've had to do a lot of hand-holding to get customers up and running. It's only now that we are beginning to have enough customers to talk about as real success stories. With the launch of Live Cycle 8 later this spring, you will have, for the first time, fully integrated servers with one installer and one administrative panel. And we've incorporated the ability to do Flex data capture. My belief is that, despite the fact that we have been growing nicely, once we release Live Cycle 8 we will be set for interesting movement.

Also, we are embedded in SAP's NetWeaver software. If you want to do an interactive form in NetWeaver, you have to go through Adobe's technology. If you want to change that form, you have to buy something from Adobe or SAP. It's only recently that people have started using SAP applications on top of NetWeaver, so that is clicking for us. It's exciting, it's just taken a long while for it to take off. Again, it's not a surprise and if we were independent...you think about Salesforce.com, a $500 million company, and the world thinks they're perfect. And, fortunately, I have too many businesses to talk about.

Going forward, what will be the important new markets for Adobe?
Chizen: Video. And when I say video, it's not just editing, it's the entire work flow. Real-time editing, post-production, streaming, DRM, delivery...so, end-to-end video for the professional and the serious hobbyist. And for the casual home-based user, depending on the economics there.

The second big focus is making sure that everything we do extends into non-PCs. So that mobile business, besides getting royalties on the devices, we (make money by selling) servers to the carrier that optimizes the content to be delivered in an elegant way to those devices. We expect by the end of the year there will be a major carrier here in the U.S. that will deploy a Flash Cast-based service. The enterprise will continue to be a big focus for us. Real-time collaboration. And some new things like digital books, and some of the host-based apps we have talked about, leveraging ad-based models.

When I think about Adobe, there are our core businesses: Creative apps, the enterprise, Acrobat. And then there is just a whole series of little experiments going on that are really cool. We have so much technology now to play with. From a synergy perspective, Macromedia added a lot to what Adobe was doing and Adobe added a lot of scale to what Macromedia had hoped to do.