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Adobe, Macromedia rapidly becoming publishing rivals

Analysts say that while the software companies have steered mostly clear of each other in the booming electronic publishing market, an already fraying peace between them is not likely to last long.

Adobe and Macromedia, two software companies that have flourished conspicuously in the Internet age, are on a competitive collision course.

You wouldn't guess it from some statements of the companies' executives, who maintain that they serve different constituencies and sell products that are more complementary than competing.

But analysts say that while the companies have steered mostly clear of each other in the booming electronic publishing market, an already fraying peace between them is not likely to last long.

"I would agree that they don't compete all that much, but I would add a caveat--not yet," said Banc of America Securities equity analyst Greg Vogel. "They already compete in a few products, but they will be competing more with each other, not less, in the future. Their overlap is likely to increase."

Recent courtroom skirmishes over patents are one indication of increased competitiveness between the two companies. Adobe sued Macromedia for patent infringement in August, and Macromedia fired back with its own patent infringement suit last month.

"I think you see these lawsuits pop up in a lot of developing sectors as the companies want to stake out their ground and hold onto it," said Aaron Scott, financial analyst with Tucker Anthony. "As the space grows and gets more competitive, the lawsuits are a natural extension of what they're trying to achieve in the marketplace."

Adobe, the third-largest software maker in the United States with more than $1 billion in annual revenues and a market capitalization of $17.5 billion, would at first glance seem to be playing Goliath to Macromedia's David. Macromedia had fiscal year 2000 revenues of $264 million and has a Wall Street valuation of $3.7 billion.

On top of that, Adobe has been on a roll recently, racking up a string of equity analyst recommendations, laying plans to build a new tower at its San Jose, Calif., headquarters, and announcing its intention to hire 1,000 new employees over the coming year.

But it is Adobe, the longtime market leader for print publishing, that has been wielding David's slingshot when it comes to the Web content-creation software market.

Microsoft's FrontPage--which at $149 is about half what Adobe and Macromedia charge for their products--is in the lead with 39.1 percent of the unit share for Web-authoring tools sold in August, according to PC Data.

But even with a higher-priced product, Macromedia has eaten into Microsoft's share, rocketing to 17.40 percent this August from 6.20 percent in August 1999. Microsoft slipped from 46.50 percent.

Adobe trails with 5.90 percent of unit sales, down from 7.50 percent last year.

In January 1999, Adobe acquired GoLive to vie with Macromedia's market-leading Dreamweaver Web-authoring software. But Adobe says that only with its recent release of GoLive 5.0 has it produced a tool that is competitive with Dreamweaver.

Analysts agree that the battle between the companies is still nascent.

"Clearly Macromedia is the strong mover in the category and is establishing Authoring power the sales benchmarks for those looking to compete in the Internet publishing space," said Roger Lanctot, analyst with PC Data. "It's worth noting that they've had a significant impact on Microsoft's position in the category. And you have to withhold judgment on figures you're looking at for Adobe. This is no time to leap to any conclusions about what their prospects are."

While both companies reflexively dismiss the notion that they are engaged in a brawl over market share, they are equally quick to point out their competitive strengths and predict that they will prevail over the other.

Macromedia likes to relegate Adobe to the print world--where it does indeed have its roots and the lion's share of its present business. Macromedia writes off Adobe's Web-authoring software as a "low-end" product and slams its animation tool as a Johnny-come-lately with little chance against the Web graphics standard-bearer.

"In most of the areas...of Adobe's business, we don't compete with them," Macromedia chief executive Rob Burgess said in an interview. "They're a lot more focused on print than we are...There's nothing that competes with Flash, and Dreamweaver is really by far the leading product there."

Burgess said Macromedia saw 80 million downloads of its Flash player last month alone.

But Macromedia will have to fend off Adobe's concerted challenge to keep those leads, said Adobe president Bruce Chizen, who scoffed at Burgess's claim that GoLive fell into the "low-end" category. He also predicted a swift end to Dreamweaver's ascendance.

"I suspect that by the end of next year we will pull even or be slightly ahead," Chizen said in an interview. "GoLive 5 is our first real competitive offering with Dreamweaver."

Chizen said Adobe would bring the dominance of its Photoshop photo-editing software to bear on the Web-authoring software battle, automating the processing of Photoshop images within GoLive and taking advantage of Photoshop's marketing resources.

While Adobe has challenged Macromedia's Web-authoring software and Rob Burgess animation content-creation tools, Macromedia has offered Adobe some new competition as well, marketing its Freehand illustration software to compete with Adobe's dominant Illustrator.

The legal battle between the two companies is heating up in the background. Adobe denied that its courtroom action had anything to do with a recent competitive flare-up between the two companies and said it had notified Macromedia of its patent grievance in 1996.

"If you look at Adobe's 17-year history, we're not a very litigious company," Chizen said. "But when someone continues to rip you off, you have to take action, and you have to sue them. We had no other recourse."

For its part, Macromedia said Adobe's patented technology--the "palette" feature of the user interface--could be found in numerous examples of "prior art," the legal term for pre-existing instances of an invention, which can invalidate a patent.

"We've had scores of unsolicited submissions of prior art from before the Adobe patent was even applied for," said Burgess, who called the exchange of lawsuits an "unhealthy" aspect to the companies' competitive relationship. "We also found that they were violating some of our patents, and now we're in the position that we've had to countersue for three of our patents. I don't think the customers are winning this thing."

The patent suit against Adobe is Macromedia's first, Burgess said.

Analysts say that Adobe's expansion into Macromedia's territory is not only inevitable, but perhaps crucial to the older company.

"Adobe is the dominant player in a fairly mature market, and they have to find new markets to continue to drive growth," said Banc of America Securities' Vogel. "They have very strong products in print publishing, which people are now using to publish on the Internet, and that dovetails very nicely with being able to develop Web sites with multimedia content. It's a natural."