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Microsoft and Adobe to square off?

In digital documents, Web applications and image editing, Adobe has a healthy head start. But Microsoft is making some noise.

After two decades of successfully steering clear of Microsoft, Adobe Systems is edging closer to the software giant's crosshairs.

Since its launch in 1982, when Microsoft was 7 years old, Adobe has built up a commanding lead in the markets for digital document and image editing software, among the few areas in PC software Microsoft has failed to dominate.

Microsoft's test release last week of the Acrylic graphic design tool and the demonstration of its Metro digital document format indicate that the company may be growing less tolerant of Adobe as it encroaches on Microsoft's turf with the proposed acquisition of Macromedia and its Flash and Flex framework for building Web-based applications.

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What's new:
After two decades of successfully steering clear of Microsoft, Adobe Systems, with its pending buyout of Macromedia, is edging closer to the software giant's crosshairs.

Bottom line:
With the next version of Windows--Longhorn--delayed; the graphic design tool Acrylic still in a test version and earning mixed reviews; and digital document format Metro tied to Longhorn's fate, many see plenty of breathing room for Adobe. Still, Microsoft has clearly become ill at ease with Adobe, and Microsoft is Microsoft.

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The combined forces of Adobe's PDF and Macromedia's Flash particularly, say analysts, have brightened the bull's-eye on the San Jose, Calif., graphics software company.

"Microsoft is already showing signs that Flash is more than just an annoyance," said Burton Group analyst Gary Hein. "Announcements like Metro, Avalon and Acrylic show that Microsoft is taking Adobe plus Macromedia much more seriously. (Adobe Chief Executive Bruce) Chizen should be worried."

In the race to sell technology for building Web-based applications, the competitive landscape is far from stable. Microsoft has described its vision of Windows applications integrated tightly into the Internet through the company's Longhorn operating system, but numerous delays have allowed alternatives such as Flash and "AJAX" to gain traction.

Adobe declined to comment on the strategic implications of its proposed acquisition. But Macromedia called "ridiculous" the idea that it is competing with Microsoft's operating system at all.

"I don't think Flash is any threat to Windows," said Kevin Lynch, chief software architect for Macromedia. "We're a really small company compared to Microsoft. Flash is specifically designed for Internet use, for Internet applications, and that's very different from an operating system."

Analysts take a different view of the strategic importance of Flash, and compare it to the threat the Web posed to Windows before Microsoft launched its defensive, ultimately successful campaign with the Internet Explorer browser 10 years ago.

"I'd agree that Flash is not a direct threat to the OS, but it's a threat to portions of the OS" such as developers' tools, said Hein. "It's kind of like the old Netscape push in that if you can develop all of your apps in a browser, it makes the OS less relevant."

Unlike Netscape, which came to Microsoft's attention as a head-on threat, Adobe has made its living over the years by dominating areas Microsoft tended to neglect. Until now.

"For Adobe, competition with Microsoft is its manifest destiny," said Jesse James Garrett, a consultant with the San Francisco consulting company Adaptive Path, which works with Macromedia. "The Macromedia acquisition makes Adobe a threat that Microsoft can no longer afford to ignore."

For their part, Microsoft executives play down the competition, or as they like to call it, the "coopetition." For years, Microsoft has both competed and partnered with a number of other companies, ranging from database maker Oracle to Intuit, the leader in financial software for consumers and small businesses. Adobe, even with Macromedia, is no different. "There are certain areas where our products overlap. At the same time, Adobe and Macromedia are important partners for us," says John Montgomery, director of product management in Microsoft's developer division.

Assuming Adobe completes its acquisition of Macromedia, the combined company competes with Microsoft in three product areas.

In image editing, Adobe leads the market with its tightly integrated Photoshop and Illustrator applications. Microsoft last week released a test version of Acrylic, a vector- and pixel-based image creation and editing software title, though Montgomery downplays the direct competition.

In digital documents, Adobe rules the roost with PDF (Portable Document Format). The core of what the company calls its Intelligent Document Platform, PDF is widely considered the industry standard, in widespread use in government and the enterprise. (Adobe makes a point of noting, in its PDF fact sheet, that Microsoft applications Word, Excel, and PowerPoint all produce PDF files with the click of a button.)

Microsoft showed off its answer to PDF, called Metro, last month, as part of a demonstration of the capabilities of its upcoming, and late, Longhorn operating system.

In Web-based application platform technology, Flash and the recently introduced Flex server software have begun making inroads in the enterprise. Meanwhile, the world awaits even a test version of Longhorn amid continued evidence that Microsoft is having significant difficulty driving upgrades to newer operating systems.

With Longhorn late, Acrylic still in a test version and earning mixed reviews on developer forums, and Metro tied to Longhorn's fate, many see plenty of breathing room for Adobe and its intended acquisition target. Illustrator and Photoshop, part of Adobe's recently updated Creative Suite 2 package, are seen as all but invulnerable for the foreseeable future.

"It seems to us that the likelihood of prying creative pro customers away from either Adobe product, especially with the advances delivered in the new Creative Suite 2 releases, is not high at all," wrote Merill Lynch equity analyst Jay Vleeschhouwer in a report circulated last week.

But concern about Adobe's prospects--as reflected in a dip in the company's share price following the Acrylic release--has less to do with the quality of Microsoft's offering than with the fact that Adobe has provoked Microsoft's competitive ire.

Rather than competing with products or technologies, Hein said, Microsoft identifies competitive threats on a company-by-company basis.

"And they go after the company," Hein said. "Adobe and Macromedia are more of a competitor than either standalone, and Microsoft will compete by offering a free version that's better integrated with the OS. None of Microsoft's announcements or trial versions will displace Adobe, but it's a clear signal that Adobe just popped much higher on Microsoft's competitive radar."