Well, it has been just over a month since Adobe was hacked and I thought that things may have died down enough to take a broader look at how well Adobe has been doing since it started to transform its business model with the launch of Creative Cloud and its decision to stop offering perpetual licenses.
Customer Adoption and Business Performance
During its Q3 2013 conference call, Adobe shared some stats on the adoption of Creative Cloud.
It currently has over 1 million paid creative cloud subscriptions. This is up an impressive 331 thousand from the prior quarter. In Q3 2013, 41% of Adobe's revenue came from recurring sales, which is up from 35% in the prior quarter.
So what? These numbers lack some important context. That is, how is Adobe doing compared to its own internal expectations.
This is where the results seem particularly impressive. When Adobe introduced Creative Cloud, it projected that 40% of its business would be recurring by the end of its 2014 fiscal year.
The fact that it exceeded this target by the end of Q3 2013 highlights the impressive adoption of the service.
Adobe isn't the only one benefiting from the new distribution model.
It seems to be intent on proving the benefits to customers through consistent upgrades. It rolled out a pretty significant update over the summer and added 150 new features to its video tools at the end of October.
It's clear that shifting from sales of boxed software has made it easy to rollout updates and enhanced functionality through regular updates rather than annual forklift upgrades. It's nice to see that the introduction of useful updates are no longer getting hung up by financial reporting regulations and fixed release schedules.
I would argue that in the near term, the rapid adoption of Creative Cloud will provide Adobe the incentive to keep the updates coming fast and furious. It will need these updates to ensure that people who signed up on promotional offers remain paying customers after their first year of reduced pricing is up.
Addressing Customer Concerns
Adobe is trying to mollify some of the people who were concerned with the decision to stop selling perpetual licenses in June.
For example, its new Photoshop Photography Program which gives users Photoshop CC, Lightroom 5, Bridge CC, Behance, and 20GB of storage for $9.99 per month on a 1-year subscription shows that it's willing to consider more tailored packages for people who don't want / need the full suite or are more price sensitive.
Hopefully more bundles like this, a video bundle in particular, will address people's complaints about paying for software they dont' need. I would expect that once the rate of growth for Creative Cloud begins to slow, Adobe will start offering more of these packages to convince some of the holdouts that have resisted subscription pricing to make the switch.
Perhaps Adobe will feel more comfortable offering different types of packages now that it now has data on what people are selecting. As of the end of Q3, 95% of Creative Cloud subscriptions were annual plans, versus month-to-month; and 81% were for the full Creative Cloud, versus point products. If the vast majority of people are taking all you can eat, then Adobe can easily afford to offer some of the cheaper packages to placate the more vocal critics without too much cannibalization of its revenue.
Adobe looks like it's also searching for an answer to complaints about how the subscription service locks people in because they can't open or work with old projects once they cancel the service. Adobe has apparently floated some trial balloons around concepts like including a permanent version of CS6 for customers that signup for a discounted 3-year contract. This would give cloud customers the same benefits as perpetual license customers, namely, the ability to work with projects in perpetuity.
Even if none of these options ever come to pass, so long as month to month subscription options are available, then people that stop using the service but need to open an old project can sign up for a temporary account. If this is done in the context of a paying job, then temporarily paying for a month or two of service, while annoying, is a cost of business that should be passed on to a client that wants some work done on an old project.
With the exception of the security fiasco, which isn't specific to Creative Cloud, Adobe seems to be firing on all cylinders and must be very pleased with its transformation.
The only serious question I have about Creative Cloud is whether this explosive growth has come from cherry picking? People who upgrade to every new version of Adobe's creative products should be any easy sell on the new model. By definition they value the new features and are willing to pay for them. The question is, how many of Adobe's customers fall into this camp and how many fall into the group of irregular upgraders that skip versions and hence may be tougher to sell on the merits of Creative Cloud.
Given that Adobe has exceeded its own expectations, I suspect that there is still plenty of opportunity here, and that Adobe's accelerated release schedule will convince some of those perpetual version skippers to make the switch to the new distribution model.