Dear Google: Buy Adobe

Posted on October 27, 2010 by jyarmis

Recent news reports have linked Apple and Microsoft as potential suitors for Adobe.  While Adobe CEO Shantanu Narayan has thrown cold water on the Microsoft discussions and the rancorous relationship between Apple and Adobe renders an amicable partnership unlikely, one name has been absent from these discussions, and they’re the ones who should most likely want to buy Adobe, has the resources to do so and can build an extremely synergistic business case for the combination, and that’s Google.

A brief look at the financials.  Adobe at this writing has a market capitalization of a little over $14 billion.  Google has $33.4 billion cash on hand and generated over $10 billion in operating cash flow in the last 12 months.  Not only does Google therefore have the financial wherewithal to make an acquisition of this size, it’s probably one of the few acquisitions of this scale (along with Salesforce.com; market cap almost $15 billion) that it could make without significant antitrust scrutiny.  While continuing to trash Adobe, it’s not like Apple could argue compellingly that Google shouldn’t be allowed to buy it.  (While we’re at it, Google should also buy Salesforce, but we’ll talk about that later.)

So, why should Google buy Adobe?

  1. In a battle for the hearts and minds of developers, Google is missing key elements.  Yes, Android is a successful and growing platform but Google’s developer relations are no better than Apple’s, with both of them being substandard.  As Google grows out its platform ambitions, with Chrome OS on the horizon, having a well-developed developer relations program will be important in its battles with Apple and also increasingly Microsoft.  Do developer relations matter?  One could argue that one of the compelling reasons why early Windows beat IBM’s OS/2 in the marketplace after the Microsoft/IBM split in the late 80’s and early 90’s was because Microsoft had strong developer relations and after the split, IBM had to effectively start from scratch and was way behind even while having the technologically superior platform.  Developers matter, differentiated applications matter and so developer relations matter.  Adobe has a long history with them; Google has none.
  2. Google, despite its myriad product offerings, is effectively a one-trick pony:  advertising.  Of course, if you’re going to rely on one trick, this is a pretty good one to rely on, and Google is an ongoing financial juggernaut.  However, to realize their full software and platform ambitions, Google is going to need to broaden beyond advertising as the sole source of their revenue.  Adobe presents Google with great opportunities to grow into traditional software licensing models.
  3. And while offering traditional software licensing models, Adobe also presents some familiar-to-Google bottoms up enterprise opportunities.  Adobe has, shall we say, an interesting portfolio of enterprise software.  Traditional industry analysts (read:  Gartner) have always had a hard time characterizing Adobe since they don’t always neatly fit into Gartner Magic Quadrants or at least their products are missing certain features that Gartner considers key in its category definitions.  Adobe’s response has always been “we just meet actual customer needs.”  While they haven’t therefore neatly fit into architectural diagrams, Adobe has successfully penetrated enterprises with a bottoms-up, or more accurately middle-out, approach.  This fits well with Google, who <sarcasm alert> hasn’t exactly penetrated the enterprise through the front door. <end alert>
  4. While Google advertising opportunities have enabled “freemium” models to flourish on the web, paradoxically Google itself has not benefited from such models.  Over 98% of Google’s revenue derives from advertising and there are scant opportunities to upgrade from free Google products into revenue-producing ones.  Adobe offers several such opportunities, from consumer-oriented ones like moving from Picasa to Photoshop to enterprise-oriented ones like Acrobat.
  5. While Google has major cloud computing infrastructure initiatives in place, the early market has been dominated by key emerging competitors Amazon, Microsoft and Salesforce.  Adobe has interesting infrastructure elements that expand Google’s presence in the cloud architecture space.
  6. As noted earlier, Google’s enterprise approach is largely lacking.  One could have said the same of Apple, who has pursued a consumer-driven strategy for virtually all of its corporate life.  It was interesting to see, therefore, Apple’s announcement earlier this week of a partnership with Unisys to better help integrate Apple technologies (notably the iPhone and iPad) into enterprise architectures.  Google, too, must pursue external relationships to meet real customer requirements but an Adobe acquisition would give Google some much-needed internal support capabilities as well.  As mentioned earlier, I still believe Google should acquire Salesforce.com to expand its software and platform capabilities and to dramatically expand its enterprise support capabilities.    Google is going to have to either acquire Salesforce or get serious about competing with them.  Either way, an Adobe acquisition would be a step in the right direction.
  7. Lastly, this makes sense as a defensive move.  To the extent Apple and/or Microsoft are seriously looking at Adobe, it would hurt Google were they to acquire Adobe, necessitating Google to adopt a piecemeal solution to the elements addressed above.

So why should Adobe be interested in a Google acquisition?

  1. While I hardly embrace Steve Jobs’s bombast about Flash, it’s clear that HTML5 presents a significant challenge to one of Adobe’s major and enduring platforms and thus from a purely financial perspective, this may be the best time to sell.
  2. Adobe’s cross-platform arguments diminish in a world where there are fewer platforms and different requirements.  If, as I have argued, the mobile world is coalescing around Apple IOS and Google Android, and Adobe’s presence on one of those platforms is insecure at best, the rationale for an Adobe solution is dramatically diminished.  Further, with the different requirements of a mobile platform, with its lesser hardware power, the ability to support interim software layers is not as clear-cut as on the desktop, or in the cloud.  Mobile devices are heavily about the integrated experience and Adobe doesn’t play well against that requirement.
  3. Adobe is a better fit with Google.  With Microsoft and Apple both, there are significant overlaps in the product portfolio and/or minimal interest in some of the pieces with the the likely result being that core Adobe products and platforms are discontinued or sold off.  There is little to no overlap with Google and yet strong synergies; thus the ability to preserve the product portfolio, and the driving vision behind it, remains largely intact.

Google and Adobe…better together

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Filed under: Ad-Supported Business Models, Cloud Computing, Mobility | Tagged: , , , , | 2 Comments »

Technology Change: Slower than I Think but Faster than You Think

Posted on October 26, 2010 by jyarmis

Last week, I gave a presentation to a “traditional” publisher on the impact of new technologies on their business.  This is someone who has a very successful and profitable “dead trees” business and my mandate was to come in and challenge their thinking with regards to the impact of technology on their business.  Their managers feel no sense of urgency to do anything about new technology now because the existing business continues to thrive and despite the prognostications of industry pundits, they have yet to feel an impact on their current business and thus are in no rush to actually invest in new approaches (even while it’s fun to think and talk about them).

This caused me to reflect on the technological change I have seen in my lifetime.  I have spent 31 years focused on “disruptive technologies.”  I started working on PCs in 1979 — two years before IBM launched its PC — and I’ve witnessed some amazing technological change in those 31 years.  As an observer of, and advocate for, those changes, I’ve come to an interesting and important realization.  As optimistic as I am about the pace and depth of technological change, I’m usually over-optimistic about the time frames in which it happens.  This was the case in the early Internet days and I believe is once again the case with regards to a new set of disruptive technologies.

While I was never a wild-eyed proponent of Pets.com or Webvan, I am certainly guilty of feeding into the hype that led to their elevation.

So, we technology pundits are overly optimistic.  No big news there.  However, there is big news:  while we may be overly optimistic in the short-term, we’re actually overly conservative in the medium-term!  Ten years ago, the Internet bubble was about to burst.  All those wildly optimistic claims about how the Internet was about to change everything were going to be laid to waste.  Yet here we are, ten years later, and the truth is that the Internet has changed everything.  It has reached a point where, if you lose your Internet connection at work, you just go home or go somewhere where you can get that Internet connection because without it, well, you just can’t do your job.  And it’s not much different at home.  When I lose my cable TV connection, well, there are lots of other ways to entertain myself and, short of a major sporting event (on the level of the World Series), I feel no obligation to leave the house.  Lose my Internet connection?  I may wait around an hour to see if it comes back but anything longer than that and I’m contemplating a run to Starbucks or Borders or somewhere else where I can grab a Wifi connection.

The truth is that the Internet revolution is more profound than even we wild-eyed optimists thought it might be a decade ago.  We had the timing wrong but, even more significantly, we had the impact wrong, and weren’t wild-eyed enough.  And guess what?  We’re doing it again.  And this time again, it is going to happen more quickly than you think…and more quickly than the Internet took.

So, what is “it”?  Regular followers know that I have been talking about the “perfect storm” of disruptive technologies — social, mobile and cloud — for over three years now.  My premise is that each of these, while an interesting phenomenon in their own right, actually serve to amplify each other such that the overall market impact is greater than if any one of these phenomena were occurring in isolation.  That amplification effect is one reason why I think that the medium-term impacts of these technologies tend to get understated.

There are two other unique characteristics of these new technologies that I think will cause their impact to be so significant more quickly:

  • Pace of change
  • Economics

With regards to pace of change, the fact that we’re heavily Internet-connected enables us to embrace new capabilities much more quickly.  In the early Internet days, we were faced with the daunting challenge of upgrading connectivity models from dial-up to broadband and to deploying new software (the browser) on a large number of machines.  Having done that now, we’re in a position to embrace new Internet models of distribution (e.g., cloud computing) with very little friction.

Mobile also has some radically different market dynamics than the desktop that enables, and leads to, a faster pace of change.  First of all, we’re embracing the mobile Internet even faster than we did the desktop Internet, as famously called out in a Morgan Stanly report.  In fact, they project that the number of mobile Internet users will pass the number of desktop users in the next 3-4 years.  The dynamics of the mobile market are also very different than those of the desktop, enabling more rapid change.  First of all, this is a much larger market.  Cell phones of all kinds (not just Smartphones) are shipping approximately 1 billion units per year, or about 4x that of the desktop market.  These will rapidly shift to Smartphones across the entirety of the market as prices plummet (in Moore’s Law fashion).  Even more striking, the average lifespan of a desktop or laptop computer is in the 3-5 years range whereas the average lifespan of a mobile device is 21 months.  That means we are changing over the installed base of a multi-billion unit market every two years or so.  There is very little installed base drag in the mobile marketplace!  And this perhaps understates the pace of change.  Granted, we’re in a period of software immaturity but the leading mobile software platform providers (e.g., Apple, Google, RIM) are upgrading their software platforms with significant new capabilities (both software and form factor) every 3-6 months.  That contrasts sharply with the desktop, where software advances are measured in 3-7 year cycles and are often met with significant market resistance because of the cost and disruption of upgrades.

Bigger market, faster turnover, greater pace of change.  Yes, the impact is going to be felt faster than you think.

Economics are also contributing to a faster-than-you-think impact of new technologies.  I refer particularly here to the impact of cloud computing.  In the past, for businesses to embrace this kind of technological change would have required massive capital investments on their part to deploy infrastructure to exploit the new platforms.  Cloud computing now enables companies to embrace new technologies in a much more flexible fashion, requiring little to no capital investment and as a result, much faster and more scalable implementations.

I don’t want to get into an argument here about cloud computing.  That’s a discussion for another day.  Security?  Red herring.  In fact, I posit that over time you’ll find cloud computing solutions will have better security than on-premises solutions because the cloud computing providers have greater incentive to provide that security.  I have come across many CIOs who have an immediate negative reaction to the cloud.  I’ll ask them “if you were starting a business today…” and usually before I can complete the question, they’ll go “well, of course then I wouldn’t own infrastructure.”  The question therefore isn’t whether or not to do cloud but rather how and when.  But I digress.

Bottom line, the flexible economics of cloud computing enable a more rapid embrace of new technologies than would be the case if companies had to make massive capital investments to support new software platforms like social and mobile.

It’s easy to ignore we proponents of massive technological upheaval in the early days.  Yes, we’re probably overstating how impactful these technologies will be in 2010 and maybe even 2011.  However, ignore our forecasts for 2012 and beyond at your own peril.  And if you wait until then to start embracing the change, you will find the pace of the market change then to be so fast that you’re unable to keep up, let alone catch up.  My advice to that publisher was this is absolutely the best time to be embracing technological change, while you’ve still got a successful business to fund that change.  If you wait until your existing businesses start to feel the impact from technological upstarts, you might find yourself in a very uncomfortable position, akin to the way Barnes & Noble and Borders feel about Amazon.  It’s not inconceivable that one or both of them will be out of business within a year.  They didn’t feel the urgency to get involved early — and probably saw the demise of Pets.com as validating their thinking — but when things happened faster than they thought, they had already lost the innovation edge and, more importantly, the customer.

We overstated the timing but understated the impact before.  I think we’re doing it again, and this time the change is going to be even greater, and so should your urgency.

Filed under: CIO, Cloud Computing, Marketing, Mobility, Social networking | 4 Comments »

Windows Phone 7: Microsoft’s (Considerable) Challenges and its Surprising Opportunity

Posted on October 12, 2010 by jyarmis

As I discussed in my last post, mobile is a space Microsoft needs to win if it’s to remain as relevant in this decade as it was in the last two.  I’ll never underestimate Microsoft’s power and, more importantly, its stubbornness/tenacity in battles it must win.  However, there are so many moving parts in this space and so much potential for Microsoft’s efforts to go awry that it’s very hard for me to develop any enthusiasm for Windows Phone 7, launched yesterday.

Let’s just look at some of those challenges:

  • User interface.  Microsoft looked at the iPhone and unlike Google, which said “we should copy that,” instead said “we can do better than that.”  Trying to out-interface Apple is a daunting proposition.  Has anyone done that?  Ever?  And in any event, is this the time it’s going to happen?  I’ll give Microsoft credit for realizing that perhaps the market didn’t need yet another iPhone clone.  However, its approach is actually at odds with how it has succeeded on the desktop.  The desktop and to a large extent the iPhone and Android worlds have succeeded because they’re open platforms upon which application developers can unleash their creativity and users can freely and equally access that creativity.  Instead here Microsoft has said “we know what activities you do with your phone and we’ll make those more prominent.”  If this is actually a static set of activities common across a wide enough range of users, I’d actually applaud that approach.  However, I don’t believe it’s at all a static set of activities and I think there’s sufficient variation from user to user that this approach will generally suffer.  Sure, if you’re a Zune person, great for you.  Both of you.  But I don’t think many users are thinking “wow, this iPhone is too tough to use; I wish someone would simplify my choices for me.”
  • Does Microsoft’s approach make it harder for application developers to achieve prominence?  With Microsoft controlling so much of the initial user experience, applications are relegated to a less prominent position.  This might discourage application creativity in areas Microsoft considers “core,” like pictures or social networks, and might hurt application developers whose applications might otherwise be considered core by users but are relegated to less prominence on WP7.
  • How many platforms can the market support, anyhow?  It’s clear Apple is a long-term survivor.  I don’t say “leader” because ultimately that’s not their business model.  They don’t play in high volume, low margin spaces and make no mistake about it, the smartphone market is going to be high volume in very short order.  Blackberry is positioned to be a survivor as a niche solution.  Their investments in corporate-relevant infrastructure mean that they can be a trusted provider for key scenarios even while other providers infringe on them at the margin.  That means that Android, HP/Palm, Nokia/Symbian and Microsoft are left fighting for markets that can only support one or two of those parties.  The decision may actually rest on more than just smartphones, which leads us to our next discussion.
  • Whither the tablet.  Android needs rework to adequately support tablets.  HP is going to move Palm into a variety of Internet-connected devices, including tablets, printers and more.  What’s Microsoft’s tablet strategy?  I’ll need more time looking at WP7 to assess whether this is a viable UI for tablets or whether it’s more likely to be some evolution of Windows not-Phone 7.  If, however, WP7 is not a tablet or other embedded device OS, that constrains the market opportunity for WP7 and thus its attractiveness to application developers.
  • Velocity.  Microsoft’s track record at getting operating systems out the door is, well, spotty.  (I’m feeling charitable today.)  The velocity in the phone market is a radically different dynamic than on the desktop.  Upgrade cycles are measured in weeks and months, and certainly not years.  Is Microsoft going to be able to maintain that pace and do so in a way that doesn’t jeopardize product quality.  Their track record is sobering.

However, Microsoft is in an interesting position when it comes to the carriers, especially here in the States.  The carriers have a love/hate relationship with Apple.  They’d love to have the iPhone.  They hate that Apple gets to dictate all of the terms.  With Google, it’s more of a wary situation.

While Google is more complicit with the carriers than Apple, the carriers are (rightly) suspicious of Google’s motivations.  If Google isn’t exactly making money licensing the core platform, then what’s in it for Google?  Clearly Google views this as an essential step in moving its ownership of the search space on desktops into a mobile world.  Thus, at some level, Google’s economic rationale and that of its partners are competitive and/or misaligned.  That doesn’t make for a great partnership.  Google competitors all around are trying to drive stakes into that misalignment with these patent lawsuits that further the economic risk elements and point out some of the inequities in the relationship (I get the benefit, you assume the risk).  That said, unless we’re about to change the patent landscape and head to Armageddon like situations, these things usually resolve themselves with small amounts of money changing hands.  I actually think that should one of the involved parties pursue these patent matters to full resolution, it will be counter-productive and will in fact hasten the time when we see patent reform up to and including the elimination of software patents, many of which, to this outside observer, seem, well, patently absurd.

So where does this leave Microsoft?  To the carriers, Microsoft may actually seem like the most benign of the three partners.  At least they understand Microsoft’s licensing model and appreciate the fact that Microsoft was their complicit partner on earlier Windows Mobile platforms (even while such complicity rendered the platform in need of its very replacement).  Again, I’ll write about my dislike for the carriers in a future posting.  They still hold to a desire for control that is unhealthy for the ecosystem and for us users.  But given that they hold on to these notions, their desire to partner with someone who will cow-tow to their mandates is strong.  If Microsoft’s willing to be that partner, all may not be lost for them.

Of course, that means that a Microsoft victory could be very bad for the rest of us…

Filed under: Consumer Electronics, Mobility | Tagged: , , , , , | 6 Comments »

Microsoft’s Challenges

Posted on October 4, 2010 by jyarmis

It has been more than a year since I’ve posted, and it’s nice to be back.  I’ll talk about my absence in another post but let’s just say that being the “disruptive technologies” guy at a company that doesn’t embrace disruptive technologies is an interesting challenge.  Anyhow, I thought I’d being my return to active blogging with a discussion about my long-time favorite vendor, Microsoft.

Goldman Sachs just downgraded Microsoft’s stock to neutral, saying Microsoft needs to do three things to get back into Goldman’s graces:

  1. Increase its dividend
  2. Rationalize its consumer strategy
  3. Lead in cloud computing.

I’ll touch on each of those in turn but while I haven’t read the Goldman report, it seems to me that they’re missing the two critical places Microsoft needs to succeed at as well:  mobile and social.  Maybe those are covered under “consumer” but (a) I don’t think they fully belong there and (b) I think they’re so critical to Microsoft’s success that they bear separate mention.

As for mobile, it’s clear that the imminent Windows Phone 7 launch is Microsoft’s last chance to get this right.  There are too many platforms fighting for too few developers and while Apple has caved a little on the use of cross-platform tools, developers will still prioritize and exploit platforms in different orders.  I’ll give Microsoft credit for the realization that another iPhone clone (after Android) is not what the market is waiting for.  Whether Windows Phone 7 is different enough, and better at all, is an open question.  I have my considerable doubts but at least Microsoft is pursuing a high risk/high reward strategy instead of a low risk/guaranteed failure one.  We can lament all we want about Microsoft’s litany of failures in this space, and they are considerable, but in a charitable moment I may actually allow that Microsoft’s failures are actually what enabled Apple’s and Google’s successes.  They tried to do the impossible — get the carriers to see the light — well before the carriers were remotely interested in conceding anything.  (The carriers still don’t see the light, but that’s a discussion for another day.)

In social, I think Microsoft needs to get much more aggressive but not in building a competitor to Facebook.  They’ve already lost that battle, even while their equity investment in Facebook will produce a nice financial windfall in the next year or two.  Rather, I think the wide open market remains creating the “Facebook for the enterprise.”  This is still an underdeveloped space and the market leaders remain small companies with uncertain futures.  I think we’ll start to see these companies acquired by the bigger players within the next year so Microsoft’s window, if you will, of opportunity is small.  And please don’t tell me that SharePoint is that strategy.  SharePoint is certainly a beachhead Microsoft can exploit but as a user-driven total Facebook-like solution, it’s not even close.  If Microsoft doesn’t act soon, their old nemesis IBM is actually well-positioned here.  I observed to an IBM executive over a year ago that if some company not named IBM had IBM’s product suite, the world would be wild over what they’ve put together.  However, being buried within IBM has cost it broad market awareness.  But as customers start to understand the power of enterprise-grade social networking, IBM is very well positioned to capitalize on that demand.  Microsoft has an even stronger opportunity but is much further away from being able to exploit it.

Now, briefly, to Goldman’s points.

As for the dividend, I’m not a financial analyst but it’s clear that Microsoft has to do something with its amazing cash hoard of over $36.5 billion.  As an analyst, I’d always prefer to see Microsoft come up with interesting internal ways to invest it first, then also to pursue acquisitions, but given its track record and the sheer volume of that cash balance, I can understand demands to return it to shareholders in the form of dividends, especially when the 11 year chart of the stock price is basically flat.

As for the consumer strategy, I think it would be a huge mistake to divest itself of the portfolio.  I think, however, Microsoft needs to better integrate its consumer and enterprise strategies in a coherent whole, exploiting synergies between the two.  From a user perspective, I think the two experiences are totally blurred.  We do consumer things at work and enterprise things at home.  (If you doubt users are doing consumer things at work, see how much time they spend on fantasy football in the office.)  If the user perspective is blurred, there’s an opportunity for someone to provide a blended experience and who better than Microsoft?  In fact, I would argue that this is Microsoft’s opportunity alone.  Do I think they get it?  Nah.  But is it a huge opportunity?  Oh yeah.

Finally with cloud, I would agree with Goldman.  Microsoft has a huge opportunity, and a long-term imperative to be a clear leader here.  However, Christiansen’s “innovator’s dilemma” rears its ugly head here.  While Microsoft has actually been surprisingly aggressive on the server side, their stance with Office continues to lag the market opportunity and other market entrants precisely because the self-impact is greater than the market opportunity.  On the server side, the self-impact is less clear and thus Microsoft can afford to be more aggressive.  However, when it comes to allocation of resources, marketing and development, their packaged offerings certainly get more attention precisely because they get more current revenue.  It’s hard for any CEO of an established company to put weight behind the oft-stated position “we need to attack our own business before someone else does.”  And Steve Ballmer, given his historical background and predilection for sales and marketing would have a harder time than most to actually implement that.  But if he doesn’t…well, the technology industry has always been very unforgiving of market leaders during times of market transition.  With the emergence of new platforms — social, mobile and cloud — unless Microsoft gets more competitive and more aggressive in all three of these areas, it is not out of the realm of possibility to think that Microsoft becomes the CA of this decade, exploiting a captive installed base but doing little else of fundamental interest.

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