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

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

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