Adobe's race to the billion dollar marketing cloud

To be a billion dollar marketing cloud company.

That's a stated ambition of Salesforce.com CEO Marc Benioff, but Shantanu Narayen, CEO of Adobe, wants to beat him to it.

Earlier this year at its annual MAX conference in Los Angeles, Adobe confirmed a landscape-changing shift in strategy to support the needs of digital enterprises.

Although it will continue to sell and support the latest version of its Creative Suite packaged desktop design software, from here on in all new features will go into its Creative Cloud, the online suite of all its products it introduced a year ago.

The future is SaaS - and it's also about building a marketing cloud business.

Narayen now boasts of marketing cloud bookings growing at 25% year on year and that Adobe continues to "ramp" towards that $1 billion a year run rate.

He says:

"In digital marketing, we continue to be the leader in this exploding category, targeting chief marketing officers, chief revenue officers, advertising agency and publishing executives who are looking to accelerate their shift to digital.

"The breadth of our solutions is unparalleled, and we continue to lead in categories like web analytics and content management. Forrester selected Adobe as its only leader in their 2013 Web Content Management for Digital Customer Experience report, citing the progress we have made integrating our Adobe Experience Manager solution with our Analytics and Target solutions.

"No other company has long-standing relationships with marketers and an end-to-end value proposition like ours. Marketers need help to accelerate their shift to digital. Integrating Adobe Marketing Cloud with Creative Cloud will completely change the paradigm of how marketing gets done. From creatives to marketers, and from ad agencies to media companies, we provide a compelling, competitive advantage that addresses the challenges they face."

As for Salesforce.com's ambitions in the same space, Narayan says there are clear differences between the two firms positions:

"We clearly see our heritage and the fact that we have the most comprehensive set of marketing solutions available as our advantage. We don't approach it from the ERP or the sales side. And hence, we believe that we are the trusted partner of marketers all around the world.

"We will continue to fill out our offering as well in terms of the marketing cloud.

"But I think our biggest differentiation and our unique point comes from the web infrastructure and the web analytics, where we are clear leaders in. And then we look at adding functionality from that core."

Good and bad news

As for the transition to a cloud-based subscription model, well, there's good news and there's bad news in this week's second quarter financials from the firm.

On the positive front, subscriptions have risen from 221,000 three months ago to 700,000 today, bringing subscription revenue to $225 million.

On the negative front, that means product sales are down 26% which in turn means revenues down 10% to $1.1billion and profits down from $224 million to $76.5 million.

Once again, it's clear that the road to the cloud is a bumpy one for providers with large legacy installed bases.

Narayen is - as well he should be - upbeat about Adobe's position which he argues is "just the beginning".

He says:

"Since we launched Creative Cloud, the overwhelming majority of customers buying on Adobe.com have selected Creative Cloud rather than CS6. Customer satisfaction rates are high.

"The top reasons customers cite for their love of Creative Cloud include having access to everything in the product portfolio, enabling them to try new tools and build new skills, always being up-to-date with latest features and capabilities, and the affordable monthly membership fee. These benefits are compelling to our existing customer base and are helping us achieve our goal of bringing in new customers.

"I would say that North America is slightly ahead of the international markets in terms of the adoption of the Creative Cloud. But our other big markets, the UK, Germany and Japan are also seeing adoption."

But not everyone's pleased - not least my colleague Dennis Howlett who's none too happy with what he sees as Adobe's "hijacking" of the word 'cloud'.

Narayen intriguingly drops a hint that the firm might be checking out new ways to placate the rebellious - although he has no details to share at the moment.

But he admits:

"Our decision to discontinue perpetual licensing of new versions of our desktop products has caused concern with some customers. While we will still continue to offer CS6 on a perpetual basis, the feedback from our community is important, and we are evaluating additional options that will help them with the transition."

And he affirms there's no change to the longer term thinking:

"Our goal is to over-deliver on customer expectations, which we believe will make the entire community ultimately embrace Creative Cloud."

Verdict

Early days, early days. But there's a lot for Adobe to be happy about in terms of the numbers of subscribers it can boast.

The impact of the shifting business model on revenues and profits is unfortunate, but entirely predictable - and within the management's own expectations, so Wall Street hasn't been spooked. In fact, Adobe's share price went up when Q2 numbers were released this week.

There's a long, long way to go yet though and further financial pain is inevitable. Customer satisfaction will also be worth keeping an eye on as more of the creative installed base look to new features and functionality.

As for the $1 billion marketing cloud ambition - well, game on Mr Benioff, game on! (But let's not forget that not all marketing clouds are equal…)

 

Disclosure: At time of writing, Salesforce.com is a premium partner of diginomica.