It Can Be Done
Picture it: Halloween Day, 2011. Adobe (ADBE) decided to play the ultimate trick-or-treat on their customers. Instead of the treat of perpetual licenses, they offered the trick of a subscription model. Adobe’s flagship software, Creative Suite, was about to go from boxed software to a monthly subscription. Spooky, right?
Mark Garrett, Adobe’s CFO, faced Wall Street analysts and said, “The faster earnings fall, the better off we are as a company.” Because who doesn’t love a good financial nosedive?
Details on Adobe Creative Suite before the migration:
- Units sold per year: 3M (as flat as a pancake)
- Revenue growth: Mainly from price increases (how original)
- Upgrade cycle: Every 18-24 months (because who doesn’t love waiting?)
Adobe’s software business was making $3.4 billion with a 97% gross margin. Their stock dropped 8% after announcing the shift. Classic.
Swallowing the Fish
Adobe’s transition was less “seamless” and more “seam-full.” According to Garrett, they had to explain to Wall Street why selling Photoshop and Lightroom for $10 a month was better than $700 upfront. Spoiler: it wasn’t immediately obvious.
For three years, Adobe’s net earnings took a dive worthy of an Olympic swimmer. They dropped from $833 million in 2011 to $268 million in 2014. But like any good thriller, the twist came in 2015 when things finally turned around.
The Fish Model
When switching to a subscription model, two things happen:
- Revenue curve dips.
- Costs increase due to new investments.
So, you go from $833M to $268M faster than you can say, “Who moved my cheese?” But fear not, because a few years in, the compounding effect of subscription revenue helps, like a life raft in stormy seas.
The Rest is History
Adobe now has close to 20 million paid Creative Cloud subscribers. Their stock is up 1820% since 2011. They turned the financial horror show into a fairy tale.
Additional Reading Material
- Harvard Business Review: How Investors React When Companies Announce They’re Moving to a SaaS Model
- McKinsey: Reborn in the cloud
- CFO: Adobe Completes Swift Business-Model Transformation
- Medium: Satya Swallows the Fish
Conclusion
Transitioning to a subscription model isn’t for the faint-hearted. It’s a journey of dips, increases, and eventual triumph. Adobe’s story shows that with enough courage and a bit of insanity, it can be done.
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