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April 25, 2005  Adobe and Macromedia

Some people have asked my opinion about the $3.4B acquisition of Macromedia by Adobe (humorous translation by John Gruber). I left Adobe at the end of February, so I have more flexibility in what I can say than if I were still employed there. Here is my opinion, point by point.

1. "Who cares?"

Surprisingly the direct result of the news was a backlash against the two companies.

Dave Winer, one of the pioneers of web infrastructure like the RSS specification, commented: "Off the top of my head, who cares? At one time both companies had some mojo, to borrow a term from Yahoo, but those days are long-gone." Om Malik, senior staff write for Business 2.0, wrote something similar: "These two companies have not developed killer apps for either broadband or wireless enabled comm-puting. They missed the whole blogging thing, and have not produced a must have killer app in recent times. They are becoming increasingly irrelevant in digital worlds where free programs like iPhoto and Picasa are setting the tone on the desktop."

Pot, kettle, black. In the same way these Web 2.0 advocates are claiming Adobe and Macromedia are falling behind for not understanding the "new" world of blogging and consumer photo apps whose valuations are three to four orders of magnitude smaller than the platforms developed by Adobe and Macromedia, they are falling in to the trap of thinking that that world of social software is the only thing that matters. Get over it. It's not.

Saying the "biggest ever deal in the content creation and Web development sector" (ZDNet) doesn't matter is a little self-serving. Macromedia Flash Player and Adobe Reader are on virtually every web connected computer on the planet. That sort of platform is not something that you can build overnight, and building platforms is not as sexy as releasing funky consumer applications, but it is much more rewarding financially.

Another critique came from David Beisel, who wrote that Adobe "'innovates' around a new tweak in the next Photoshop release, not around new product lines or business models." I would disagree. Adobe innovates around platforms: PostScript, PDF, Photoshop. Macromedia does that same thing. Flash isn't just a file format. It's a platform.

2. The merger will help customers

Kevin Lynch, Chief Software Architect at Macromedia, points out how each of the four markets served by the companies will benefit: "creative professionals and web developers already use our products together, and we will be able to provide an even more efficient authoring"; "in the rapidly growing mobile devices area, we are able to provide a very strong set of products for developers, content providers, and operators to create and deliver rich mobile content"; "for enterprise developers, we can provide a wider set of development tools and solutions that help connect people and business systems"; "for mainstream business users, we provide a more complete environment for dynamic, engaging collaboration over the internet that enables both on-line and off-line work."

This optimism runs counter to much of the reaction from designers, who are more worried that the lack of competition will stagnate the market or that their beloved product may be left in the software scrap yard.

The fact is, this isn't going to help or hurt people across the board--some things will improve, others will get worse. Also, as with any acquisition it will take a lot of time for the changes to ripple through (Compaq Presario Notebook anyone?).

3. It's all about Microsoft

Ovum senior analyst Bola Rotibi said "What makes it more poignant for MS is that having those two companies together makes it a harder play for Microsoft in these areas. Microsoft should be worried." News.com reported: "What's taking shape is the ultimate battle for the browser," said Paul Colton, CEO of Xamlon, a company that provides tools for creating applications that run in Microsoft's .Net framework.

It would seem obvious: for both Adobe and Macromedia, Microsoft presents the most significant risk to future growth. Microsoft has a market capitalization of near $275B and could swallow both Adobe and Macromedia and not even notice the $2B/year revenue growth amidst the $36B that it pulled in last year. Microsoft is not an 800 lb. gorilla. It is a 275B lb. gorilla.

And yet, John Dvorak still has the short-sightedness to say that Adobe is over-reacting to the Microsoft threat: "OK, so with this dingbat bogeyman-fear mindset Adobe grabs Macromedia in a big $3.4 billion dollar deal this week. There is no real evidence that mean old Microsoft was thinking about Macromedia, but there has been a lot of chatter about Microsoft getting more serious about the online content development game."

Microsoft not thinking about Macromedia? Absurd. Have you not been tracking XAML + Avalon + Sparkle? Microsoft's vision for the future of Windows is all about multimedia, all about rich interactivity, separation of the presentation layer from the data layer... and you don't think that falls squarely within the world of Macromedia?

4. Fear the worst?

Despite recommendations to the contrary there still seems to be a nervousness among graphic designers that I've talked to about the merger. The fact of the matter is that this is common. Remember the $500M acquisition of Aldus by Adobe back in 1994? Adobe picked up PageMaker, FrameMaker and some software that they later killed (anyone still crying over the death of Aldus Hitchcock?) because it overlapped with superior Adobe applications. Adobe to this day still sells PageMaker and FrameMaker even though it has also build InDesign. Three page layout applications from the same company? Why not? Each serves its own niche. I suspect the same will happen with the Macromedia merger. If people really love Fireworks, it will be around, even if the overlap with Photoshop causes confusion in the minds of new customers.

5. Adobe paid too much

Adobe paid a 25% premium of the last closing price of Macromedia (and with the typical dip in the stock price of the purchasing company, this number went past 30%). Many people have said that this is too much to pay, and I have to agree. Macromedia has been struggling. Their growth rate is only at 10% compared to Adobe's 30%, and their P/E is at 50 which is okay for a company like Yahoo! who's seeing a growth rate of 120% on revenues of around $4B, but not for a company with the financial performance of Macromedia.

Being that I worked at Adobe, the one thing I regret is that I was hoping to see Macromedia crushed, not consumed.

My favorite quote about this entire ordeal is from a Seybold Report:
"The combined company will be a giant within the publishing market. No one else will be able to approach it in size, name recognition, customer support and breadth of product line... From the Adobe side, at least, the real driving motivation behind this deal has less to do with products and product positioning than it does with creating a certain kind of company for the future." By the way, this Seybold Report was written in 1996 and it was about the merger of Aldus and Adobe.

Posted by johnnie at April 25, 2005 12:44 AM

Comments

Dave Winer's comment is typical. Like Microsoft, old-school corporations have to become service or media companies in order to grow revenue streams. While some innovation is still necessary, it's not the core, and that's why Adobe misses out on blogging, and Microsoft is pushing into the gaming and entertainment scene.

What seems obvious to me is hardly mentioned: Adobe has a pretty good track-record on video editing software, allowing them to leverage the newly acquired Flash asset into something that aloows Adobe to exercise more control over how broadband media is distributed.

There were times when I heard rumors about Microsoft acquiring Macromedia, and I though it was a brilliant move, so as to fold Flash technologies into media player or vice versa. It surprises me that Ballmer did not pursue it.

Posted by: til at June 22, 2005 04:43 PM


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