Adobe (ADBE) Chief Executive Bruce Chizen plans to ring in the new year far from the company's gleaming silver-and-glass headquarters in San Jose, Calif. If all goes to plan, he'll be kicking back in Australia with his wife and kids, checking his BlackBerry as little as possible, and taking what he calls a "much deserved vacation."
Deserved indeed. The straight-talking, charismatic New York native has had some year. Coming off a banner 2004, when Adobe sales grew 28%, he followed up in December, reporting fiscal 2005 growth of 18% -- easily beating expectations (see BW Online, 3/21/05, "Adobe Keeps Surprising").
And Adobe had more good news in December. It finally closed the $3.4 billion merger with Macromedia announced in April (see BW Online, 4/19/05, "Macromedia and Adobe: Finally One").
DO IT ON TIME. But Chizen had better unwind while he can, because he has a lot to do in 2006. There's the usual merger integration -- reassuring Macromedia devotees that the hipper, more innovative of the two companies won't lose its edge and convincing key "Macromedians," as they're called, to stay onboard. He also has to fill some management slots, including chief financial officer, after recent departures.
And in the fourth quarter of next year, which ends in early December, Adobe is expected to release new versions of its core product, the Creative Suite 3, according to analysts. Analysts are watching closely to make sure the newly integrated engineering teams can deliver a suite that successfully bundles Macromedia's Web design products like Flash and Dreamweaver with Adobe's print design products like Photoshop and Illustrator -- and do it on time.
The good news: Adobe and Macromedia are two of the most influential and successful companies in their core businesses of graphic and Web design. They would have to stumble badly to lose there. And that makes up about 70% of the business, analysts say (see BW Online, 4/19/05, "Photoshop and Flash: Potent Combo").
SEXY ANIMATION. The real challenge will be what to prioritize second. For the last three years, Chizen has championed Adobe's nascent but growing enterprise business, which essentially helps paper-reliant companies or governments handle forms and documents on computers. Meanwhile, 50 miles up Highway 101 in San Francisco, Adobe President Stephen Elop -- formerly Macromedia's CEO -- is a man obsessed with mobile.
For much of the last year,, his aim has been to outfit every phone and consumer device possible with the company's popular Flash software. Already installed on 98% of PCs, Flash is a favorite among designers who use it to create sexy animation and video Web ads, games, and applications (see BW Online, 2/24/05, "Macromedia Looks Flash in Cell Phones").
Can both visions be realized under one roof? Chizen admits it's a tall order, though he adds: "It's a wonderful problem to have." Including the core creative products, all three businesses still have potential growth. And all three share a reliance on the prevalence, if not ubiquity, of Flash and Adobe Reader.
"MORE ENORMOUS." But practically speaking, they're three very different lines of business, with different sales cycles and target markets. As industry experts dig into the promises of the merger, some are starting to wonder if Adobe can do all three well. "It would be a stretch to say there is any synergy between [the enterprise and mobile businesses]," says Martin Pyykkonen, an analyst at Hoefer & Arnett.
In April, when the merger was announced, Chizen emphasized that mobile was a big reason he pursued Macromedia. He added that the executives who led that business would stay with the combined company. Still, he was noncommittal, remarking at the time: "It's one of those situations where you're looking at these immediate opportunities and saying, 'Which one is more enormous?' It's too early to tell."
Now that the deal is done, he concedes he's still not sure what it will take to be successful in mobile. That's a big reason why the creative business and the enterprise business are the clear No. 1 and No. 2 priorities for Chizen.
"We are prioritizing the creative business, and we're doing the same on enterprise," he says. "The two that are unknown in terms of how much resources they should require are real-time collaboration [software] and everything around mobile."
"WILD WEST." Chizen notes that Adobe's core business is very profitable, and he expects revenues to grow 40%, to $2.7 billion, in 2006, thanks in part to the acquisition. Such growth can fund several fledgling businesses at once.
And Elop is confident his mobile vision won't get short-shrift. As head of worldwide sales, he'll have some say in that. "I am very certain we will not lose a step there," he says. "I have not needed to hammer it home." Still, he admits that compared with Adobe's other businesses, mobile is a bit of a "Wild West."
In the glow of a strong 2005, few analysts are waving a red flag. Still, amid the integration challenges and upgrade to Creative Suite 3, some fret the Macromedia vision could get lost at Adobe, historically the less innovative of the two. The concern would be heightened if Elop doesn't stay with the company after his one-year contract is up, and he won't discuss his plans that far out.
The enlarged Adobe would go a long way toward allaying concerns if it's able to swing a few big agreements with handset makers, to augment ones Macromedia did with DoCoMo (DCM), Nokia (NOK), and Samsung before the merger. To that end, "things are happening and shaping up now," Elop says, without elaborating. Top on analysts' wish lists is a deal with Motorola (MOT), the world's No. 2 cell-phone manufacturer.
COMPELLING MARGINS. The problem is weighing near-term revenues against potential ones, analysts say. The enterprise business, while still not profitable, is showing signs of growth. Adobe doesn't report enterprise as a category, but license deals with companies and governments alike made up 57% of the almost $600 million Acrobat business. And deals worth more than $50,000 are growing each quarter, Chizen says.
The mobile business, on the other hand, generates less than $50 million a year. But the margins are more compelling: Macromedia was making between 50 cents and $1 royalty per phone shipped. In 2006 some 700 million Flash-capable phones will ship, and that number is growing at 25% a year. Pre-merger, Macromedia expected mobile to near $100 million in revenues by 2007.
While that's impressive growth, it's hardly enough to sway the fortunes of what's expected to be a $2.7 billion company in 2006. But the debate isn't just about which business can bring in more money.
The foray into mobile extends Adobe's and Macromedia's existing strengths in the online and desktop worlds. Adobe's PDF is the standard for secure digital forms and documents, and Macromedia's Flash is the standard for delivering animation and video over the Web. It's that ubiquity that's allowing Adobe to sell to large businesses in the first place.
CRITICAL MASS. But the effort by Macromedia -- and now Adobe -- to get Flash on every cell phone or smart consumer device is all about creating future sources of sales and profit. Phones capable of shipping Flash are hitting critical mass. If Adobe isn't aggressive it could be ousted by other technologies like Java, Symbian, or even certain forms of Linux (see BW Online, 11/08/05, "Linux Answers Phone Makers' Call").
It's the next frontier of high tech, and for Adobe to stay relevant, it can't afford to stumble, the way it arguably did in the early days of the Web, giving Macromedia an entrée with important programs like Flash and Dreamweaver. The enterprise business "is still dealing with the paper-to-electronic shift, and that's already getting archaic," says Jim Murphy, research director at market researcher AMR. "They have to stay ahead of the next big thing."
And it's not like the enterprise business has been a cakewalk for Adobe. Despite its best efforts, it just isn't seen as a business software company outside the creative industry. It's not always obvious what Adobe can do for companies.
PROVEN WRONG. Even with the addition of products from Macromedia's stable, at best Adobe's software fills in nooks and crannies. It's not central the way other software, such as databases, applications, security, or even analytics are. That can make it a tough sell, Murphy says. "PDF is the de facto standard, but they still suffer from a lack of understanding of what the potential of PDF is," he says.
Chizen isn't one to back down from a challenge. Consider the Acrobat business that's also at the core of enterprise sales: Ten years ago analysts pooh-poohed it, and it now represents almost $600 million in revenues. In 2003, Chizen made a controversial decision to bundle Illustrator, PhotoShop, and InDesign into a "Creative Suite," and skeptics have been proven wrong. That move helped boost overall creative sales 21%, to $743 million, over the course of the year and didn't tail off after the release the way new releases from Adobe have in the past, analysts say.
"I see it," Chizen says of the enterprise business. "There will be a hockey stick in there. Probably not in 2006, but I can see [it in] 2007 or 2008."
He has proven his chops as a visionary CEO, even when others doubt that vision. But for the sake of the new Adobe, investors hope he stays loyal to the Macromedia vision, too.
Lacy is a reporter for BusinessWeek.com in Silicon Valley
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