Enterprise

After the Figma deal, the only thing that can stop Adobe is itself

After buying Figma for $20 billion, Adobe will have no clear competitor in its quest to dominate the design industry. But to succeed, the company will need to execute well and find sources of organic innovation.

Adobe CEO Shantanu Narayen speaks during his keynote at Adobe MAX 2022.

“While there were questions perhaps about the purchase price, and questions upfront about what that said about our core business … it’s now about the excitement of what [we] can do together,” Adobe CEO Shantanu Narayen told investors.

Photo: Adobe

For decades Adobe has completely dominated the creative software industry. The company’s impressive community of designers, communications, developers, and artists have propelled the company to becoming a $14.6 billion giant with no clear rival.

Although discontent over pricey subscriptions, steep cancellation fees, hard-to-use software, and slow innovation hasn’t made Adobe’s customers the happiest in enterprise software, there weren’t many alternatives.

But one emerging alternative was Figma, the web-based product design startup with a cult following that Adobe acquired in September. The massive $20 billion acquisition reflects Adobe’s intent to revinent itself around collaborative web-based design.

Adobe still faces potential challenges in making the deal a success, including Federal Trade Commission scrutiny, pushback from designers wary about its history, and a challenging macroeconomic environment. But if Adobe can succeed, it will only further entrench the company’s unrivaled dominance among creative professionals.

Playing defense

It’s easy to forget that Adobe has been a major part of enterprise tech for decades. Founded in 1982, the company’s imaging, video, illustration, and 3D products have become the de facto standards for artists, illustrators, and designers all over the globe.

Throughout its history Adobe has acquired a number of smaller competitors to grow its reach, including Marketo, Behance, Frame.io, and others. Today Adobe’s portfolio includes products in imaging, video, photography, marketing, commerce, and others that sit across its three clouds: Document Cloud, Experience Cloud, and flagship Creative Cloud.

Adobe’s Document Cloud, which is the smallest, generates about $2 billion in revenue annually for the company, driven largely by PDF reader Acrobat and its e-signature product, Adobe Sign. Although Document Cloud delivers the lowest revenue of its three clouds, the product suite is integral to Adobe’s broader growth strategy, which hinges on bringing Acrobat to every user across every device, and then funneling them throughout Adobe’s broader product suite.

“The demand for PDFs has never been greater,” said digital media president David Wadhwani, who oversees Document and Creative Cloud, during the company’s financial analyst day earlier in October. “It’s a very productive engagement and up-sell motion for us.”

Experience Cloud comes in second, with $3.9 billion in revenue last fiscal year, propelled by digital marketing products for audience analytics and content management, and underpinned by its customer data platform.

But the true driving force of the company is Creative Cloud, which houses products such as Photoshop, Illustrator, Premiere, and XD; it generated $9.5 billion for the company last fiscal year, the majority of its overall revenue.

Over the past several years, Adobe has been focused on moving its creative suite into the cloud, launching web-based versions of Photosop, Acrobat, Illustrator, Premiere, and others, although the majority of its core applications are still desktop-only.

As an attempt to remedy that, and compete with startups such as Canva and Figma, the company launched Adobe Express in December of last year. The free app that lets users easily design graphics, edit photos, trim videos, and more.

Adobe Express is distinct from the company’s other Creative Cloud products because it doesn’t require a pricey subscription or years of expertise to use, making it more accessible to a wider swath of users. “Express has definitely expanded the top of the funnel,” Wadhwani told investors. “We’ve removed all barriers to adoption.”

Based on comments from CEO Shantanu Narayen, CFO Dan Durn, and others during the company’s annual MAX conference earlier in October, it’s clear Adobe believes its future hinges on web-based collaborative design. That’s why the acquisition of Figma, which has been both web-based and built around simultaneous multi-user collaboration from its debut, will be so central to Adobe’s success moving forward.

Winning the web

Figma was established in 2012, and found success by putting easy-to-use creative tools in a browser for low prices. Bolstered by a freemium model and an intuitive interface the company grew from $0 to $400 million in annual recurring revenue in only a few years.

“One of the things that I remind people is, Figma didn't even start to monetize until I think very late 2017. So they’ve gone from zero to over 400 million in ARR in something like four years,” Adobe senior vice president of digital media Ashley Still told Protocol. “That is very unique. If you go look at Atlassian or Slack or others, it is just rare to have the type of growth rate that Figma has,” she said.

Now Adobe is hoping it can capture some of what makes Figma special, along with $400 million in additional recurring revenue.

Investors, analysts, and others in the tech community have questioned Figma’s massive purchase price. At $20 billion, the deal is 50 times Figma’s annual recurring revenue and would set a record as the largest private tech acquisition in history at the time of announcement.

If you go look at Atlassian or Slack or others, it is just rare to have the type of growth rate that Figma has.”

But Adobe executives remain confident about the purchase price and value of Figma. “If you went out 12 months you can easily get to discounted cash flow models that [justify that amount] over time,” said Still.

But some industry analysts aren’t buying that calculation.

“When you consider what Figma is adding as a percentage of Adobe's total ARR and even factoring in an expectation of robust growth for another two, three years, it’s still in our view difficult to truly rationalize the amount that is being spent,” said Gregg Moskowitz, managing director of enterprise software research at Mizuho.

The real reason Adobe paid so much, of course, is because Figma was a serious competitive threat. While Moskowitz hadn’t necessarily seen enterprise customers leave Adobe entirely, “We were hearing on some occasions that customers were curbing the amount of growth in Adobe licenses and funneling more of their budget towards Figma,” he said.

Plus, if Adobe didn’t buy Figma now, it might never have been able to.

“Think about the opportunity cost of not getting Figma right now,” said Valoir research analyst Rebecca Wettemann. Sure, Adobe “spent a lot of money for it, but compared with what right? With missing out on the opportunity,” she said.

Adobe, of course, is aware of all this. “While there were questions perhaps about the purchase price, and questions upfront about what that said about our core business … it’s now about the excitement of what [we] can do together,” Narayen told investors.

That may be true. Adobe knows that it needs Figma to remain the software of choice for designers and creatives, and Figma will benefit from Adobe’s customer base and financial muscle.

Already, Adobe is taking a number of steps to become more like Figma. During Adobe's annual MAX conference, the company announced a number of new product features with Figma-like flavoring, including new collaboration features for Photoshop, Illustrator, and PDF reader Acrobat. Adobe also expects that Figma is going to help make real-time co-editing a reality across its product suite.

Non-compete

Adobe still faces some challenges in propelling itself into its next stage with Figma’s help.

Since Adobe largely dominates the design field, the FTC will probably keep a close eye on the proposed Figma acquisition. Earlier this year the FTC sued to block Meta’s acquisition of VR company Within, which was arguably more tangential to the company than Figma is to Adobe.

But Adobe executives don’t agree. “We’re confident that the businesses and the products are really adjacent,” said Adobe’s Still. That sentiment was echoed by Narayen to investors, even though Adobe has products that compete directly with Figma.

For example, Adobe XD, which is a desktop product for user experience design, essentially does the same thing as Figma. Case in point: When Figma built similar functionality but offered it collaboratively over the web, Adobe slowed down its investment in XD.

“[Figma] totally reframed the whole industry to the point where XD became a company that was just not growing or working, frankly, and we started to wind down our focus on that,” chief product officer Scott Belsky admitted during a press conference at Adobe MAX.

We were hearing on some occasions that customers were curbing the amount of growth in Adobe licenses and funneling more of their budget towards Figma.”

Designers are also broadly opposed to the Adobe-Figma deal, because many viewed Figma as a cheaper and easier-to-use alternative than Adobe. Designers have voiced concerns about everything from pricing changes and high cancellation fees to fears over losing the vibrant Figma community.

Those fears aren’t entirely unfounded. “Adobe is not great to do business with,” said Valoir’s Wettemann. Since Adobe has been “ostensibly the only game in town for professional designers and developers, they’ve been able to dictate terms to a certain extent,” she said.

Although Adobe is committed to maintaining a free tier for Figma and other products, some investors and analysts are convinced the price will go up anyway.

As much as designers don’t like price increases, it probably won’t lead to much customer churn. For example, after Adobe raised prices on its Creative Cloud suite about six months ago, there was some customer pushback, but not enough to cause concern for Adobe, said Moskowitz. He also pointed out that price increases in this environment aren’t uncommon, and that companies like Microsoft have raised prices on some products by 10% or more.

Adobe has also tried to convince designers that it intends to preserve the sense of innovation and community Figma has thrived on. But large-scale integrations always present challenges to corporate culture, and corporate red tape and bureaucracy slow down innovation.

Allowing Figma’s Dylan Field will remain CEO, he will still have to squeeze into Adobe’s culture. “I wouldn’t say autonomous,” Adobe’s Still said of Figma’s operating structure. “There are definitely very specific areas of synergy that we’re excited to drive together.”

Adobe is not great to do business with.”

Stitching together acquisitions is never easy, but Adobe executives have pointed to the company’s track record of helping startups in the past. For example, Behance, the social media platform for creatives founded by Adobe chief product officer Scott Belsky, grew its community from 1 million to 31 million members since its acquisition by Adobe.

“The product is better and tighter and faster-growing than it’s ever been before right now,” said Belsky during a press conference. “So Behance has not only benefited its community from the acquisition, but it’s also a better product.”

Adobe also has a history of installing the leaders from those acquisitions as key executives. “You’re talking to someone who came in through an acquisition,” said Belsky. “David Wadhwani, president of our digital media business, came in through Macromedia. A number of our leaders came in through acquisitions. And so in some ways, we have that playbook.”

Some analysts agree that Adobe has done well in its past M&A strategy, but still think Figma is a different story. “You’d have to look at Marketo as the most expensive, but even that was less than one-fourth the size of what Figma is costing them,” said Mizuho’s Moskowitz. “Any way you slice it, this is a different animal, there’s going to be more complexity with respect to integration,” he said.

Despite the challenges Adobe will face moving forward, the company has several key advantages. The company still has a large community of designers, artists, and developers; a dominant market position; a sprawling product suite; a strong cash position; and healthy revenue.

After acquiring Figma, Adobe will have no serious contender, aside from startup Canva, which is used primarily by average consumers and not professional designers. It has both the ambition and resources to define the next generation of creativity and design.

Adobe started supporting NFTs last year, and at Adobe MAX it announced a slew of product features and enhancements intended to power the metaverse. Those include new additions to its generative AI product, Adobe Sensei, partnerships to help authenticate digital content, and updates to 3D design product Substance, which will integrate some apps directly into Meta’s Quest platform.

Although analysts know the enterprise software industry is tougher to navigate today than in the past, they remain optimistic about Adobe’s future.

“Overall we didn’t [see] that there are any deep concerns. I still think that Adobe carries unrivaled breadth [and] unrivaled brand awareness in the markets in which they play,” said Moskowitz.

Still, while ideas are easy, execution is hard. The good news for Adobe is that the only true barrier the company faces is itself.

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