Adobe’s Cloud Subscription Strategy Creates a Profit Boom
When Adobe Systems Inc. started the transition from a product-sales model to a cloud-based subscription model less than five years ago, the move looked risky. Skeptics figured it would eat into the rich profit margins of the company’s pricey design, photography, and video software. At the time, prices on its popular Creative Suite package, which bundled together Photoshop, Illustrator, and other programs, started at $1,300 and went as high as $2,600, depending on the version. Meanwhile, some customers openly rebelled against the idea of renting cloud-based versions in perpetuity. About 50,000 signed a Change.org petition demanding the company abandon the scheme. Revenue shrank 8% in 2013 and was pretty much flat the next year. There are not many doubters today, however. Adobe’s revenue was just shy of $5.9 billion for the fiscal year ended in November, up from $4 billion in 2013; about 80% of that came from subscriptions and other recurring sources. Melissa Webster, program vice president for content and digital media technologies at researcher IDC, calls it a great example of “smart paranoia.” Says Webster: “If they didn’t reinvent, someone might reinvent them out of business.”
When Adobe began thinking about leaping to the cloud, less than 5% of its revenue came from subscription products. “Every single quarter we started from scratch,” says Chief Financial Officer Mark Garrett. The downside of the sales model became painfully clear during the recession, when revenue dropped 18% in a single year. A pilot program in Australia followed, then an initial subscription offering, then the big step: announcing it would stop selling its Creative Suite products. Customers could keep using their existing software, but if they wanted to get updates and product support years into the future, it would be the cloud or nothing. It was a no-retreat, “burn the boats” strategy, Garrett says: It could work only if customers, and Adobe itself, had no choice.
That said, Chief Technology Officer Abhay Parasnis argues the shift also depended on making Creative Cloud better than Creative Suite—adding capabilities for users to work on mobile devices, for example. “This was a brand-new product,” he says, “a new experience.” Moving to the cloud meant users could share files and collaborate on projects, and Adobe could roll out features and improvements as they are developed, instead of saving them for a major software release every 18 to 24 months.
Zsolt Vajda, a freelance designer in Budapest, cites some of these factors—particularly the ability to collaborate without worrying about who was using which version of the software—to justify his early embrace of Creative Cloud. And, he says, “buying each component of Creative Suite, if you’re starting out, could be very expensive.” Paying $50 a month for the comparable cloud package feels more manageable for a small company or an individual (though it adds up to $1,800 over three years).
Garrett says more than a third of Creative Cloud subscribers are new to Adobe, a figure that may well include those who previously turned to pirate versions of the software. Despite early complaints, Adobe says it’s managed to convert a large portion of its customer base—if not always enthusiastically. “I am seeing it as complete capitulation, honestly,” says John Schnall. His New Jersey animation studio doesn’t need the latest software to achieve Schnall’s hand-drawn style, but clients increasingly expect his company to have Creative Cloud access, he says. Schnall says it is possible he will come to love the new programs, but it is not a choice he would have made on his own.
Creative Cloud is Adobe’s core product, generating about 55% of revenue, but the company’s future may depend more on its other cloud offerings. Document Cloud, with Acrobat as its centerpiece, is designed to help companies go paperless. Experience Cloud, built partly through the acquisitions of Omniture Inc., a maker of analytics and other software, and the video-advertising company TubeMogul, offers a set of online marketing tools. “Connecting the creative pipelines to digital marketing in a more seamless way is a great opportunity,” says IDC’s Webster, noting there are not a lot of software platforms that allow the different actors in what she calls the “content supply chain” to plan, organize, and manage their work. Adobe is “in a unique position,” she says.
When Adobe announced its move to the cloud in 2013, photographer Brad Trent was among those who strongly objected, supporting the Change.org petition with an epic blog post arguing that pro-level customers would get no new value from the switch. “I was ranting pretty hard,” he says. His views haven’t really changed; he wonders, for instance, what incentive there is for Adobe to continue to innovate. Under the old business model, the onus was on the company to demonstrate that each iteration of Creative Suite was an improvement on the previous one, to get customers to part with more than $1,000. That’s less of an imperative when the customer is paying $50 a month. Nevertheless, Trent has grudgingly signed up for a Cloud version of Photoshop. “As a business move for them, I get it,” he says. “But you can’t get off. It’s like they’ve hooked everybody on digital heroin, and you’re gonna be on it for the rest of your life.”
Citations
- https://bloom.bg/2sMfJq7 BusinessWeek
- http://bit.ly/2sMxqG0 – TheStreet.com
B-Schools Scramble to Add Fintech to the Curriculum
Leading U.S. business schools are trying to teach students how to become masters of financial technology, a subsector of Wall Street that has grown in size and prominence, but because the area is still ill-defined and relatively new it is hard to develop courses. Stanford University and Georgetown University business schools are planning to offer “fintech” courses for MBA students for the first time this fall. New York University is planning a new course for undergraduates after launching a fintech specialization in its business school last year. They join the University of Pennsylvania’s Wharton School, Columbia University’s business school and the Massachusetts Institute of Technology’s (MIT) Sloan School of Management, which all launched similar programs in recent years.
The new courses are being driven by student demand, officials from those universities told Reuters in interviews. A number of prominent startups have exploded onto the fintech scene in recent years, fostering interest in mobile payment apps like Venmo, digital loan platforms like SoFi and robotic wealth managers like Betterment.
“Ten years ago everyone wanted to go into investment banking or in the trading side,” said Reena Aggarwal, Director of the Georgetown Center for Financial Markets and Policy. “Now the students are much more interested in innovation.” NYU’s undergraduate course, for instance, attracted enrollments from twice as many students as expected.
But the burgeoning industry is so diverse that academics said it is difficult to construct a syllabus for financial technology 101. There are no textbooks and few professors have fintech expertise. “For fintech, some people mean bitcoin and cryptocurrencies; some people mean the technology JPMorgan uses for trading,” said Angela Lee, Columbia Business School’s Chief Innovation Officer. “Everyone thinks it’s sexy, and a lot of people use it colloquially without knowing what it is.”
Instead of developing traditional syllabuses, universities have been teaching students how markets are disrupted by new technology, helping them develop business ideas or offering classes on narrower topics. For instance, MIT taught a course on blockchain, the technology that first emerged as a system underpinning the virtual currency bitcoin. Stanford’s course will focus on financial inclusion, or designing affordable products and services for disadvantaged customers, said Kenneth Singleton, a management professor who will teach the class.
Universities have also invited financial technology executives to lecture. “There is no ready-made teaching material that you can put together,” Antoinette Schoar, a professor of finance at MIT Sloan, said in an interview. “You have to try your own curriculum or develop real life cases.”
Those involved with the programs said learning about fintech can help students’ careers, whether they join traditional Wall Street firms or launch their own companies. They said it has also helped attract high-quality students. One Wharton student, David Gogel, enrolled after developing an interest in fintech while working at American International Group. He is now co-president of the FinTech Club, one of the largest professional organizations at the school, with 260 members. “Part of the reason I chose Wharton was because of its investment in fintech,” he said in an interview.
Citations
- http://for.tn/2r9ZTDB – Fortune
- http://reut.rs/2qZRSlA – Reuters
The Good News Is . . .
- Initial jobless claims came fell 10,000 to 245,000 in the June 3 week. The 4-week average was up but only slightly, at 242,000 which is in line with the trend. Continuing claims were lower, at 1.917 million in lagging data for the June 3 week with the 4-week average at 1.915 million and hitting a new low going back to the early 1970s. Jobless claims have been very low, pointing to unusually strong demand for labor.
- At Home Group Inc., a leading home décor superstore chain, reported earnings of $0.17 per share, an increase of 21.4% over year-earlier earnings of $0.14 per share. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $211.8 million, an increase of 23.1%. Management attributed the results to broad-based success across new and existing stores, geographies and product categories.
- The Japanese technology conglomerate SoftBank agreed to acquire Boston Dynamics, a manufacturer of animal-like robots, from Google’s parent company, Alphabet. SoftBank also agreed to acquire Schaft, a secretive Japanese bipedal robotics company, also owned by Alphabet. “Today, there are many issues we still cannot solve by ourselves with human capabilities. Smart robotics are going to be a key driver of the next stage of the information revolution,” said Masayoshi Son, chairman and chief executive of SoftBank. The deal is an unwinding of some of Google’s robotics investments. Boston Dynamics, a company spun out of the Massachusetts Institute of Technology 25 years ago that has received funding from the Pentagon, gained notice for its two- and four-legged robots. Designed for military use, they move with uncanny balance and speed.
Citations
- https://bloom.bg/2eVhfSb – Bloomberg
- http://cnb.cx/2lwnm3s – CNBC
- http://bit.ly/2rKyPyj – At Home Group Inc.
- http://nyti.ms/2raDUkU – NY Times Dealbook
Planning Tips
Tips for Financing Investment Property
Home prices have been on a steady climb from the depths of the housing crash, leaving many wondering if it is still a good time to invest in the residential real estate market. According to the National Association of Realtors (NAR) 85% of major metropolitan areas saw gains in existing single-family home prices in recent years. However, low interest rates are still attracting buyers and limited inventory is escalating prices in some desirable areas. But while interest rates remain low, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. However, a little creativity and preparation can bring loans within reach of many real estate investors. Below are some tips to consider if you seek out financing for a residential investment property. Be sure to consult with your financial advisor to determine if this type of investment is appropriate for your situation.
Have a sizable down payment – Mortgage insurance will not cover investment properties, so you need at least 20% down to secure traditional financing for them. If you can put down 25%, you may qualify for an even better interest rate. If you do not have the down payment, you can try to obtain a second mortgage on the property, but it is likely to be an uphill battle.
Be a ‘strong borrower’ – Although many factors—among them the loan-to-value ratio and the policies of the lender you are dealing with—can influence the terms of a loan on an investment property, you should check your credit score before attempting a deal. It will have the greatest impact on a loan’s terms. Below a score of 740, it can start to cost you additional money for the same interest rate. Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same rate. The alternative to paying points if your score is below 740, obviously, is to pay a higher interest rate. In addition, reserves in the bank to pay for all your expenses, personal and investment-related, for at least six months also have become part of the lending equation. If you have multiple rental properties, lenders often want reserves for each property.
Shy away from big banks – If your down payment is not quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than large, nationwide financial institutions. Neighborhood banks are going to have a little more flexibility. They also may know the local market better and have more interest in investing locally. Mortgage brokers are another good option because they have access to a wide range of loan products, but do some research before settling on one.
Ask for owner financing – A request for owner financing used to make sellers suspicious of potential buyers, because almost anyone could qualify for a bank loan. But these days, it has become more acceptable due to the tightening of credit. However, you should have a game plan if you decide to go this route. Be ready to tell the seller the amount and terms of the seller financing. You have to sell the seller on owner financing, and on you.
Think creatively – If you are looking at a good property with a high chance of profit, consider securing a down payment or renovation money through home equity lines of credit, from credit cards or even from some life insurance policies. As always, research your investment thoroughly before turning to these riskier sources of cash. Financing for the actual purchase of the property might be possible through private loans from peer-to-peer lending sites like Prosper.com and LendingClub.com, which connects investors with individual lenders. Just be aware that you may be met with some skepticism, especially if you do not have a long history of successful real estate investments. Some peer-to-peer groups also require your credit history to meet certain criteria.
Citations
- http://bit.ly/2aFaX5z – Credit.com
- http://bit.ly/2rbcnzD – Investopedia
- http://bit.ly/1dMJXj4 – Bankrate.com
- http://bit.ly/2s6Cp6k – LandLordology.com
- http://bit.ly/2s6qsO9 – Zillow
