Adobe Enters New Markets With Macromedia Buy

Graphics- and publishing-software company Adobe Systems Inc. is gaining a foothold in new markets with the agreement it disclosed Monday to acquire Web-publishing software company Macromedia Inc. for $3.4 billion in stock.

For that amount, Adobe gets Macromedia's ubiquitous Flash technology, which makes it possible to deliver graphically sophisticated Internet applications without substantial bandwidth requirements. It also gains professional development tools for rich Internet applications in the form of Studio MX and Flex. There's also Breeze, a well-regarded conferencing application, and RoboHelp, a tool for creating desktop and online help systems, to name a few of Macromedia's notable apps.

"This acquisition strengthens Adobe's mission of helping people and organizations communicate better," said Bruce Chizen, CEO of Adobe, in an audio conference call. "The combination of Adobe and Macromedia will be a company that can more readily achieve our shared vision. Together, we will be able to offer customers full, integrated solutions for next-generation communication and interaction, especially on non-PC devices."

The non-PC devices Chizen is referring to are mainly mobile phones, a software platform considered to have greater growth potential than the more mature PC market. Because Macromedia's Flash technology is ideal for delivering graphics applications and content on portable devices, the acquisition opens a promising new market to Adobe.

"I think that Flash becomes a very, very interesting technology as we start to roll out multimedia services on mobile phones," says Yankee Group analyst Rob Rich. "But we're pretty early on with that."

Chris Swenson, director of software industry analysis for market research firm The NPD Group, says that while non-PC devices are insignificant from a revenue perspective at the moment, they're important from a growth perspective. "Macromedia, with far fewer resources than Adobe, has been able to seal some amazing deals on the mobile side," he says.

Beyond opening up a future market, the deal moves Adobe into direct competition with Microsoft and other enterprise-software and -service vendors that are aiming to provide graphically sophisticated business applications on the Web rather than the desktop. In a note published following the announcement, research firm Forrester Research Inc. said, "Adobe is now in a much stronger position to deliver the information workplace, which will be hotly contested by EMC/Documentum, IBM, Microsoft, Oracle, and potentially SAP, and will provide the contextual, role-based delivery of voice, documents, rich media, process models, business intelligence, E-learning, and collaboration tools through presence awareness, information rights management, and personalization."

"Of all the vendors, Microsoft will be the most affected because they're really trying to define a new type of desktop," says Forrester analyst Robert Markham, who predicts that IBM and Oracle will be tempted to partner with Adobe in enterprise Web application development to counter Microsoft's enterprise ambitions.

Coach Wei, founder and chief technology officer of Nexaweb Technologies Inc., a developer of rich Internet applications for enterprises, sees the deal as a natural marriage between two similar companies. "Both companies are very consumer oriented and rely on consumer software packages for most of their revenue," Wei says.

More than half of Adobe's annual revenue of $1.67 billion in fiscal 2004 came from its digital imaging and video products and its Creative Professional products, of which Photoshop and Illustrator are the star attractions. And 86% of Macromedia's $370 million annual revenue in 2004 came from the sale of the company's designer and developer products. Usually priced at several hundred dollars and up, such software applications are generally considered to be professional rather than consumer products.

Perhaps unsurprisingly for someone whose company competes in the markets Adobe is eyeing, Wei argues that it will take some time before Adobe really learns what's important for enterprise applications in terms of reliability, scalability, and performance.

He contends that the acquisition was driven by a desire to build a company more capable of taking on Microsoft in the enterprise applications market. "Even without the acquisition, Adobe and Macromedia have been moving more and more toward competing with Microsoft in the past few years," he says. "Especially with the release of Longhorn in the next year or so. Longhorn's mission is to connect people, and that's exactly what Adobe wants to do as well."

Not that this is anything new. As Swenson points out, Microsoft has been competing with Adobe since day one. Only the points of contention have changed.

Microsoft's next major release of Windows, called Longhorn, will feature a graphics system known as Avalon aimed at improving Web development. Like Adobe, Swenson says, Microsoft aims to provide technology to enterprise developers to develop rich Internet applications.

Markham also sees an effort to undermine Adobe's PDF format. "Microsoft has been incrementally been moving toward XML as the format for all of their Office documents," he says, "so that's really where the competition will come in. It will pit PDF against a Microsoft XML format. And I think we'll also see an independent XML format for archive as well."

Microsoft will have to work hard here. In May, a subset of the PDF specification, PDF/A, is likely to be accepted as an ISO standard for archiving electronic documents, further strengthening PDF's position as a universal file format.

Adobe has approximately 4,000 employees worldwide; Macromedia has approximately 1,450. The companies anticipate some layoffs, although specifics remain to be determined. The transaction is expected to close this fall.

This story was updated on April 21.