Winning Business Models: Evolve or die

You’ve spent years developing your product and its market. People, without much regret, pay hundreds of dollars to buy it. Everything gets better with each successive version as you add more and more functionality. Many have tried, but no one can even really dent your appeal or share. You’ve done so well at becoming the gold standard that your product name has become a verb. Your biggest problem is not adoption, but rather piracy. Seems like you have a winning business model.
Enter Web 2.0 where traditional software companies could not afford to match your truly impressive feature set–needed to challenge you at retail–a couple of guys with little or no funding can now duplicate the core functionality that accounts for the bulk of actual usage. Your lock on the retail market that worked so well for so long means nothing when Web distribution lets the upstarts go straight to the user.
Welcome to the world of Adobe Photoshop.
Planning the next move
What do you do? What can you do? The old strategy of adding even more functionality is now seen by many of users as bloat that they are increasingly unwilling to pay for, especially so among the new users required for continued growth. Adobe already offers Photoshop Elements, a savvy differentiation play aimed at what Adobe calls the hobbyist market. While the core market of creative professionals is likely to remain loyal—they actually use the impressive functionality—new competitors such as Fauxto and Pixoh threaten the many non-core users that have plumped Photoshop’s revenue for so long. With a recent study by Rubicon Consulting showing 37% of PC users already regularly using at least one Web-based application and few barriers for that number going to 70%, the mosquitoes finally seem to be a serious health threat to the dinosaurs.
While the creative professional loyalists may keep Photoshop viable as a cash cow product, the status quo increasingly appears unable to continue delivering the winning business model.
A new winning business model is more than a new product or version (e.g. Photoshop Elements) or a new way of collecting money (e.g. SaaS or open source).
The cost of change
At the high end, Adobe already changed its business model once, with winning results, with it conversion of its core customers to Creative Suite. This was a page out of the Microsoft Office playbook that dropped the price paid by some users, encouraged much broader adoption of the applications in the suite. Internally, it required changes to the development cycle so that product releases are synchronized on an 18-month cycle. Externally, Adobe has to work hard to maintain customer, reseller and investor interest toward the end of the release cycle when Adobe does not have a lot of new offerings.
At the low end, Adobe is concerned about free offerings enabled by Web 2.0 impacting growth by hollowing out the low-end and hobbyist markets.
Enter Photoshop Express, a web-based offering from Adobe designed to compete directly with free, web-based applications. The Photoshop Express business model is radically different from Adobe’s traditional applications and is designed to make “Adobe imaging technology accessible to large numbers of people.” Adobe is doing what it can to separate Photoshop Express from its cash cow imaging business, but the decision to offer a free application that does many basic image manipulation tasks undoubtedly twisted a lot of guts at Adobe and there are probably plenty of critics waiting in the wings to say “I told you so” if the strategy doesn’t pan out.
However necessary, it’s still a bold move from a company unaccustomed to making bold moves.
The change that’s required
Since Photoshop Express is a free application, Adobe’s traditional business model does not work. Its target market is a new class of users Adobe has little experience in reaching and the company’s lock on the retail channel provides it no benefit. In order to be successful, Adobe must re-think every aspect of its Express business—including the very elements that made it so successful in its traditional markets. Partnerships and ancillary services will be key to gaining usage and generating revenue. Further, Adobe needs to make some hard decisions when the new and old collide. These may be the hardest decisions. For example, will Adobe see Express solely as a feeder to traditional versions of Photoshop or will it allow Express to thrive and grow in its own right, guiding Adobe into a new world of software applications with many new and unproven methods of monetization?
The upcoming choices will reveal which cultural, financial and product path Adobe chooses.
Disclosure: Adobe Systems is a client of Rubicon Consulting, but we have not worked on the Photoshop Express offering.