Sign your life away: how Adobe made investors 775% profit in 7.5 years

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Now, on with today’s issue…]

Adobe is the undisputed king of design, photography and video software.

It is extremely rare that will find a creative that doesn’t rely on Adobe software.

Almost all graphic designers use Adobe Photoshop.

Almost all photographers use Adobe Lightroom.

Almost all motion graphics engineers use Adobe After Effects.

And almost all videographers use Adobe Premiere Pro.

You get the idea.

Adobe is to creative software what Microsoft is to word processing.

However, there is a massive difference between the price of Adobe’s programs and the price of Microsoft Word.

Back in the early 2000s, Adobe Photoshop cost $999. All the other Adobe programs were priced similarly.

As you can imagine, $999 is a huge outlay for a graduate creative. And god forbid you needed more than one of Adobe’s programs, which most creatives do.

As you can imagine, back then many, many creatives simply used pirated copies of Adobe software.

It was a running joke among my friends that no one actually pays for Photoshop. People saw pirating Photoshop like they saw sharing songs on Napster.

Buying software was for the big shots who could afford it, or who could get their companies to foot the bill.

Fast-forward a few years and as the internet became more reliable, Adobe decided to change up its business model.

Instead of letting you buy a program outright, it would lease you it instead, through what it called Adobe Creative Cloud.

I don’t know if this was as a direct result of how much Adobe lost through pirated software, or if it was simply a better way for it to make money from its customers.

Either way, with the launch of Adobe Creative Cloud in 2011, the software landscape was forever changed.

2011: Adobe changes the world of software forever

This change did not go down well with Adobe’s customers. Internet message boards were filled with ire at Adobe’s new move.

You see, when Adobe first launched its Creative Cloud subscription, it promised concerned customers that it would continue to sell full software licences to people as well.

Two years later, it changed its mind and said if you want its programs, you have to cough up every month.

No one was surprised. Everyone saw it coming, and that’s why so many people were so angry in the first place.

No longer could you own the program yourself. You would now be forever at the whims of Adobe and would have to pay whatever it asked, on a recurring monthly basis.

Adobe positioned its Creative Cloud subscription as a better option for customers. But in reality, it was much more expensive for them over the long term.

However, as I said at the beginning, if you’re a creative, you need Adobe software. So people had to pay up.

Today, the Adobe creative suite costs £49.94 a month.

But it actually works out even more expensive than that because you also have to pay Adobe for storing your files on the cloud (the programs don’t really work unless you use its cloud services too).

1TB of storage is an extra £10 a month.

So you’re looking at around £720 a year, every year, for as long as you have a job. Over five years you’ll have paid Adobe £3,600. And that’s if it decides not to increase prices.

If it does, you’ll have to pay that too.

Remember, back before Creative Cloud, you could simply buy the program outright and use it for a good few years before you decided to upgrade. Many people waited years to upgrade, and only did so when they had a big job come in.

Now you need to pay Adobe £720 a year, no matter what. And because it is storing all your files, you need to keep paying even if you aren’t getting that much work – or you’ll lose everything.

As you can probably tell, I am not a fan of Adobe’s switch to a subscription business model. I am not a fan of leasing things in general.

When I buy something, I like to know that it’s mine. More importantly, I like to know what it will cost me and budget accordingly. It was decades before I finally succumbed and got a contract mobile phone instead of pay-as-you-go.

Still, I pay Adobe £30 a month (I managed to find a voucher code that gave me a discount) because I spend most of my free time editing photos, and Adobe has by far the best programs to use for that.

And, it’s very convenient having access to your entire photo library from anywhere in the world, through an (admittedly great) app on your mobile phone.

I’m not happy that my Adobe subscription is an outgoing that I can never pay off, no matter how much I would like to.


What’s bad for consumers is great for investors

All the reasons I hate Adobe’s subscription model are the very same reason why its stock has done so well since introducing it.

Back in October 2011, Adobe stock was trading for around $29.

Today, it’s worth $253.

That’s around a 772% increase in around 7.5 years.

Or to put it another way, had you invested in Adobe in 2011, when it first switched to a subscription model, you’d have doubled your investment every single year since.

On the chart below I’ve marked where Adobe first introduced Creative Cloud in 2011, and where it forced all its customers into using it in 2013.

Source: Google Finance

There is no denying that this change in Adobe’s business model did wonders for its stock price.

And that’s why I am writing to you about it today.

Because since then, many, many other businesses have jumped on the subscription business model band wagon.

And subscription-based businesses is the subject of this month’s Frontier Tech Investor.

Eoin Treacy has a different take on the advantages and disadvantages of this business model for consumers than I do. But he reaches the same conclusion about its investment potential.

That is, if you want to make money investing right now, you need to be looking into businesses that run on a subscription-based model.

In Frontier Tech Investor, Eoin points out that many consumers can no longer afford to buy big ticket items outright. So sales for these items are dropping off. But consumers can afford to rent them.

From this month’s Frontier Tech Investor:

The problem is thus: if average consumers can no longer afford to make big ticket purchases, how are the US’s biggest companies supposed to sell big ticket items like cars and computers?

In the US, a recent Bankrate study found 61% of people would pay for an unexpected emergency ($2,500) by taking on debt. That number was 62% in 2016, which means that following a big jump in economic growth, the financial condition of consumers has not moved at all. Property prices have gone up a lot though and affordability continues to trend in the wrong direction for consumers.

This problem gets to the essence of every business, which is: you may have great products, but if you do not know your customer, then you are going to have a hard time making sales. Or put even simpler: if you are selling high-cost items and your typical consumer doesn’t have enough money, what’s your Plan B?

He continues:

The subscription business model is the perfect fit because it makes products affordable, while at the same time spitting out data on what a business’ customers are interested in, what they are using, what they aren’t and what they want to see developed. At the same time, it irons out cash flows, which effectively turns highly cyclical earnings into much more predictable modellable cash flows.

For me, buying the software outright is a no-brainer, but for many people with limited resources that is just not an option. That is the entire rationale behind the decision by Adobe, Salesforce, Amazon, Netflix, Autodesk and a long list of other companies for adopting a subscription business model.

Apple is the latest to begin to explore it. The company has been churning out iPhones for a decade and it is safe to say that anyone who wants one and can afford one probably has one. There is a solid argument we are at peak phone and the pace of smartphone adoption is going to deteriorate from here.

If you are the world’s most desirable phone manufacturer and we are at peak phone, what do you do? The answer according to the company’s CEO, Tim Cook, is to boost the allure of the company’s subscriptions offerings. It’s early days yet, but wait a couple of years and Apple may be charging a subscription for receiving a new phone at every update.

The fact that Microsoft, which is wholly dedicated to its subscription offering, leapfrogged Apple in December to become the world’s most valuable company is a testament to the earning power of the subscription business model.

As you can see, Eoin is a big fan of subscription-based businesses from an investment perspective.

And in this month’s Frontier Tech Investor, he has tipped a company that allows any business to convert its services into a subscription-based model.

It already works with thousands of different businesses from dozens of different industries, and is one of the hidden gems of the industry.

Here is what the business does, from this month’s Frontier Tech Investor:

It lands with a company and delivers two big products.

The first is it automates all subscription order-to-revenue operations in real time for any business it works with.

Then it sets up a grow-as-you-grow model so that as the subscription business at the destination firm grows so does [redaction]’s revenue.

That is what allows it to generate retention revenue of greater than 110%. It is very good at managing cancellations and the only way to do that is to keep your customers happy. At the same time, it is selling new line items to its subscribers, which is growing its footprint. It is no exaggeration to state that [redaction] is the subscription business of subscription businesses and it is therefore a pure play on the sector.

Obviously, I can’t name the company here publicly, as that wouldn’t be fair to Eoin’s paying subscribers.

But if you’d like to find out what this company is called, and get Eoin’s full research and recommendation on it, you can join Frontier Tech Investor here.

Exponential Stock in Focus by Donovan Mathews

Plantronics (PLT): UP 19.62% on 07/02/2019

The second instalment of “stocks in focus” shows that investing isn’t always sexy but this hardly matters when the profits can be potentially so huge. This week I want to show you Plantronics – it designs, manufactures and distributes headsets for business and consumer applications, and other speciality products for the hearing impaired.

These are products for offices, contact centres, mobile devices, cordless phones and even computers and gaming consoles. As I mentioned, not super exciting stuff! But in the case of Plantronics, an investment could have been extremely profitable. Its stock has been on the rise, jumping almost 20% in a day, 25% in a week and over 40% in a month.

The company’s most recent positive performance coincides with the release of Plantronics’ third quarter results on 5 February. It saw operating income doubling and double-digit revenue growth in four of its major sectors (desktop phones, audio conferencing, UC headsets and consumer headsets).

The exciting growth figures are most likely a result of the acquisition of Polycom, a global leader in video communications. These key collaborations help broaden Plantronics’ portfolio, expand market opportunity and give it a stronghold of the communications and collaboration ecosystem.

The markets are an exciting place and I’ll be back next week to pull back the curtain on another big market move.

Until next time,

Harry Hamburg
Editor, Exponential Investor

PS Remember that Nick O’Connor’s £3,994 “Publisher’s Guarantee” is waiting for you right now.

Click here for more details.

Category: Technology

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