Adobe Can't Photoshop Away Its Own Fading Prospects

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Adobe PhotoshopLet's see Adobe Systems (ADBE) try to Photoshop its way out of this one.

Shares of the leading desktop publishing software company opened sharply lower on Wednesday morning after posting uninspiring quarterly results and disappointing guidance.

"Adobe Reports Strong Second Quarter Financial Results" may have been the headline of the company's earnings release, but Mr. Market didn't see it that way at all.

Adobe is Everywhere -- So Why Isn't It Booming?

Adobe is the undisputed champ when it comes to arming publishers with the tools to stand out in cyberspace. Fire up YouTube or play a social game online and it's probably Adobe's Flash in action. If you open a PDF file it was probably authored on Adobe Acrobat -- and you're probably reading it using Adobe Reader.

If you've ever wanted to see what your head would look like on a goat, Adobe Photoshop is there for that, too. There are also many other high-end software programs that publishers use to both design websites and push out publications.

This would normally seem like a booming place to be these days, but Adobe's not seeing it that way. The software company is now only targeting revenue growth of 6% to 7% this fiscal year.

Adobe points to weakness in Europe as a reason for lowering the high end of its top-line outlook, and the troubled region has been a popular scapegoat -- with a human head, no doubt -- lately.

Get Off My Cloud

Adobe is also in the process of transitioning many of its traditional customers to the subscription-based Creative Cloud platform.

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Instead of meaty up-front payments for Adobe's programs, its cloud-based patrons will be shelling out subscription fees in installments. The move may result in a more predictable stream of revenue, but it may also make it easier to switch to cheaper alternatives.

The market is generally mesmerized by the concept of cloud computing. The ability to make applications truly portable by storing them on a Web-accessed server has helped transform enterprise software darling salesforce.com (CRM) and Linux solutions provider Red Hat (RHT) into multibillion-dollar companies.

However, the compelling reason for companies to go with Salesforce or Red Hat instead of old-school PC-stored solutions is that they usually save companies money. Adobe is the premium brand in desktop publishing already. It is more likely to be disrupted than to be a disruptor itself.


Picture a World Without Adobe

Adobe will continue to matter for power users, but its relevance with the masses will fade. We're already seeing signs of disruption.

When Apple (AAPL) decided not to support Adobe's Flash in the iOS platform that fuels iPhones, iPads, and iPod touch devices, it seemed to be a deal-breaker. Apple created workarounds for YouTube videos, but how could Apple succeed with an incomplete computing experience?

Well, after selling hundreds of millions of iOS gadgets -- and the gradual adoption of HTML5 as an alternative to Flash -- it seems the consumers have spoken. Adobe's products will continue to be popular with desktop publishing pros, but the company's grip on mainstream users will probably fade over time.

Why did Facebook (FB) fork over $1 billion for Instagram earlier this year? The appeal of the free photo-sharing service was difficult to ignore, but it's also the ability to touch up snapshots -- something that casual users would often lean on Photoshop to make happen in the past -- that drew users to Instagram.

Adobe Can't Photoshop Away Its Own Fading Prospects

1. Activision Blizzard (ATVI)

Life was easy when everyone was playing Guitar Hero. Facebook has reinvented the way game-hungry masses spend their time, logging into Facebook to tend to virtual farms, mafia campaigns, or item-finding experiences.

It's not a surprise that the traditional video game industry has been struggling for three years. Market leader Activision Blizzard doesn't even make Guitar Hero games anymore, and its World of Warcraft player count has been steadily declining over the past year. Call of Duty is still a growing franchise, but that can't last forever.

As traditional game companies are struggling, Zynga (ZNGA) -- which accounts for 18% of Facebook's revenue -- is thriving.

Diehard gamers are still firing up their consoles and are toting around their portable gaming systems. The problem is that mainstream gamers -- the casual players who didn't live and die by every franchise's latest release -- have moved on to casual and social diversions. They're free or nearly free, and the viral magic of Facebook connecting friends as players made it possible.

2. Google (GOOG)

Few will suggest that Google is in trouble. The world's most valuable Internet company is worth more than twice the market cap that Facebook is commanding. However, Big G is nervous.

Google's bread and butter business remains paid search, and what happens when folks stop trekking over to Google.com whenever they need to launch a query? If asking friends or simply relying on Facebook's own search box is easier, won't that hurt Google?

There are other ways that Facebook is having an impact on Google.

Google's YouTube may be the world's hottest video-sharing website with more than 800 million monthly visitors, but Facebook also allows its more than 900 million unique monthly users to upload clips on its site to share. We also have Gmail, Google's popular email platform. A lot of people are just sending private messages through Facebook that would normally go through traditional email.

3. Angie's List (ANGI)

Subscribers turn to Angie's List for unbiased reviews. Members pay dues to have access to customer reviews for local service providers. Need a handyman who can fix a pocket door? Is your clogged drain not clearing with your plunger? Who can tutor you daughter for her upcoming college entrance exam?

Angie's List prides itself on the vetted and unbiased opinions that can be found on its site. Well, as fate would have it, these are the same things that can be effectively tackled for free by posting a request as a status update on Facebook.

4. American Greetings (AM)

Remember when shelling out a few bucks for a greeting card was the most cost-effective way to commemorate a special occasion?

Well, thanks to Facebook, offering up birthday wishes or congratulatory acknowledgements is simply a Facebook posting away. Is it cold? Is it impersonal? It doesn't matter. It works. American Greetings has done its part to beef up its digital presence, but analysts still see earnings growth going the wrong way here this fiscal year.

5. Shutterfly (SFLY)

Facebook has also changed the way we consume photographs. We're no longer printing them out, and that's bad news for Shutterfly. The company turns digital snapshots into prints, photo books, and other customized merchandise.

Facebook is a hotbed for the sharing of photos, and that is something that has intensified since its recent acquisition of Instagram.

Shutterfly has managed to grow nicely even as Facebook ascends, but the perception that Facebook is turning Shutterfly and its peers into an elephant's graveyard exists.

All five of these companies may have cheered Facebook's plunge below its $38 IPO price on Monday, but their business models still have to reckon with the beast that the undisputed champ among social networks has become.

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Who needs Adobe Premiere Elements to edit videos when even YouTube is offering free cloud-based tools?

Once again, Adobe finds itself cursing Apple. It was Apple, after all, that created the App Store ecosystem, which leveled the playing field for developers. Instead of having to worry about bankrolling a project and costly physical distribution, the next Instagram is only an inspired coder away. Traditional makers of productivity software have a right to be worried.

The company can always fire up Photoshop to make things look better, but reality is not as kind.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Facebook, salesforce.com, and Apple. Motley Fool newsletter services have recommended buying shares of salesforce.com, Adobe Systems, and Apple.
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