CM J68 Global Strategy and Technology Exam

Christopher Grohmann 231186-CHG1 05.04.13 Adobe Systems Incorporated Case Copenhagen Business School, 2013
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Introduction
This paper will discuss the current business situation of Adobe Systems Incorporated. The company was found 20 (30) years ago and developed itself quickly as leading software supplier for publishing, graphic arts and web authoring tools. It established the PostScript format, followed by the highly successful universal PDF format. Currently Adobe is highly interested in making their PDF format the new de-facto e-Book standard. Opportunities and challenges have been analyzed based on competition analysis and the analysis of own strategic assets. Logic strategic advice will then be discussed.

1. How did Adobe resolve the chicken egg problem when establishing PostScript as a de-facto standard?
Already very early Adobe as a first mover on the market understood the need for a standard format for publishers and graphic designers. They found a market gap and addressed the demand for a universal computer/printer interface. Implementation of an open standard was the key tactic. Page description language was open, free to use and established itself quickly due to Adobes technical support and third party developers. Adobe granted free access to the controller chip design in order to push diffusion of their new standard and engaged in joint product development with end users. The success of PostScript was also its universality. Back then revenues were subordinate and Adobe was planning to build revenue from their open standard on the long run. This made the chicken-egg problem very easy to solve, because it was very cheap und uncomplicated to join this network but at the same time it promised high added value for its users. This fact attracted both sides of the two sided platform alike, developers and graphic artists, which highly Adobes font collection. Adobe had the tactics right by licensing the post script interpreter technology to printer manufacturers on a royalty basis. With their PostScript technology Adobe successfully created first mover advantages and was able to build an early network system with Apple, Aldus and Linotype, which finally brought the promised revenue.

2. What tactics should adobe use to combat Microsoft and to establish PDF as a de-facto ebook standard?
It was unclear how standards in the eBook market would evolve1 As research by Shapiro and Varian has shown winning this war for the next eBook standard depends on the ownership of seven strategic key assets.2 Accordingly, the key to a new successful eBook-PDF era is that Adobe needs to lead that disruption instead of getting disrupted by competition. 3

Network Effects
Adobe is facing serious and aggressively moving competition.4 5 However, Adobe already inherits an advantageous position as leading provider of formatting technology and already established PDF as defacto standard for formatted content on the web. In order to win this rival evolution standard war against a highly powerful player like Microsoft, Adobe needs to forge alliances and combine external resources with their own. Strong alliance partners function as complementors who help to establish PDF as de-facto eBook standard. Joint ventures, acquisitions (glassbook), simple contracts as well as vertical integration (The eBook Value System) are essential tactics to positively influence the value chain around the PDF format. Adobe needs to take advantage of indirect network effects and use complementary products (eBooks , eReaders, third party PDF software) to increase the value of the PDF format for all parties involved. Adobe needs critical mass and to surpass a tipping point which moves users further away from alternative formats. The value of this network for all its users is then further increased with the number of users. 6 This point presents a highly challenging task for Adobe which is facing the dilemma of a two sided platform, this time only with more key players(The eBook Value System) which need to be fully convinced that PDF will be the new standard that prevails.

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See Adobe case p580. Shapiro, C. and Varian, H. R. (1999). The art of standards wars. California Management Review, 41(2), 832. See Table 1 for a detailed analysis of Adobes standard war enablers.

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See Table 2 for a comparison of their advantages. 5 See Exhibit 12 of the Adobe case. 6 Katz, M. L. and Shapiro, C. (1994). Systems competition and network effects. The Journal of Economic Perspectives, 8(2), 93115.

Similar to a buying center, those players have different interests and needs which Adobe, as a keystone company has to understand and to address. Adobe needs to become the hub and coordinator in their framework managing interdependencies which are the key to overall success of their eco system. Users need to have faith and may not be scared to get locked in into an unpromising system. Further like in the PostScript era it needs to be cheap and easy to join the network and difficult to exit it again.

The compatibility dilemma/chance

Currently Adobe is strong, especially in one component for a desired network (SW) so they would prefer compatibility of their PDF format with different readers and platforms. Ideally however, if Adobe controls a superior overall system (HW&SW), then it could focus on monopoly strategies and engage in incompatibility strategies, which locks out competition. This tactic would generate an excellent one way communication system with indirect effects to increase network value. Publishers were looking for a single eBook standard as well.

Long-term strategy: The Abobe eBook Reader

The problem with current eBook readers is that they are lacking sophisticated performance (display readability, size, and battery durability). If Adobe wants to succeed on this market, state of the art technology needs to be developed, that creates a buzz among consumers. With strong alliance members like Amazon or Sony, Adobe would have a powerful sales channel and sophisticated hardware, which builds enormous synergy effects. On the long run Adobe partners with a powerful hardware manufacturer and sells a sophisticated e-reader almost at the breakeven point and by doing so facilitates potential customers decisions to join the Adobe eco system. Once being part of the eco system customers get locked in and have to stick to the PDF standard. (Razor Blade Strategy)

Binding commitments
Adobe needs to keep future prices low to create credibility and to attract new customers. Adobe should communicate their sunk costs to the customer as well. It presents their own commit to the supply of software updates or investments in promising hardware technology. Finally the model and the entrance of the ecosystem needs to be as attractive as possible for potential users to join. Finally this tactic will create high switching cost for customers and lock them into the virtual network.

3. Which market segments should they target?

Basically in order to create critical mass, Adobe would need to engage in a similar strategy like Microsoft. Adobe has to lead the migration path to their PDF standard and their eco-system. In order to answer this question one has to evaluate opportunities and potential of several segments and strategies and consider well in how far those target segments could help establishing PDF as a new standard.

Scenario I: The Launch

Start with a narrow set of eBook users, early adopters, academics and governmental institutions (eDocs print Market had twice the volume of the premature e-book market)7 1. Start early but aggressively with pioneers (physicians), looking for reference information. 2. Address young students with penetration pricing strategies. The textbook sector for educational institutions (sophisticated text search options) and reference manuals for technicians on short call have high potential to disrupt the market. With the help of adobes platform independent contributors can publish papers and material independently and painlessly. 3. Adobe already targeted high profile customers. (B2B digital signatures and the IRS tax forms, which could be filled out.) 4. According to exhibit 7 the travel market segment appears to be highly promising since they highly value basically all features the eBook is able to provide. Less interesting segments to launch the reader for appear to be fiction, non-fiction and juvenile categories.

Scenario II: The broad consumer space

After an early test drive of the new product and its acceptance on the market Adobe needs to act more aggressively. In order to really establish PDF comprehensively and sustainably there is basically no getting round intelligently targeting the mass market at some point and to create critical mass. Microsofts general consumer market strategy is much more challenging for a firm like Adobe, which until then invested little in marketing their products. Now, that Adobe started with smaller segments with success they increasingly have to expand their focus to more segments, when technology becomes more sophisticated and user friendly. This question is less about either a narrow segment or a broad mass market. This question is a matter of sequence and the right tactics on how to address those markets profitably. After all the success of Stephen Kings eBook novella speaks for itself and shows high levels of willingness of a broad mass market to invest in emerging technologies like dedicated eBook readers and reading
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See Exhibit 14 of the Adobe case.

software. With the current PDF format features however (exhibit 11), it will be difficult to convince broad masses to switch to an electronic eBook device which is supposed to substitute their good old paper books. E-book technology back then was not capable of presenting a threatening substitute for classic paper literature. The Hardware was not convincing enough and either too pricy or too heavy. Adobes network will have to invest significantly in R&D to create a convincing product first and to commit to it visibly. Until then Adobe should as well collaborate with PDA manufacturers and software developers to establish their format as quickly as possible.

4. How can they make money if they succeed in establishing PDF as de-facto standard?
At this point we assume that Adobe won the standards war and that PDF has been established as the new de-facto eBook standard. Adobe has its own sophisticated and dedicated eReader (or a rented one by an ally) on the market and has a (temporary) monopoly. They now control the first five activities of the eBook value system, which automatically creates complementary effects and facilitates the strategic option to become a publishing house themselves. Once Adobe is owner of their own network they have large monopolistic power. Not only can they control the price to enter the network easily but also control who is allowed to enter it at all. Adobe is also aware that the value of the network for its users increases in relation to the size of the network and amount of offered solutions. As the owner of their network they exploit their network effects (more users) which allows for economies of scale and higher output volume and lower prices for hardware devices. Lower profit margins (and lower prices for the customer) on the hardware side also stimulate demand for more complementary Adobe software, which in return can eventually be offered for a lower price as well if rules of economies of scale apply. This implies in particular that Adobe will be able to sell more of their whole eBook value system tools.

Third Party Development

Further Adobes open PDF system supports second sourcing of additional supply sides which they can proactively influence. This helps to prevent exploitation of customers and creates further value for the eco system through additional features. (PDF Reader on PDAs)

Publishers and Online Bookstores

They would be able to save immensely on printing warehousing and distribution, but at the same time had to invest significant sums to build up their digital infrastructure, to digitize their paper books into the PDF format. Logically publishers would have to pass on those saved costs to Adobe. Adobe would be able to higher royalties for authors than the Publishers, offering them an attractive platform to publish their work themselves without a middleman. Adobe could generate revenue from general licensing of published content and digital signatures. Additionally they could get commission by publisher and even directly by authors for every PDF eBook sold.

The Adobe Publishing House

Alternatively, on the long run, Adobe has the potential to build up an own publishing house and to make regular publishers redundant. The more accepted the eco system becomes among a growing customer base, the more potential Adobe will receive in becoming a stand-alone publishing platform with attractive conditions for authors who want to work more independently. The benefits and cost savings are obvious: no printing cost, no warehousing, no distribution cost and higher profit margins for both parties.

Application Service Provider (Cloud) Adobe is already successfully renting out PDF creation services online. Digital Rights Management
PDF Merchant and Webuy will become one of the most important sources for PDF format and already created significant revenue from several industry players. With the establishment as de-facto standard, business transaction forms and sold PDF e-books will need constantly renewed encryption that prevents piracy. Business partners will be willing to pay extra royalties to keep their intellectual property safe and to secure their own revenues.

Ads and outstanding CRM Adobe could sell its e-reader for a discounted price if the buyer is willing to accept frequently exchanging ads on his device. As soon as Adobe sells mobile reading devices with internet connection, it will be able to analyze user data and use it for outstanding customer relationship management, being able to offer further customized reading offers directly on the reading device.

Conclusion and outlook

In order to win this war, Adobe has to take a time out and look back to their successful PostScript Era. In order to establish new standards, It is highly important to engage in openness but at the same time find the balance to securing intellectual property. Complementary goods and powerful virtual networks as well as control over critical strategic assets are essential to establish new standards, especially for Adobe as a comparably smaller player. Now Adobe has to watch competition for potential superior performance in new standards and to answer immediately to keep their competitive edge. As a keystone player they should continue in investing highly in synergies, hardware and software, to keep on creating constant streams of additional value for their network. Adobe has to keep their resource capabilities VRIN: Valuable Rare In-Imitable Non substitutable

Table 1: Analysis of Standard War Enablers8

Critical Strategic Assets Current Situation
Control of an installed customer base
Very comprehensive user base, widely accepted.

Action plan
Use and leverage amount of users to increase value through network effects (indirect). Convince Key Players through: Aggressive Marketing, Penetration Pricing. Visible Commitments, Early Announcements Adress Customer Expectations (quality, price and availability of eReader) Actively influence second sourcing to increase format features and usability Constantly improve PDF Merchant encryption algorithms. Address piracy issues and build trust. Build alliances to use HW innovating skills. (Synergy effects) Rapid design cycles. Leverage the power of the internet Further use preemption and leverage switching costs for users. (Lock-in) Build alliances to use HW innovating skills. (Synergy effects) Build alliances to use superior HW innovating skills. (Synergy effects). Develop further complementary SW models which increase value for the ecosystem. Push it further with strong marketing / sales campaign. Leverage reputation to build trust and credibility.

Intellectual Property Rights

Adobe owns manifold software and its rights; specification for PDF format however is open.

Ability to innovate

Great innovators in software. No HW experience.

First-mover advantages Manufacturing abilities

First mover in 1989 with PostScript standard. PDF de-facto standard for formatted web content. Only SW, no HW so far

Presence in complementary products

Adobe Acrobat Software is manifold and complementary, No HW complementors so far.

Brand name and reputation

20 years of experience Strong acceptance and trust. and distribution on the publisher market present a strong asset

Green color refers to strong assets which should be leveraged; yellow and red refer to weaknesses that should be eradicated.

Table 2: Comparison of competition and their advantages 9

Adobe
Printing, Superior graphics capability. Adobe needs to leverage its features and enhance to value for its ecosystem.

Microsoft
Aggressive Strategy: Early strategic acquisitions and consecutive deals. Proactive behavior, less wait and see

Gemstar
Acquired eBook manufacturers Alliances and Acquisitions. Product features need to be convincing and lock in customers as well as lockout competition Wide sales channels Attractive pricing for the mass market Team up with large publishers

200 Million Downloads and first mover advantages. Further leverage preemption and switching cost. Effective Digital Rights Management PDF Merchant Digital Rights Management Software. + EBX from Glassbook Strong partners: PWC, Intertrust Would be even more effective with ecosystem.

Built in modem for direct access to the Gemstar eBook store. (Prototype of Amazons later Kindle strategy) Adobes devices need to provide superior performance Open Standard (Open for third Moving aggressively even party software developers for on European markets. further mobile reading devices) After establishing More proactively control, the market in the influence and support US, worldwide development for mobile strategies are devices. appropriate. New comer Gemstar had the right strategy but is lacking competitive advantages and resources over Adobe and Microsoft which were already established on the market with their formats. However, Gemstar presents a highly dangerous competitor to Adobe which must not be underestimated, if Adobe wants to establish PDF as eBook standard Adobe has to fight back with a similar strategy and leverage their competitive advantages and resources. Microsoft used its aggressive strategy to interfere with exclusive deals between adobe and publishers. Adobe should use and build on their strong relationships with publishers, which were already significantly locked in in the closed PDF framework.

Definitely the largest player. Great resources (IT Knowledge and capital for R&D) Even more important for Adobe to forge strategic alliances. Great publicity and an outstanding visionary (Dick Brass) Mass marketing consumer market, which is essential to establish a new standard. Adobe needs to fight back and to create a similar Buzz, attractive pricing for the masses

implies strategic intentions for Adobe

References
Iansiti, M. and Levien, R. (2004). Strategy as ecology. Harvard Business Review, 82(3), 6878. Katz, M. L. and Shapiro, C. (1994). Systems competition and network effects. The Journal of Economic Perspectives, 8(2), 93115. Nicolai Pogrebnyakov (2013). Platforms, ecosystems and standards. CBS Class 5 CM J68 Global Strategy and Technology. Shapiro, C. and Varian, H. R. (1999). The art of standards wars. California Management Review , 41(2), 832. Sundararajan, A. (2006). Network effects. http://oz.stern.nyu.edu/io/network.html

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