Flash In The Pan: Historical Lessons Of Adobe's Macromedia Acquisition

victorwongData-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Victor Wong, CEO at PaperG.

Adobe’s 2005 acquisition of Macromedia, along with its flagship products Flash and Dreamweaver, for $3.4 billion in stock, had huge potential.

Macromedia’s plan for Flash to become the underlying technology for a broad range of apps and devices seemed to align perfectly with Adobe’s desire to dominate the marketing and media markets. But on its most recent earnings call, Adobe revealed that Flash was no longer a major contributor to the bottom line.

But was it ever?

At the time of the sale, Macromedia was only generating about $40 million a year in net income, on $422 million in revenue. It would have taken large amounts of cost-cutting, synergies and time to make back $3.4 billion on that sort of financial performance.

So if not the tangible cash, maybe Adobe was more interested in some intangible benefits. You could argue that it did succeed in positioning Creative Suite, now Creative Cloud, as a must-have for any interactive designer or developer. However, talk to any designer today and it was always Photoshop that was the must-have for creative professionals, with Flash only really being used by the advertising and media industries.

So if Adobe’s goal was to capture the advertising spend of enterprises, why bother buying Macromedia? Omniture, acquired for a mere $1.8 billion in 2009, has been the far better investment for Adobe on this front. Now generating hundreds of millions of dollars per quarter, it became the foundation of Adobe’s marketing cloud, and has likely already paid for itself. In 2015, Marketing Cloud is on track to generate $1.35 billion in revenue.

It would be difficult to argue today that Macromedia “earned its keep” within the Adobe suite of solutions. Beyond satisfying some curiosity or even schadenfreude, retracing the story of Adobe’s doomed Macromedia acquisition highlights the mismanagement and directional shifts within the software and advertising industries that seemed to doom the deal from the start.

Missed Mobile Opportunities

After the Macromedia acquisition closed, Adobe wanted to build on Flash’s success in Japan, where it built a $1 billion market in Flash content for mobile by licensing Flash Lite to Japanese mobile carriers. Adobe wanted to do the same in the US and Europe but also to create a “Flash App Store,” where Adobe would share in the profits on selling supplemental Flash content.

But there were two big problems with the execution. First, after the acquisition, Adobe had laid off all members of the original mobile business unit from Macromedia that had spearheaded Flash Lite’s success in Japan. Second, Adobe bet on dominant feature phones while ignoring the growing smartphone market.

Eventually, as Adobe failed to spark a Western market for mobile Flash content, it became harder to get mobile traction due to the focus on feature phones as smartphones took off. The Flash team recommended a rewrite of Flash to make it more smartphone-friendly, but by all accounts, they were turned down by Adobe leadership as cost-cutting became a priority. This left Flash in an untenable position in mobile.

Steve Jobs’ 2010 open letter, “Thoughts on Flash,” didn’t help either. In his terse explanation of why Apple did not allow Flash on its products, he skewered its security, reliability and performance. Flash wasn’t built for mobile touchscreens, he said, lambasting it for sucking battery power as well. Whether Adobe simply didn’t feel it was worth reinventing Flash for mobile or some other factor was at play, those issues persisted.

Jobs wasn’t alone in his criticism. Flash was widely panned for its bloat, in terms of the computing power required to run it. As others held Adobe accountable for not maintaining the platform, it actually created some ill will in the technology space. By 2011, Adobe had laid off 750 employees, including the Flash-authoring team, and threw in the towel on developing Flash for mobile.

It’s a wonder Flash limped along as far as 2015, but it did, albeit slowly, wasting away the entire time until Google announced it would stop all Flash content from playing automatically on the Chrome browser.

The only people upset to see Flash go were in the advertising industry, which relied on it as a consistent, high-quality animation engine, and yet Adobe decided the agencies weren’t important enough. Adobe would later bet on going directly to brands via its Marketing Cloud, which it sells to enterprises. For its part, Marketing Cloud was the far smarter bet and less reliant on outsiders to support it.

The Mobile Quandary

Misery loves company, and Adobe is not the only tech giant to learn a painful lesson because of mobile and overextension.

Microsoft recently wrote $7.5 billion off its Nokia unit, which it acquired just more than a year ago to win mobile by getting into the hardware business. An interesting aside: Macromedia’s CEO at the time of its sale, Stephen Elop, also led Nokia as CEO into the sale to Microsoft. In both Adobe’s and Microsoft’s cases, the leadership could have benefited if they had not underestimated mobile and deviated from their core competency.

Given the rapid-fire pace at which technologies evolve, the decisions these companies are making, as informed as they may seem at the time, didn’t stay sound for long. In retrospect, it seems all too clear that Adobe’s Macromedia acquisition was destined to fail after a merger. Maybe if Macromedia had stayed independent, it would have maintained perspective on what had made it successful in the past and continued to invest in its own future rather than cut costs to achieve some sort of synergy.

Regardless, one can only hope that these gigantic companies are learning from the multibillion-dollar mistakes of the past. If so, they may not be doomed to repeat them.

Follow Victor Wong (@vkw), PaperG (@paperg) and AdExchanger (@adexchanger) on Twitter.

2 Comments

  1. There is a lot of sense in this article, but it does omit one other significant motivation: to eliminate the competition. Photoshop was never vulnerable, but FreeHand had (still has, actually) a dedicated following and Fireworks was doing good business for web designers. Part of Adobe's motive was to monopolize the market. Whether that was worth what they paid is open to debate, but I'm not certain we would have seen Adobe drop standalone licenses without it.

    Reply
  2. Uli Paulin

    Indeed, Macromedia could have prospered and evolved independently, based on its great set of Web development tools, Flash not being its most important; And it did well as long as their CEO was distracted playing with shockwave.com. He then returned, intent on transforming the company into a solution provider, an experiment that collapsed under its own weight. Dylan should have stuck to the acoustic guitar if you get my drift. The overpriced scraps were sold to Adobe, lots of people lost their jobs and a few got rich – the usual story.

    Sounds bitter? It shouldn’t. Working at the “mothership” Macromedia from 1996 to 2003 was a thrill ride like no other during pioneering times and rewarding on every level. Good luck, millennials.

    Reply

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