Welcome back to The Deep Dive, the place where
we sift through the mountain of source material
you share with us to find the absolute core of
what you need to know. And today we are tackling
a giant. A true giant. We're doing a monumental
analysis of a company whose products, well, they
basically underpin the entire digital creative
economy. We're talking about Adobe Inc. Yep.
Based in San Jose, California, Adobe is that
multinational software company that, you know,
historically defined content creation and publication.
I mean, when we say Adobe, we're talking about
tools you use every single day, sometimes without
even realizing it. Oh, absolutely. Photoshop,
Illustrator, and of course the big one, the universally
inescapable portable document format, the PDF.
The PDF. You can't escape it. But this story
is so much bigger than just a list of software
titles. It really is. It's a decades -long narrative.
It's about rapid technological innovation, massive
market consolidation, and, of course, that highly
controversial mandatory shift into the subscription
economy. A shift that totally redefined how creative
professionals have to operate. Our mission today
is to really explore the three pivotal arrows
that created this powerhouse and then, you know,
analyze the current state of regulatory pressure
it's under. So where do we start? We'll start
with Adobe's foundational role in literally sparking
the desktop publishing revolution. Then we'll
track its strategic transformation into more
of an enterprise service provider and that contentious
switch to Creative Cloud. And finally, we'll
do a deep dive into the major controversies.
I'm talking security failures, anti -competitive
history, and the really serious legal challenges
that have popped up right up to, well, this very
month. We've got a lot to get through. We do.
We've got billions of dollars. in failed acquisitions,
a massive FTC lawsuit, some fundamental failures
in cybersecurity to wade through. This is not
just about software. Not at all. It's about control.
Control over file formats, market lock -in, and
the business practices of a company that dictates
terms for nearly every professional creative
workflow on the planet. The information we have,
it seems to reveal this fascinating, almost contradictory
pattern. It is a contradiction, isn't it? A company
built on these genuinely radical technological
innovations that now, it seems, relies really
heavily on financial and structural lock -in.
Lock -in, meaning it's just difficult or really
expensive to leave their ecosystem. Exactly.
All to maintain its industry dominance. Okay,
let's unpack this. Let's do it. So, the Adobe
story. It begins like so many great Silicon Valley
tales with a strategic departure from a massive
established company and a new idea in a small
space. That's right. A classic garage startup
almost. Adobe was established in December 1982
by John Warnock and Charles Gashka. And these
guys were coming from Xerox PR, right? Yeah.
The legendary Palo Alto Research Center. Very
same. They'd been working on key foundational
concepts for graphical user interfaces for printing.
I mean, PRC was where everything was happening.
And the name, Adobe. It's a nod to its humble
start. It comes from Adobe Creek in Los Altos,
California, which, you know, ran right behind
Warnock's home. I love that. But they didn't
just stumble into the software market. Their
initial strategic choice was, Absolutely defining.
It was crucial. They actually considered a few
different business ideas first. Like what? Well,
they thought about starting a copy service business
or maybe selling a complete turnkey system for
office printing, you know, hardware and software
all bundled together. Okay, so why didn't they?
They rejected those paths to focus entirely on
developing specialized software. They believed,
and this was key, that proprietary hardware would
limit their reach. Smart. Very smart. And this
decision led them directly to the creation of
the Adobe PostScript page description language.
Now, we need to pause here because PostScript,
it isn't just some tech footnote. This was the
breakthrough. This enabled the entire desktop
publishing revolution. It really was. So why
was PostScript so revolutionary? I mean, for
our listeners who might not remember what printing
was like before the mid-'80s, what was the actual
problem it solved? Well, before PostScript, if
you wanted high -quality printing from a computer,
you were dealing with these proprietary printer
drivers, and they were usually based on fixed
bitmap fonts. Right. So if you try to make text
bigger or smaller... It looked awful, jagged,
people called them the jaggies, and every printer
needed a driver that was specific to the application
you were using. The results were just totally
inconsistent. So PostScript changed all that.
Completely, because it was a language built on
mathematical principles, on vectors. So instead
of telling the printer, put a pixel here and
here and here, you were telling it, draw a perfect
circle. That's defined by this equation, no matter
how big you make it. Precisely. PostScript described
text, vector graphics, letter forms with mathematical
precision. It was device independent. You could
send the exact same file to a, you know, a low
res desktop laser printer or a super high end
commercial photo typesetter. And the output would
be perfect and consistent every time. Every single
time. It decoupled the design process from the
output device, which for graphics professionals
was absolutely revolutionary. And the key moment
that made Adobe financially viable, like right
out of the gate, involved maybe the most famous
figure in tech history. Steve Jobs. Steve Jobs.
Jobs saw the potential of PostScript immediately.
He tried to buy Adobe outright for $5 million
in 1982. Wow. And they said no. Warnock and Geschke
refused. It was a huge risk. But their investors
stepped in and kind of pushed for a compromise,
something that would get them capital without
them surrendering control of the company. And
the deal they struck was, well. Financially brilliant.
Oh, it was genius. Jobs didn't buy the company,
but Apple purchased shares that were equivalent
to 19 % of Adobe. And crucially, that was paired
with a five -year advanced license fee for Postscript.
And that advanced license fee was the secret
sauce. That's what did it. It ensured Adobe had
immediate, massive operating capital. So they
became the first company in Silicon Valley history
to be profitable in its very first year. In their
first year, they didn't need to slowly build
revenue through sales. Their foundation was laid
by one strategic partner, Apple. And that partnership
powered the whole desktop publishing revolution.
It did. When Apple licensed PostScript for its
revolutionary LaserWriter printers in 1985, which
was the first affordable laser printer for the
masses, they created this perfect synergy. And
PostScript became the international standard
for computer printing almost overnight. By 1987,
it was the standard. No question. This is just
a perfect example of Adobe's strategy of controlling
the foundation. By owning the language the printers
spoke, they controlled the quality and standards
of the entire creative output ecosystem. But
even as they were cementing their dominance with
PostScript, they were already fighting these
strategic battles over IP, specifically over
fonts. Yes, the early font wars. Adobe released
its digital fonts in a proprietary format. known
as Type 1. Which was a high -quality format tied
directly to PostScript. Right. But because it
was proprietary, it sparked immediate competition.
Apple, and then very quickly Microsoft, developed
the competing TrueType standard. It sounds familiar.
A proprietary, high -quality format battling
a more open standard that's being pushed by the
major platform owners. It established the tension
that really defines Adobe to this day. Type 1
fonts were, I mean... They were initially superior,
especially in professional printing environments.
But TrueType was designed to be platform agnostic,
cheaper, and more open. So Apple and Microsoft
just offered the world a functional, free alternative.
Basically, yeah. They were trying to erode Adobe's
control over the font market. And this tension
proprietary control versus ubiquitous adoption,
it just keeps reappearing with PDF, with Flash,
and with the subscription model itself. So while
the PostScript revolution was raging, Adobe was
also quietly building the software portfolio
that we now all recognize as the Creative Suite.
Yeah, their entry into application software began
with Adobe Illustrator. And what's often forgotten
is that Illustrator, the vector -based drawing
program for the Macintosh, it actually evolved
directly from the firm's in -house font development
software. So they were building tools for themselves
first. They were eating their own dog food, exactly,
building the tools they needed to refine their
core technology. And then the 1990s were just
marked by explosive growth through acquisition.
Absolutely. They released Premiere, which later
became Premiere Pro in -house in 1991. But critically,
they acquired Photoshop from John and Thomas
Knoll. And FrameMaker. And then they snatched
up After Effects and PageMaker from a company
called Aldus. Right. The acquisition of Photoshop,
which was developed by the Knoll brothers, was
arguably the most important software acquisition
in history. It gave Adobe the undisputed standard
in raster image editing. But that Aldus acquisition
in 94, the one that brought in PageMaker. Maker
and After Effects. That was strategically fascinating
for reasons we'll get into later. Oh, yeah. Big
antitrust implications. By integrating all these
key titles, Adobe was no longer just a printing
language company. It was creating the essential
multi -platform toolbox for design, video and
print. And they were financially solid. By August
1986, they were already listed on the NASDAQ.
They were a powerhouse early on. And if PostScript
defined high -quality printing, the next massive
launch from them defined the universal sharing
of digital documents. PDF. PDF. In 1993, Adobe
introduced the Portable Document Format, or PDF,
and its associated software Acrobat and Reader.
This was Warnock's Camelot project. The stated
goal was to solve the profound problem of document
fidelity. Okay, explain that challenge. If PostScript
solved printing fidelity, what problem did PDF
solve for screen fidelity? PDF solved the consistency
problem across... I mean, wildly disparate computing
environments. Right. Because in the early 90s,
if you created a document in one word processor
with certain fonts and then you sent it to someone
with a different computer. It's a disaster. Yeah.
A Mac user sending to a Windows user. The formatting
would just break. The fonts wouldn't map correctly.
The layout would shift. It was a mess. PDF was
designed to encapsulate everything. The text,
the graphics, both raster and vector and the
fonts themselves into one self -contained package.
So it always looked the same everywhere. Always.
That consistency is why. we still use it for
everything today. It truly became the digital
equivalent of paper. And this is where their
standardization strategy was just brilliant.
It was. They kept the PDF format itself proprietary
for a long time, controlling its evolution until
2008 when it was published as an ISO international
standard. But the viewer, Adobe Reader, that
was always free. Free and universally available
from day one. And that was a stroke of genius
that guaranteed adoption. They monetized the
creation tools Acrobat while ensuring the consumption
was totally friction -free. They achieved ubiquitous
market penetration without sacrificing long -term
control. And that strategy format control, it
wasn't an accident. We should probably reiterate
that the Aldus acquisition also gave Adobe control
over the TIFF image file format. Right. Further
demonstrating their mastery of securing professional
digital asset standards at the core infrastructure
level. They owned the building blocks. So as
we move into the 21st century, Adobe's strategy
seems to pivot. It moves away from just defining
single formats and more toward consolidating
the entire creative workflow. Exactly. Into these
seamless, high -value proprietary bundles. Which
led to the Creative Suite. The first version
launched in 2003. And it grouped the core software
Photoshop Illustrator InDesign into a single
integrated package. And this was a critical shift
in how they sold the software. They moved away
from individual sales toward a system where you
just bought the whole toolbox at once. And that
bundled approach really paved the way for their
biggest acquisition yet at that time. The Macromedia
Blockbuster in 2005. A $3 .4 billion stock swap.
That macromedia acquisition, I mean, that was
a defining moment. It wasn't just adding to their
existing print suite. It brought in all these
essential web and multimedia tools that just
dominated the pre -smartphone internet. All the
big ones, Flash, Dreamweaver for web design,
ColdFusion for server -side development, Captivate.
They instantly achieved dominance in both print
and web design pipelines. But that web portfolio,
it came with some significant baggage, didn't
it? It did. Macromedia's ColdFusion, for instance,
was known for having some pretty complex security
flaws. And the source material notes that these
flaws would become highly relevant during later
security catastrophes. Because that ColdFusion
source code was among the proprietary code that
was stolen later on. Exactly. Which enabled bad
actors to exploit vulnerabilities in government
and corporate systems that were still running
the software. So this rapid consolidation of
creative tools, it was paralleled by a massive
strategic pivot into the enterprise market. That's
right. In 2009, Adobe spent $1 .8 billion to
acquire Omniture, which was a leading online
marketing and web analytics company. And this
is where the transformation from a purely creative
software company to a major enterprise service
provider really begins. This focus on what they
call customer experience management, or CXM.
Yep. Those Omniture products were integrated
into what became the Adobe Marketing Cloud. So
let's clarify for the listener. What is customer
experience management, and why would a company
known for Photoshop suddenly want to spend billions
of dollars on web analytics? Well, CXM is essentially
the holistic management of a customer's entire
journey with a brand, from initial awareness
all the way to post -purchase loyalty. Okay,
so Photoshop and Illustrator create the content,
the visuals, the ads, the websites. Right. And
Onitra provided the ability to measure how effective
that content was, to analyze customer behavior
on digital platforms and automate personalized
marketing campaigns. So Adobe realized that controlling
the creation tools was only half the battle.
The real enterprise money was in managing, deploying,
and analyzing the customer experience generated
by that content. They were positioning themselves
as the indispensable digital infrastructure provider,
not just the designer's toolkit. Exactly. Amidst
this whole pivot, they faced a spectacular Very
public defeat over one of the macromedia crown
jewels. Flash. The famous conflict with Apple.
Steve Jobs famously refused to support Flash
on the iPhone, on the iPad, on any iOS product.
He published his now infamous open letter, Thoughts
on Flash, which was just a scathing technical
and philosophical critique. His argument was
multifaceted, wasn't it? He cited specific technical
limitations. Security vulnerabilities, reliability
issues that led to crashes, and significant battery
drain on mobile devices. But crucially, he argued
that Flash was a proprietary closed system in
an age that was demanding open web standards
like HTML5, CSS, and JavaScript. And Adobe's
response? Well, predictably, they countered that
Apple was just seeking to maintain total proprietary
control over content delivery on iOS and limit
competition. But that public argument had a very
definitive outcome. It did. In November 2011,
Adobe capitulated. They announced they would
cease all development of Flash for mobile devices.
It was the signal that Flash was essentially
dead, and it shifted the industry irrevocably
toward HTML5. The irony there is just, it's thick.
Oh, it's so thick. Adobe, the pioneer of proprietary
formats that became standards, like PostScript,
lost the battle because another powerful platform
owner, Apple, successfully argued for an open
standard against Adobe's own proprietary tech.
Which brings us to the real game changer. The
moment that secured Adobe's financial future,
but, you could argue, fundamentally damaged its
relationship with its professional user base.
The introduction and eventual mandatory imposition
of Creative Cloud. Right. The initial shift began
in 2011. Before CC, creative professionals operated
on a perpetual license model. You paid a large
one -time fee. I mean, the full creative suite
could easily top $2 ,000. And you owned that
version forever. Updates were paid for with upgrade
licenses. And Creative Cloud was introduced initially
as an alternative. An alternative, yeah. It offered
access to the entire suite for a subscription
plan that started around $600 a year. Which,
for a major agency needing multiple licenses,
could seem pretty enticing compared to spending
tens of thousands of dollars upfront. For some,
yeah. But the initial reception was mixed. While
that $600 a year rate looked cheaper than a $2
,000 upfront cost for one person, users quickly
realized that the combination of the expensive
perpetual license for CS6 and the new subscription
option meant that cost burden was actually higher
than ever. And then in 2013, the hammer came
down. The mandatory move. Yep. Adobe announced
that Creative Suite 6 CS6 would be the final
perpetually licensed version. Moving forward,
the only way to get new versions, updates, bug
fixes, or new features for Photoshop, Illustrator,
and the rest of the core software was through
a Creative Cloud subscription. A complete conversion
to the Software as a Service, or SOS. Total conversion?
That's a great way to put it. Owners into tenants.
How did that change the psychological contract
with the company? It was perceived as a profound
betrayal by many, particularly freelancers, students,
and smaller studios. They felt trapped. Because
it wasn't just a voluntary new feature. It was
a non -negotiable financial... Exactly. The core
psychological contract of ownership was just
broken. It was replaced by mandated tenancy.
You no longer bought a tool. You paid rent for
access. And if you stopped paying, your entire
professional workflow just stopped working. You
couldn't even open legacy files created in the
newest CC formats. I have to play devil's advocate
for a second, though. From a corporate perspective,
there was immense value for the user, right?
Oh, for sure. Agencies, for instance, now had
immediate universal access to every single product,
even the ones they only needed once a year, like
Adobe Audition. Plus, immediate updates and collaboration
features. That's a huge value proposition. That's
absolutely fair. For large enterprise clients
and big agencies, the move was highly beneficial.
It simplified licensing, it provided predictable
costs, and those collaboration features were
crucial. But for the small players, the mandatory
nature was the issue. So Adobe essentially traded
widespread customer loyalty for immense financial
stability. That's the long and short of it. Wall
Street loved it. It transformed Adobe's revenue
stream from sporadic, high -variance sales to
this highly stable, predictable annual recurring
revenue, ARR. And that financial certainty drives
stock valuation more than almost anything else.
And what about the stated goal of reducing piracy?
That was one of the rationales that Adobe sometimes
used for the shift. Did it work? Not really.
The source material notes that the subscription
model failed to deter piracy, at least in the
short term. I mean, within one day of the first
Creative Cloud exclusive version of Photoshop
being released. One day? One day. Cracked regions
were already online. The problem wasn't solved.
It was just moved to a different medium. So the
mandatory subscription model had two profound
strategic market impacts then. First, as you
said, the financial stabilization. Second? Second,
it created instant powerful market lock -in.
Once you adopt CC and save your files in the
latest format, migrating to a competitor like
Affinity or Coral Draw becomes exponentially
more difficult. Right, because you risk file
conversion issues or losing proprietary data.
Exactly. This lock -in, supported by financial
penalties for leaving, became the core pillar
of their sustained market dominance, and it moved
the focus away from pure product competition.
And when a company achieves that level of market
consolidation, the scrutiny inevitably turns
to two areas, security and business ethics. And
Adobe has faced massive criticism on both fronts,
particularly in 2013. That year was devastating
for Adobe's reputation. It started as a data
breach and quickly escalated into, I mean...
national security incident. It really did. I
remember the initial reports being shocking,
but the true scale just kept getting revised
upward. Yeah. Initially, they reported what,
like 2 .9 million customers were affected. But
later, they had to admit that the scale was gargantuan.
38 million active user accounts were compromised
and 150 million total records of Adobe customers
were made available online by the hackers. And
that's not even counting the payment card information.
No. On top of that, around 40 million sets of
payment card info had been compromised the year
before in 2012, which they only discovered during
this broader 2013 investigation. So let's zoom
in on the security failure itself, because the
methods they used or rather failed to use were
criticized as being just absolutely rudimentary.
The criticism was scathing. The stolen data included
encrypted credit card info, usernames, and reversibly
encrypted passwords. The critical failure was
how they handled the passwords. Security firms,
notably Sophos, were just merciless. What did
they do wrong? They used weak encryption methods,
and critically, they failed to salt the passwords.
Okay, for our listeners, what does salting a
password mean, and why is the failure to do it
such an egregious security lapse? Salting is
a fundamental best practice. When you encrypt
a password for storage, you don't just encrypt
the password itself. You attach a random, unique
string of characters, that's the salt, to the
password before you encrypt it. Which means that
even if two users have the same exact password,
the encrypted result, the hash, will be different
because of that. So if a hacker steals the database,
they can't just run a massive dictionary attack
against every password simultaneously. Exactly.
Without salting, the hackers can use what are
called rainbow tables or other pre -computed
lists to decrypt massive batches of passwords
extremely quickly. Not salting passwords, according
to security experts, allowed for the recovery
of a huge amount of information with very little
effort. It was a profound embarrassment for Adobe.
But the long -term threat wasn't just the customer
data loss, as terrible as that was. No, it was
the source code theft. That's right. Hackers
got into Adobe's internal source code repository.
They stole vast portions of proprietary code
for major products. Photoshop, Acrobat, and critically,
ColdFusion. This theft was described by some
security researchers as one of the worst in U
.S. history in terms of corporate intellectual
property compromise. So why is source code theft
so dangerous, especially years down the line?
Because the source code is the blueprint for
the application. If malicious actors have that
blueprint, they can scrutinize millions of lines
of proprietary code to find zero -day vulnerabilities
exploits that Adobe doesn't even know exist yet.
Which allows them to create these targeted persistent
attacks. Right. As we mentioned, flaws in that
stolen cold fusion code were later used to breach
systems at PR Newswire and Washington state court
systems, exposing thousands of Social Security
numbers. It opens the door not just for easier
piracy, but for long term supply chain vulnerabilities
for every enterprise customer running those Adobe
products. And to add insult to injury, the way
they handled the crisis showed a clear disparity
in how they valued their customer. Yeah, that
was bad. Adobe offered affected U .S. customers
free credit monitoring services, but no similar
arrangements were made for non -U .S. customers.
Despite the global nature of the breach and the
clear financial risk for everyone. It was a globally
destructive failure managed with a regionally
narrow solution. So moving beyond security, Adobe's
history shows this clear decades long pattern
of leveraging acquisitions to eliminate direct
competitors. And that has generated significant
antitrust concerns. The prime exhibit here is
the Freehand case. This case is the perfect illustration
of how market dominance, once you have it, can
be used to stifle innovation. We have to go back
to 1994 when Adobe acquired Aldus Corporation.
Right. Aldus owned Pagemaker and After Effects,
which Adobe wanted. But Aldus also owned a program
called Freehand. Which was a direct, viable competitor
to... Adobe Illustrator, their flagship vector
graphics editor. And the Federal Trade Commission,
the FTC stepped in immediately. They recognized
that by controlling both Illustrator and Freehand,
Adobe would have a near monopoly on professional
vector graphics editing. So what did they do?
They issued a consent decree that banned Adobe
from acquiring Freehand or any similar program
for 10 years. Adobe was forced to divest Freehand,
selling it back to a company called Altus. But
the ban had an expiration date, and the story
didn't end there. No, it didn't. Altus was acquired
by Macromedia, which kept developing Freehand
as a legitimate competitor. Then, in 2005, Adobe
acquired Macromedia for $3 .4 billion. And in
doing so, they acquired Freehand again, this
time after the FTC ban had expired. Perfectly
legal, but the effect on competition was devastating.
So once they reacquired Freehand, what was the
strategic move? Elimination. Adobe stalled all
freehand development in 2007. They just stopped
updates, rendering the product obsolete and incompatible
with future operating systems. So they effectively
created a situation where they controlled the
only two professional vector graphics products
for Mac, and they deliberately made one of them
useless. Exactly. It created a decade -long vacuum
in professional vector competition. And this
action was a massive provocation. It triggered
5 ,000 graphic designers to stand up and sue.
It did. In 2011, a group of 5 ,000 professional
users filed a civil antitrust complaint under
the banner Freehand. They alleged Adobe violated
antitrust laws by abusing its dominant position
to deliberately kill Freehand rather than compete
on product merit. And their argument was that
abandoning a robust product line was designed
purely to funnel users to Illustrator. That was
the core of it. Now, the suit was settled out
of court and Adobe didn't admit guilt. The freehand
community's ongoing demand that Adobe release
the product to open source developers It just
shows the enduring resentment over that move.
It's a crucial historical lesson. It is. If you
control the infrastructure and then you acquire
all your competitors, the only thing left to
compete on is price and service. And as we've
seen, Adobe has faced consistent criticism on
both of those. Which brings us to those persistent
financial and reputation based complaints, especially
around global pricing disparity. Oh, this has
been a recurring issue for decades. Retail prices
for Adobe products were consistently reported
to be up to twice as high in non -US countries.
For instance, the price for Creative Suite 3
Master Collection was £1 ,000 higher for European
customers than for US customers. And a petition
protesting that unfair pricing got tens of thousands
of signatures. It did. And the financial policies
often felt disconnected from global economics.
In June 2009, despite the British pound weakening
against the dollar, Adobe increased its UK prices
by 10%. And they actively prevented UK users
from buying from the cheaper US online store.
So they enforced regional pricing differences
even when it disadvantaged their international
customers. Right. And this perception of aggressive
and flexible pricing combined with, you know,
notorious software bloat, especially in their
free offerings, created a major reputational
problem. To the point that TechRadar included
two of their cornerstone products, Adobe Reader
and Flash, on its list of the 10 most hated programs
of all time. Citing their ubiquity, frequent
security updates and just general inefficiency.
And it's worth quickly noting. that this pattern
of control wasn't just external. No, in 2013,
Adobe was part of a class action lawsuit filed
alongside tech giants like Apple, Google, and
Intel, alleging the company had engaged in illegal
hiring agreements designed to suppress employee
compensation. And that suit was eventually settled
in 2014, with the four companies paying a substantial
$324 .5 million to the employees involved. So
the issues of anti -competitive practices clearly
extended to their internal operations as well.
OK, so as we enter the modern era. Adobe has
fully leveraged the stability of its subscription
revenue to pursue these aggressive acquisitions.
And they're focused almost entirely on bolstering
their enterprise services, specifically the experience
cloud. The pace of these billion -dollar purchases
is staggering. We saw the acquisition of the
e -commerce provider Magento Commerce for $1
.68 billion in 2018. Marketing automation for
Marketo for $4 .75 billion also in 2018. Workflow
startup Workfront for $1 .5 billion in 2020.
And the video collaboration platform... Frame
.io for $1 .275 billion in 2021. And these moves
aren't about getting a better version of Photoshop.
They are about building out the Adobe Experience
platform. This platform built on their Sensei
AI and machine learning framework. It uses those
acquired tools to provide comprehensive customer
experience management. So they're saying to enterprise
clients, we don't just provide the design tools.
We are the operating system that runs your marketing,
your data analytics, and your sales funnel from
creation all the way to conversion. That's it
exactly. They're leveraging their existing dominance
in creative services to become an indispensable
piece of enterprise IT infrastructure. If you're
a Fortune 500 company, moving away from Adobe
Experience Cloud would mean ripping out your
core marketing and data infrastructure. Which
makes the lock -in far deeper than just the file
formats themselves. Much deeper. And this expansion
leads directly to the biggest corporate drama
of the last two years. The failed mega acquisition
of Figma. Oh, this was huge. In September 2022,
Adobe announced its massive, ambitious $20 billion
deal to purchase Figma. $20 billion. Yeah. And
Figma, at the time, was the leading, rapidly
growing competitor to Adobe XD, their own prototyping
tool. Figma had become the darling of the user
interface and user experience design world. It
was cloud native. It was collaborative. It was
fast. It represented a genuine threat to Adobe's
future relevance in a critical high growth design
segment. And the moment that deal was announced,
it faced intense global regulatory scrutiny.
Immediately, both the U .S. Department of Justice
and the European Union's antitrust regulators
expressed deep concern. Their worry was straightforward.
Adobe already holds a near monopoly in the desktop
design software market. So eliminating Figma,
the primary emerging challenger, would just eliminate
all competition in an entirely new segment. This
is the freehand case all over again. But on a
$20 billion modern scale, the strategy of if
you can't beat them, buy them was finally running
into serious legal resistance. And the argument
from regulators was that even though Adobe XD
had failed to match Figma's growth, Adobe was
just so dominant that allowing them to buy the
competitor would halt all real innovation. of
the sector. And the regulatory process was so
intense that in December 2023, the two companies
called off the merger. That failure came with
a hefty price tag, too. A massive one. Adobe
had to pay Figma a $1 billion termination fee.
One. billion. It just underscores the immense
risk Adobe was willing to take to ensure no single
viable competitor could exist in its core creative
market. And this attempt at horizontal consolidation
was thwarted. But it leads us directly to the
latest legal battles, which center on the vertical
integration of their subscription model itself.
So the mandatory subscription switch from 2013
has finally generated serious federal legal fallout.
It has. The outrage over the high cancellation
fees has been brewing for years. Customers complained
on social media about the fee, which was reported
to be 50 % of the remaining annual contract value
if they tried to cancel early. It was basically
a financial punishment for trying to leave the
ecosystem. And this issue escalated dramatically
in June of 2024, when the U .S. Federal Trade
Commission and the Department of Justice filed
a joint lawsuit against Adobe and two of its
executives. And the suit alleges clear violations
of the Restore Online Shoppers Confidence Act.
What are the specific allegations? The lawsuit
focuses on two things. Deception and difficulty
of exit. The FTC alleges Adobe failed to clearly
disclose that early termination fee during the
signup process. They used fine print, obscure
hyperlinks, and complex web paths to hide the
actual cost. They claim users were tricked into
signing up for an annual commitment that was
disguised as a simple monthly plan. And what
about the difficulty of leaving? The difficulty
of exit? The suit alleges Adobe made it absurdly
hard to cancel, essentially creating a deliberately
frustrating cancellation funnel. So customers
would face obstacles like being forced through
multiple retention screens, being redirected
through complex web portals. Dropped calls, being
transferred repeatedly between representatives
who couldn't actually process the cancellation
only to find out later they were still being
billed. The FTC views this as illegal retention
through friction. And this is so significant
because it targets the very core financial mechanism,
that sticky recurring revenue stream that has
powered Adobe's stock growth for the past decade.
Absolutely. The strategy of aggressive lock -in,
which relied on making departure difficult and
expensive, is now directly facing a federal regulatory
challenge. And almost simultaneously in June
2024, Adobe faced a completely different but
equally furious customer backlash. Over its terms
of service regarding generative AI. Right. This
was a massive trust crisis. A TOS update for
Photoshop sparked widespread fury because the
language stated that Adobe may access your content
through both manual and automated methods, such
as for content review. And that vague language,
combined with the industry shift toward training
AI on user data, immediately raised fears among
professionals. The concern was immediate and
profound, especially for design agencies and
freelancers working under strict NDAs with major
corporate clients. The fear was that their confidential
work could be viewed by Adobe staff. Or worse,
inadvertently used to train Adobe's Firefly generative
AI models. The uproar was so intense that Adobe
was forced to respond the very next day. They
issued a clarification and updated the TOS to
explicitly pledge that it would not use customer
data to train its generative AI models. But they
failed to fully address the separate clause that
grants them the ability to view customer content
under NDA. So the core issue of transparency
and trust remains damaged. Very much so. So what
does this all mean? If we connect this history
to the modern regulatory environment, what is
the ultimate conclusion about Adobe's position?
Well, the history of Adobe is a paradox. It's
a paradox of competence and control. Technological
innovation, especially PostScript and PDF, created
market dominance. But once that dominance was
achieved, the company's focus shifted dramatically
toward financial strategy. Right. Mandatory subscriptions
and maximizing annual recurring revenue and using
structural lock -in via file formats and these
deliberately difficult cancellation funnels rather
than just relying on having a superior product.
And the current regulatory environment, especially
the FTC lawsuit and that blocked... Figma deal,
it indicates that this aggressive financial dominance
is now being challenged as anti -competitive
and deceptive business practice. So it means
that the high stakes world of creative software
is now dominated by enterprise financial strategy,
where a $1 billion termination fee for a failed
merger is just a cost of doing business. And
where consumer complaints about hidden fees and
difficult cancellations trigger federal lawsuits.
The company built on revolutionary design is
now being judged on its accounting practices
and its legal tactics. Okay, let's try to recap.
Adobe's historical importance is just undeniable.
Completely. They truly pioneered desktop publishing
with PostScript. They revolutionized document
sharing with the PDF. And they built the industry
standard creative toolkit with Photoshop and
Illustrator. I mean, they created the infrastructure
the rest of us rely on. But their contemporary
status is that of a powerful giant facing significant
regulatory and customer backlash. That strategic
shift to the Creative Cloud subscription, while
financially brilliant for shareholders, has generated
immense antagonism among the professionals who
use their products every day. So here are the
key strategic takeaways for you, the learner,
as you track the future of this company. What's
the first one? First, never underestimate the
power of controlling fundamental file formats.
By establishing standards like PostScript and
PDF, Adobe built an infrastructure that competitors
still struggle to bypass, and that provides a
critical base level of lock -in. Second, recognize
the high -stakes nature of that mandatory subscription
pivot. It solidified their financial stability
and secured massive recurring revenue, but it
fundamentally altered the relationship between
the software vendor and the professional user.
It moved from ownership to mandatory tenancy,
a shift that is now being tested in federal court.
And finally. And finally, note the ongoing scrutiny
over anti -competitive behavior. From the deliberate
elimination of freehand decades ago to the failed
$20 billion acquisition of Figma today, regulators
are actively pushing back. Against Adobe's near
monopolistic control and its deceptive business
practices, as we see with the current FTC lawsuit
over cancellation policies. Right. Market dominance
does not mean freedom from regulation, especially
when your business practices appear designed
to trap users. So let's leave you with this provocative
thought to consider. Adobe secured its early
first year profitability through an essential
investment from Steve Jobs. who later fought
aggressively against Flash because he wanted
to foster a more open web ecosystem. Given the
massive failed $20 billion Figma deal due to
monopoly concerns and the current FTC lawsuit
over business practices that hinge on lock -in
and high exit fees, will mandatory subscriptions
and aggressive pricing strategies ultimately
limit Adobe's ability to innovate and attract
new users in the face of faster, cheaper, modern
competitors? That's the big question. You have
to consider the fundamental power dynamics inherent
in the modern software as a service model. The
ultimate challenge for giants like Adobe is whether
their dominance will continue to breed genuine
product innovation or whether it will merely
breed reliance on customer retention through
difficulty and expense. Something to chew on
until our next deep dive. Indeed. We'll see you
next time.