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Weekly Column

End Game: Why Apple Will Buy Adobe

Status: [CLOSED] comments (150)
By Robert X. Cringely
bob@cringely.com

With CES over and the San Francisco Macworld Expo set to begin on Monday, we pundits are turning our attention to Apple, the big technology business success of not only 2007, but of the entire decade. Steve Jobs has his Macworld keynote address coming and will no doubt deliver to us a few of the products we've all been predicting, presented with a level of showmanship simply not seen elsewhere in the industry. But my job this week is to look beyond products, to take a step back and give a long view of where Apple is headed. And the centerpiece of this analysis is my conclusion that Apple will inevitably buy Adobe Systems.

About 18 months ago an Apple employee at an internal meeting asked Steve Jobs about Apple's positioning in the enterprise market. Jobs told the employee that IT wasn't really Apple's business and that he should go work at a company like IBM or HP if he wanted to pursue that line of work. Jobs said Apple was in the "content creation" business with the consumer iLife applications as well as professional apps like Final Cut Pro. While Apple doesn't see itself as an enterprise IT vendor, it sees its technology powering particular types of enterprises, notably those in graphics, media, and entertainment.

Some readers may know what a dongle is. For those who don't, a dongle is a sort of electronic key that plugs into a PC to enable the use of some expensive software application like AutoCAD. Each copy of the app comes with a single dongle so you can put the software on as many computers as you like but only one -- the one with the dongle installed -- can function at a time. Dongles, which are rarely used today, were an early and quite effective form of copy protection. Apple uses a variation of the dongle technique for its professional applications, but in Apple's case the dongle IS the computer. Yes, the software is a good value but you have to buy a computer from Apple -- a dongle -- to run it on. So Apple runs its professional application business effectively at breakeven, making its profit on the associated hardware.

Last year, for example, Apple bought an application called FinalTouch from Silicon Color that was essentially video color correction on steroids. They changed the product name to Color, added a couple features, then rolled it into Final Cut Studio, Apple's top-end video application suite. Though FinalTouch sold for up to $25,000, Color is included in Final Cut Studio FOR FREE, which is a kick in the head to Apple competitors like Avid that don't have hardware sales to count on for profitability. This hardware-software one-two punch is how Apple has come to dominate media creation and is the main reason why those who think Apple will license Mac OS X to other hardware companies are simply wrong.

Of course content creation has been the heart of Apple's business ever since the original LaserWriter and the invention of desktop publishing, so this is nothing new. What IS new, however, is Apple's role in content distribution as well. QuickTime enabled Apple to be in the video creation business but iTunes put Apple in the potentially much larger video distribution business. This shift from creation to distribution is vital to understanding Apple's current strategy and involves a counterintuitive feedback loop to those professional applications. Where Final Cut Pro was useful to Apple as a driver of hardware sales, it is now becoming MORE useful as a driver of content to be distributed through iTunes.

Here is an example of what I mean. Apple has long been a member of the Blu-ray camp when it comes to which high definition DVD standard to support, yet for some reason Apple has yet to ship ANY computers with Blu-ray drives, or HD DVD drives, for that matter. What the heck is with that? How can Apple, as the dominant maker of video creation systems, ignore both Blu-ray and HD DVD? It's because Steve Jobs sees the logical distribution format for HD as being via iTunes, not on a disc of any sort. Now that Toshiba and HD DVD appear to be on the ropes, Apple may be forced to offer a Blu-ray option on build-to-order Mac Pros, but I haven't heard any rumors to that effect. Steve would prefer that there be no optical video distribution at all and he has warped Apple to that purpose, probably at the expense of some sales.

Now let's take this another step and consider how Apple might further optimize itself in its role as enabler of content creation to fuel iTunes. Given this new focus for the company, what might Steve Jobs propose to do with some of that $15 billion in cash the company has on hand that last year earned it a dismal (in VC terms) 5.27 percent interest?

Folks a lot smarter than I have wondered over the years about potential Apple mergers and acquisitions driven by Steve's bloodlust. Apple-Disney, Apple-Google, Apple-TiVo, even Apple-Sun come to mind, but the only one that makes any sense to me at all is Apple-Adobe.

Owen Thomas at Valleywag made the point recently that overlapping boards mean that Google has great influence over Apple. He went so far as saying that Google CONTROLS Apple. Hardly. It's an interesting idea, but goes just as well (or better) in the other direction. Google has had far less of a game plan than Apple. There is no Steve Jobs equivalent at Google, for example. Eric Schmidt's failure at Novell came down to the fact that he wasn't a strong leader like Jobs, so he built Google as a company that can succeed with a weak leader. That's fine for Google now, but what happens when the company comes under the influence of a strong leader, though one with patience? We're seeing that. Jobs will entice Google into painting his fence up to the point where Google needs another fence to paint and looks to Jobs to find it for them. Apple has no need to merge with Google because Apple is already getting everything it wants from Google and Steve wouldn't be the largest shareholder or even in the top three, for a combined Apple-Google. Forget that.

Apple-Disney is just as unlikely, though for a completely different reason. Apple is about facilitating the creation and distribution of content to consumers. Disney is about the creation and control of content as intellectual property. At the end of the day it all comes down to changing the world and increasing Steve's wealth. For these reasons, then, I DON'T see Apple ever merging with Disney, because that would corrupt the purity of Disney/Pixar's task.

What I DO see happening is Apple buying Adobe, which would give it effective dominance of digital content creation and distribution on a global scale. Bruce Chizen suddenly stepped down as Adobe's CEO without warning: why? A caretaker CEO (my characterization -- no slight intended) is in place. Steve has always viewed Adobe co-founder and co-chair John Warnock like a father. Warnock and co-chair Chuck Geschke are losing interest in Adobe day-to-day as they move on with their lives. Acquiring Adobe would make Apple much more of a cross-platform company. The combined professional applications could be placed in the Adobe division of Apple where they could go up in price for some markets, becoming VASTLY more profitable. But most important -- keeping in mind the whole purpose here is driving content distribution -- merging Flash and QuickTime would make any other video standards (like Windows Media) simply immaterial.

If such an acquisition were to take place it would have to be in 2008 while Avid and Microsoft still present credible competition to keep the Department of Justice and the Federal Trade Commission from opposing such a merger. It would go easier, too, on W's watch. I knew he was good for something.

Comments from the Tribe

Status: [CLOSED] read all comments (150)

We may keep on guessing the outcome of a possible merger as its anybody's game. If you go wrong no one asks you (as it takes considerable time to know that the merger went bad) and if succeeds then you can always say "see I told you that". No matter of synergies, cultural fit or strategic fit can guarantee which company would acquire (HP-Compaq)or would not acquire (Microsoft SAP) which another company. So lets not speculate and watch for the big news if at all it would come.

Yugal Joshi | Jan 18, 2008 | 7:38AM

Not in a hundred thousand years. True, Apple doesn't "do IT" and is really in the content business - not hardware or software. There is too much baggage buying Adobe with weak products and a non-Apple culture. On the face of it, it may look like Adobe is in the content business, but really they are not.

Buying Adobe would put Apple's core business on the back burner for 2-5 years, depending on how bad things were. They would have to their eyes off of their mobile and media businesses, and quite frankly they have their hands full right now. Mergers happen because the buyer has a need to satisfy their ego (HP, Time Warner, Oracle, etc) and Steve Jobs just doesn't get his jollies from this sort of thing.

QB | Jan 18, 2008 | 9:12AM

Back in November '06, I talked about how Adobe could stave off Microsoft's encroachment into their back yard with a little tag-teaming from Apple.

I have no doubt that in the coming months, Adobe and Apple will utilize Microsoft's relative naiveté in their entry into the creative market as a stick to beat them with.

Now whether Apple would acquire Adobe is a big question for me, despite the apparently neat fit, both in terms of company culture and product match...

Wayne Smallman | Jan 22, 2008 | 8:12AM