Artificial Intelligence
Adobe (ADBE) Spotlight: Embracing Image Digitalization and AI
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From Artists And Designers To AI Content
With AI taking over the tech industry, this is both an opportunity and a threat for most of the established players. On one hand, it can boost productivity, accelerate the trend of digitalization, and improve the performance of software-based companies overall.
On the other hand, it could entirely replace whole product lines or even entire digital-focused professions.
So, AI is likely to create a bifurcation in the tech industry. There will be the companies able to leverage it and embrace it, and the ones that will lose market share or see their niche disappear entirely. For now, one aspect of AI is by far the most mature, which is image generation. These are the applications that, together with LLMs, have taken the Internet by storm in 2023.
Before AI, one company was at the center of almost all the world’s digital image production: Adobe. After an initial phase of concern, it appears that Adobe (ADBE +0.44%) will also be at the forefront of monetizing the capacity of AI image generation technology.
The Visual Creation Empire
Since its foundation in 1982, Adobe has evolved, slowly becoming THE image editing company. It achieved this through a wide array of interconnecting software that became the basic tool any professional photographer, designer, or digital artist had to learn to use masterfully.
This includes many well-known apps, aside from others:
Photoshop: A powerful image editing software universally recognized as the #1 for producing high-quality photography, posters, thumbnails, advertisements, wallpapers, and digital artwork.
- Lightroom: Somewhat the “light” version of Photoshop, for small editing, with a stronger ability when it comes to managing or editing large sets of thousands of images/photos at once.
- Express (formerly Spark): A free software working as an “entry” point for beginners or amateur users, for simple editing and making videos out of photos/images.
Illustrator: While Photoshop edits images, storing data in pixels, Illustrator generates them with “vector”, which can be scaled up and down at will without data loss. This is a tool often used for icons, logos, posters, and graphics.
InDesign: A software for multi-page layouts, used to create magazines, newspapers, presentations, and books.
- InCopy: The text works in parallel to InDesign, allowing the writers to work on the same file while the designers work on the visuals.
Premiere-Pro: A video editing used for everything from YouTube videos to blockbuster movies.
After-Effects: Essentially Photoshop for video, allowing to edit and modify videos at will.
Character Animators: For copying facial expressions and transferring them automatically to a 2D character.
Auditions: Audio editor to create, blend, and design sound effects.
Acrobat: Reader & its associated softwares are the basis of PDF formats, a quasi-universal standard for online documents.
Cloud
Adobe also offers a cloud computing service called Digital Experience. It is used to manage a team of creatives, marketing campaigns, analytics, customer experience management, advertising, etc.
In Q3 2024, Digital Experience brought $1.3B in revenues while Digital Media (content creation) brought $3.99B.
First In Subscription
Adobe has an interesting history of embracing market disruption in the software industry. It was at the spearhead of the software industry transitioning to a subscription-based model in 2013, back when the industry practice was selling the latest software version for thousands of dollars.
This high price was making the adoption of Photoshop or any of Adobe's software a big jump to take for aspiring professionals or students. It also encouraged a habit of very active piracy.
Nowadays, the $10-$50/month subscription, depending on your picks, is much more affordable. It has the effect of encouraging people to first develop their digital image/video/sound skills on Adobe's softwares, making the re-learning on alternatives (even free ones) painful and costly.
It also created a powerful network effect, where the standard became Adobe software and compatibility with any other solutions is uncertain, meaning that not using Adobe could become an issue in career progression or getting freelance jobs.
Overall, the switch to subscription, and to have done it early, was a major factor in consolidating the strongest moat defending Adobe’s business: substitution costs.
The Danger Of AI
Of course, the substitution cost moat is only as strong as the difficulty of switching to a different software or technology. This is where AI differs from previous competition, like free software alternatives, as not only can it be cheaper, but it is also a lot easier to use and become reliant on.
So there was a real chance that generative AI could be an extinction event for Adobe, with AI replacing the often tedious labor and high level of expertise required by Photoshop, InDesign, etc.
Combined with the post-pandemic cool down on tech stocks, it had an impact on the company’s stock price:
Adobe Inc. (ADBE +0.44%)
But this seems now unlikely to happen, as similarly to the switch to subscription, Adobe has embraced this change early.
Firefly
Back in March 2023, Adobe released Firefly, its “generative AI for creative.”
Firefly AI can not only generate images from text but also create missing parts of an image from nothing, turn 3D into images, recolor, and apply texture to text. Essentially, it makes it effortless, which used to take a lot of time and tedious labor when using the other tools of Adobe.
The AI is natively integrated into the whole Adobe Software Suite, making its usage much more powerful and seamless for professionals than most of its competition. It was quickly downloaded by 3 million users.
This instantly had 2 effects:
- Most of Adobe's users (the large majority of content creation professionals) started to explore AI potential, but within the Adobe Ecosystem instead of other generative AI by Google, Microsoft, etc., which are much larger and more powerful companies.
- AI was becoming an extra tool making the Adobe Suite better, instead of an alternative to explore in order to cancel your Adobe subscription.
This did not go without controversies (see below), but in any case, this “pre-emptive strike” against generative AIs was clearly the right move.
Instead of discussing how AIs made Photoshop obsolete, social media were buzzing with excitement about all the mind-blowing ways Firefly could make Photoshop work better.
The Opportunity Of AI
Since the release of Firefly, Adobe has developed very quickly its AI offers. First, it expanded and integrated Firefly everywhere it could, from services to web apps.
Then it also added AI services in every software of Adobe Suite, including Acrobat (PDFs), Experience Manager, Illustrator, Premier Pro, etc.
The clear goal is to have Adobe's AI seamlessly integrate into every step of creative workers' daily routines, capitalizing on the fact that direct integration will keep them from looking for alternatives elsewhere.
Opening New Markets
This could also go beyond the use case of “retaining existing users”. For example, Adobe has long been helping creatives to make ads.
But now it also offers in its GenAI for business solutions to directly generate ads with AI, automated optimization, and future content generation in the campaign, and gives marketing teams control to “create their own content with built-in enterprise governance using AI and enterprise workflows.”.
“The 1,600 designers in the unit used Adobe's tools to help generate ideas quickly and create variants of them to be used in different parts of marketing campaigns.
What typically would take us two weeks for an end-to-end cycle, we've gotten down to two days.”
Billy Seabrook – Global chief design officer for IBM's consulting arm on Reuters.
With AI lowering the skill barrier required for creating logos or magazines or for modifying images, the offer and the demand for original content will likely grow.
By embracing change and AI, Adobe will likely retain its position as a leading software package for all visual creative works, and even grow its reach further. It will also benefit from the growth of the market, with more customized visuals for each individual, becoming progressively the direction taken by ads and content instead of mass media.
Adobe Controversies
The embracing of a subscription model and AI has not been without hiccups and issues.
Un-cancellable Subscriptions?
Recently, the US government’s FTC (Federal Trade Commission) has sued software giant Adobe, accusing it of violating consumer protection laws with “hidden” termination fees and a convoluted cancellation process.
“Adobe trapped customers into year-long subscriptions through hidden early termination fees and numerous cancellation hurdles.”
Samuel Levine – Director of the FTC’s Bureau of Consumer Protection
Overall, the accusation is that Adobe enrolls its customers in default plans, making it very cumbersome to cancel a subscription.
After using Acrobat for just a few days over the course of two months, I went to cancel my subscription and was hit with an outrageous cancellation fee. To my horror, I discovered that I would be forced to pay for an entire year’s worth of subscription, even though I had only needed the software for a fraction of that time.
For now, Adobe is claiming it will fight the claim. But honestly, it might be preferable for the company's brand and image to stop such practices.
AI & Copyrights
A Murky Copyright Landscape
Generative AIs have been controversial since their inception among artists and content creators.
Not only are these AIs at risk of taking their job, but they are also creating a very uncertain situation regarding copyright, the core legal protection for most creative workers.
Can AI works be copyrighted even if they were not generated by human labor beyond writing the right prompt? And what if AI imitates an artist, but without giving the artist credit?
In addition, it is clear that most Big Tech AIs were trained with essentially all the data possible on the Internet, regardless of the legal rights and copyrights of its creators.
So, while AI could enhance the workflow of many content creators, many others are also very unwilling to embrace it all.
New Terms Of Service
In the midst of heightened anxiety regarding copyright and the very survival of human-made creative work, Adobe decided to change parts of its terms of service.
The new version “required users to agree to give the company access to their content via “automated and manual methods” in order to keep using its software.”
This sparked outrage, with creatives interpreting Adobe's vague language to mean that it would use its work to train Firefly or access sensitive projects that might be under NDA (non-disclosure agreements). If this were the case, it would have overnight made Adobe's software unsuitable for most of the content creation industry.
This caused Adobe to backtrack and quickly claim that there was a misunderstanding. It also clarifies how its own AI is trained:
“We’ve never trained generative AI on customer content, taken ownership of a customer’s work, or allowed access to customer content beyond legal requirements. Nor were we considering any of those practices as part of the recent Terms of Use update.”
Scott Belsky – Adobe's Chief Strategy Officer & Dana Rao – Lead of Adobe's legal policy
And when looking at it with a cooler mind, it makes sense. Adobe already has access to Adobe Stock, one of the world's largest image databases, for which it already has legal access. So Adobe trained Firefly with Stock and not its users' data.
In an extra clarification step, Adobe said last week that its new terms were actually rolled out to legally allow it to better identify and combat the spread of child sexual abuse material and stop it from being processed through or hosted on its apps.
“Given the explosion of Generative AI and our commitment to responsible innovation, we have added more human moderation to our content submissions review processes. A human review of user content only occurs if potentially illegal material is flagged by this automated process.”
You can easily see how the company’s communication team has been very busy putting down fires started by the legal team from this FAQ on AI:
Ultimately, Adobe might even turn this debate into a selling point through its “AI ethics” page:
We explicitly prohibit and take steps to prevent third parties from training on customer content hosted on our servers (such as on Behance).
We defend the intellectual property rights of the creative community through advocating for the Federal Anti-Impersonation Right Act.
Still, this incident reflects the growing lack of trust between the people at large, and tech companies. And the need for companies to maybe drop the legal language in favor of easy-to-understand rules that start rebuilding trust with its users.
Financials
The arrival of AI tools definitely did not hurt Adobe's growth profile, with an extra $500M in revenues (ARR, Annualized Recurring Revenue) in Q3 2024 for its digital media segment.
Overall revenues grew by 11% year-to-year, cash flows by 8% and earnings per share by 23%.
So even if the PR department of the company has been busy getting artists to put the pitchforks & torches down, it does not seem to have hurt sales one bit.
Conclusion
Adobe Suite is the central tool in most creative processes involving images, logos, videos, or audio, and with such a strong grip over the market that all its competitors are struggling to steal market share, even when offered for free.
This is despite periodic polemics, and somewhat dubious practices around short-term subscriptions and cancellation fees, which might be a short-term risk for the stock.
Adobe is also embracing the AI age, probably the only rational choice considering that in the long run, it will not make sense to tediously edit a picture for hours when asking an AI can do it in a few minutes with a prompt.
Its approach to AI is relatively unique, with a strong focus on respecting copyright and staying on the good side of artists. And while suspicions and accusations have run hot, this is still a much more friendly approach to AI, copyright, and artists than what 99% of the generative AI industry has done so far.
So maybe, just maybe, Adobe might in the long run be perceived as an ally in keeping creation and art a human activity, albeit AI-enhanced.