Adobe (ADBE) Spotlight: Embracing Image Digitalization and AI

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 ) 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:

Source: 365 Web Ressources

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.

Source: Cool Guide

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:

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.”

Source: Adobe

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.

Source: 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.