How Adobe Is Getting Smarter

(MoneyWatch)  Adobe's acquisition of Web metrics and analytics firm Omniture for $1.8 billion gives the authoring software company a new pair of talking points in its desperate bid to hold onto business.

Adobe has been able to withstand attacks from Microsoft for years, in part thanks to European courts who ruled that Microsoft was forcing it out of the market, but the emergence of Microsoft's Silverlight as a significant (if flawed) competitor to Flash, the ongoing improvements to Microsoft's Visual Studio and Expressions document authoring and design tools, and the advent of nimble Web-based vendors, have started to seriously erode Adobe's market share.

As the FT put it:

Adobe's third-quarter results, also released on Tuesday, brought into focus the need for diversification. The company recorded revenue of $697.5m, a 21 per cent decline from last year's $887.3m. Revenues were also down steeply from the second quarter of this year, when Adobe reported $704.7m.

Global Equities Research analyst Trip Chowdhry told Forbes that Adobe needs to diversify because

Their creative suite is decline, and there's no way to organically revive it.. People believe software tools need to be free, and the market is saturated.

Omniture gives Adobe two things: experience selling over the Web (Omniture is a software-as-a-service vendor) and software that helps customers track page views and other Web metrics. The first capability can help Adobe migrate its own business towards Web-based selling, while the second gives Adobe an additional argument for why its suite of creative tools is better: where ad marketing agencies are concerned, for instance, it offers the ability to track online ad performance and delivery.

Adobe was smart to make the deal now, while it's still in a sufficiently strong cash position to make the acquisition on favorable terms, and while there's still time to rescue its business from a seemingly inevitable decline. Adobe has been a tiny mammal surviving in the shadow of dinosaurs more preoccupied with one another than with squashing a tiny competitor, but Adobe has been limited to increasingly smaller grazing lands.

The acquisition does more, however, than simply offer more breathing room. Paul Weiskopf, senior vice-president of corporate development for Adobe, told the FT that the Omniture acquisition "gives us greater business model diversification."

Adobe has already learned the ropes of the "freemium" business model -- give away your basic product and charge for the extras -- with Acrobat (where the reader is free, but publishers have to pay for the editing tools). Now, it has the opportunity to extend freemium to new areas, like analytics, which opens a whole new market for the company.