This month, Adobe announced it was acquiring Figma, the creators of a suite of successful collaborative design apps. This was big news, not just for the potential implications for creators and creative professionals, but due to the mind boggling size of the deal. Adobe is paying over $20B for Figma, representing 50 times Figma’s ARR (annualized recurring revenue), the largest revenue multiple ever paid for a scaled software company. It is also the largest sale of a private technology company in history, and in the public markets it is second only to Salesforce’s $27.7B acquisition of Slack two years ago, when the markets were still very frothy.
There’s been an outpouring of perspectives from every side: some are worried Figma may lose its corporate spirit, a few have voiced antitrust concerns, and many are questioning whether Adobe massively overpaid.
In all the talk, many are missing the key point – Adobe’s ability to pull this off stems from one of the best and boldest moves in business. Let me explain.
The Legend of Adobe’s Pivot to Subscriptions
By now, many of us know of the Adobe story. It’s one of the most favorite parts of the Subscribed book.
But for those of you new to the story, in 2011 Adobe made a bold decision to switch to take an ax to its cash cow and switch to an all subscription model. Initially, Wall Street reacted terribly, as Adobe’s revenue and expenses fell sharply in the first year they made the change. But as investors better understood the model, the stock subsequently went from $25 to over $300 at the start of 2020. This model of a hard pivot from up-front revenues to subscription revenues has come to be called “swallowing the fish” (credit to JB Wood and Thomas Lah) and is a widely used template in the technology industry.
But, the key part of the story can be found in what David Wadhwani, then senior vice president of Adobe’s Digital Media unit, shared back at the 2014 Subscribed conference. According to Wadhwani, the move wasn’t about financial engineering, it was about Adobe literally being “stuck in a box”. The strategy and focus of selling boxes of software was hitting a wall. Despite the fact that the need for creative software was exploding, Adobe wasn’t growing, at least not in terms of the number of units sold. By switching to a subscription model, ensuring every user was always on the latest innovations, Adobe was able to reimagine what else their customers needed, which led to a big expansion of innovations, including through acquisitions.
Adobe’s timing couldn’t have been better. The Creator Economy was continuing to skyrocket started, people were editing more photos and videos than they ever have before, and now with the arrival of the metaverse, Adobe is in a dominant position in an incredibly fast growing market.
Adobe ended its first year with 1.4 million subscribers. Five years later it was clear that Adobe was dominating the creative software space. Today, Adobe has a purported 26 million subscribers and counting, and a full suite of services. Since Adobe hasn’t released numbers since 2016, these are estimates, but the evidence of growth is there. By comparison, The New York Times have 10 million subscribers or Peloton with 2.97M subscribers. Point is, Adobe has a vast subscriber base.
The Power of Recurring Revenue
Why is that important? Because a large, loyal subscriber base can be a competitive asset, another theme touched on in the book. In 2018, Netflix, for example, had 120 million subscribers, which gave it $12 billion a year to spend on content. And boy, did they spend on content.
Similarly, Adobe’s torrid growth in subscribers is what’s allowing it to spend big bucks for Figma. I should point out, though, that Adobe is a little different than Netflix. The former is a menu of subscription offerings, while the latter is an all-in-one price, for now. Figma will be additive to Adobe’s revenues, not absorbed in. Let’s say every one of Adobe’s 26 million subscribers spend an average of $20/month to access Figma. Adobe would make its $20 billion back in about 3 years.
And there you have it. The price tag Adobe paid for Figma may have come as a shock to us when we first heard the number, but if you step back, it’s simply a continuation of the strategy Adobe put in place 10 years ago, and made possible by Adobe’s relentless focus on growing its subscriber base by delivering more and more value.
By the way, after a successful stint running AppDynamics and selling it to Cisco, Wadhwani’s back at the helm of Adobe’s Digital Media division. I would guess he had a hand in this latest Adobe move. Adobe might have accomplished one of the best moves in business history, all over again.
