It’s difficult to overstate the significance of Adobe’s announcement that all of their products will be solely available through Creative Cloud. No longer can you buy packaged version of Photoshop, for example, that are yours forever. Instead you can subscribe to different individual apps or suites. What makes this so interesting is that while companies come out with new products all of the time – this is the 20th version of Photoshop! – very rarely do they come out with new business models.

There are several obvious reasons for this move:

• Smoother revenue streams are much more preferable than launch-driven spikes (just ask Apple!)
• This will significantly reduce piracy (although that may have unintended consequences )
• Just as it’s easier to sell to your existing customers, rather than get new ones, it’s easier still to ensure existing subscribers don’t unsubscribe

However, there are a couple of bigger picture factors at play as well.

The PC as Humpty Dumpty

As I noted yesterday , the jobs we hire a PC to do are being increasingly done by dedicated devices. If Adobe wants to be relevant in a world where users interact with as many as five different devices in a day, then a per-device licensing model is clearly unsustainable.

Enter the SaaS model. Users can use Adobe products on as many devices as they wish. It is, ultimately, an obvious and necessary shift, and kudos to Adobe for doing it. (Update: You can only use the apps on two PCs, and you still have to pay for the tablet apps. Still better than now, but “kudos” should probably be singular – kudo ?)

Even so, their aggressiveness – there will be no more packaged software, period – seems surprising, but the truth is Adobe is probably thrilled with their new model.

The Problem With Monetizing Productivity

Productivity apps have never been a good fit for the packaged software model.

The reason has to do with what is called Economic Surplus. From Wikipedia :

Economic surplus refers to two related quantities. Consumer surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. Producer surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for.

I’ve illustrated what this looks like for packaged software:

Imagine how this plays out for Photoshop:

• Consumer A rarely edits photos, which means a photo-editing app is worth maybe $20 to him. Yet, he buys Photoshop anyways for $499. In this case, Adobe is, in effect, charging $479 too much. 1 The consumer is getting a bad deal.
• Consumer B is a graphic designer. She uses Photoshop every day, for hours a day. Without Photoshop, she couldn’t do her job , for which she is paid $60,000 a year. In this case, there is a consumer surplus of $59,501. Adobe is getting a bad deal.
• Consumer C is a student. He has aspirations for being a photographer, but is just getting started. He buys Photoshop, but finds it very hard to use; in fact, he is losing time trying to figure it out. Yet, over time, he becomes proficient, and eventually an expert. The economic surplus shifted from producer to consumer, even though there was no transaction.

How do you price a product to best monetize these three very different consumers? If you price too high, you may never acquire Consumer A or C (And Consumer C is a big loss). If you price too low, you are effectively subsidizing your consumers, which may make them feel warm and fuzzy, but not your shareholders.

Why Subscriptions Are Better

Moving to a subscription vastly improves this model, for both users and Adobe.

Consider again the three types of consumers I listed above:

• The price is much more approachable for Consumer A. 2 He can “try out” Photoshop, and if he ends up not using it, he can simply end his subscription. More importantly, there will be a lot more Consumer As, and some of them will stay subscribed. 3
• Consumer B will get a great deal right off the bat, but as she uses Photoshop throughout her career, Adobe will be along for the ride, making revenue every month as opposed to every few years.
• Consumer C is similar to A: Photoshop will be much more approachable, and there will be a lot more Customer Cs. As they become real users, Adobe moves with them.

Moreover, Adobe is well-incentivised to maintain the app to reduce churn, and users always have the most recent version. It really is a win-win. 4

Thinking About Apps

The challenges facing Adobe are shared by almost all productivity apps.

• Productivity apps are indispensable (and thus priceless) to some users
• Productivity apps usually have high learning curves
• Well-done productivity apps require significant investment up-front
• Productivity apps require regular maintenance and upgrades

Unfortunately, app store economics don’t really work here.

• If you have a low price, you need massive volume to make up for the upfront costs
• If you have a high price, users are much less likely to buy your app, especially since there is likely a learning curve
• If you can’t monetize over time, your users are extracting MUCH more value than you are receiving in revenue. That’s great if you’re a user, up until the company you love sells out because they can’t make money. Sparrow is the canonical example here. How many Sparrow devotees would gladly pay $5 a month to have the app available and continually updated?

Trials do ameliorate the pain a little, particularly if you pursue the high price option, but they don’t address the time mismatch: as a productivity app becomes more valuable, the developer doesn’t get a dime of more revenue.

Why Platform Owners Should Care

For the most part, I tend to turn a deaf ear to developer griping about App Store policies. The purpose of iOS, Android, Windows Phone, etc. is not to make developers’ lives easy; it’s to attract users for the purpose of making money for Apple, Google, 5 and Microsoft, respectively. Adopting developer-friendly policies only makes sense to the extent it will attract more users, and most of what developers want doesn’t qualify.

This is an exception. Platform owners should add subscription support for productivity apps. 6

What makes monetizing productivity apps so tricky is that they are indispensable to some consumers, yet overwhelming to others. It’s that indispensable part, though, that should matter to platform owners. If a user comes to depend on certain productivity apps that are only available on one platform – and, in general, mobile productivity apps are much more likely to be monogamous – then that user is effectively bound to the platform, and won’t even consider another platform when it comes time to upgrade.

The opportunity for growth in smartphones is increasingly previous-smartphone owners (as opposed to new smartphone owners). Keeping those owners around should be a top priority for every platform, and one of the best ways to do so is fully supporting a subscription model for productivity apps. It will make them more successful and thus stickier, ultimately to the platform’s long-term benefit.

1. Were Adobe willing to sell at their marginal cost (which for software is effectively $0) + consumer value, the producer surplus would be $479 [ ↩ ]
2. To be fair, it’s significantly cheaper to pay annually, which defeats some of the advantages [ ↩ ]
3. A lot of Consumer As buy a version of Photoshop and hold onto it for years. They are understandably upset by this change, but the truth is Adobe probably doesn’t mind losing them, given the other benefits of subscriptions [ ↩ ]
4. So why did Adobe wait so long? Truthfully, the technology just wasn’t there until the past few years [ ↩ ]
5. Well, Android is more ambiguous [ ↩ ]
6. Apps can obviously implement this on their own on the server, but that’s impractical for many small shops that specialize in these types of apps. I’m talking about full-blown app store support. [ ↩ ]