Adobe's Magento Deal Makes Great Sense

Adobe yesterday announced its purchase of the Magento Commerce platform, a widely used ecommerce system, for a cool $1.68 billion.

That Adobe would purchase an ecommerce system was the least surprising thing about the deal: it fills an obvious gap in the Adobe product line compared with Oracle, Salesforce, IBM, and SAP, which all have their own ecommerce systems. Owler estimates that Magento had $125 million revenue, which would mean that Adobe paid 13x revenue. That seems crazy but Salesforce paid $2.8 billion for Demandware in 2016 on $240 million revenue, giving a similar ratio of I2x. It’s just what these things cost these days.

More surprising was the mismatch between the two business’s client bases. Magento sells primarily to small and mid-size firms, while Adobe’s Experience Cloud products are sold mostly to enterprises. The obvious question is whether Adobe will try to use Magento as an entry point to sell Experience Cloud products to smaller firms, or use Experience Cloud as an entry point for selling Magento to big enterprises. The easy answer is “both”, and that’s more or less what the company said when asked that question on an analyst conference call about the deal. But my impression was they were more focused on adding Experience Cloud capabilities like Sensei AI to Magento. References during the call to cloud-based micro-services also suggested they saw the main opportunity as enhancing the product Magento offers in the mid-market, not selling Magento to big enterprises.

This could be very clever. Selling enterprise software packages to mid-market firms doesn’t work very well, but embedding enterprise-class micro-services would let Adobe add advanced features without asking mid-market IT managers or business users to do more than they can handle. It would also nicely skirt the pricing problems that come from trying to make enterprise software affordable to smaller firms without cutting prices to large enterprises.

The approach is also consistent with the Adobe Experience Cloud Profile announced last month, which uses an open source customer data model co-developed with Microsoft and is hosted on Microsoft Azure. This is also at least potentially suitable for mid-size firms, a market where Microsoft’s CRM products are already very strong. So we now see two recent moves by Adobe that could be interpreted as aimed at penetrating the mid-market with its Experience Cloud systems. Given the crowded, competitive, and ultimately limited nature of the enterprise market, moving downstream makes a lot of sense. Historically, it’s been very hard to do that with enterprise software but it looks like Adobe has found a viable path.

(As an aside: it would make total sense for Microsoft to buy Adobe, a possibility that has been mentioned for years. There’s no reason to think Adobe wants to be bought and the stock already sells at over 16x revenue compared with 8x revenue for Microsoft. So it would be hard to make the numbers work. But still.)

Perhaps the most intriguing aspect of the deal is that Magento is based on open source.. This isn’t something that most enterprise software vendors like to buy, since an open source option keeps prices down. Like other open-source-based commercial products, Magento includes proprietary enhancements to justify paying for something that would otherwise be free. Apparently Adobe feels these offer enough protection, especially among mid-size and larger clients, for Magento to be a viable business. And, Adobe’s comments show it’s very impressed at the size of the open source community supporting Magento, which it pegs at more than 300,000 developers. That does seem like a large work force to get for more-or-less free. Again, there’s a parallel with the open source data model underlying Experience Cloud Profile. So Adobe seems to have embraced open source much more than its main competitors.

Finally, I was struck by Adobe’s comments in a couple of places that it sees Magento as the key to making “every experience shoppable”, an extension of its promise to make every experience personal. The notion is that commerce will be embedded everywhere, not just isolated in retail stores or Web sites. I’m not sure I really want to live in a world where everything I see is for sale, but that does seem to be where we’re headed. So, at least from a business viewpoint, let’s give Adobe credit for leading the way.

SAS by the Sip: SAS Viya Offers Open APIs to Individual Services in the Cloud

SAS held its annual Global Forum conference this week, which marked the company’s 40th anniversary. One key to its long-lived success was an early decision to sell software by annual subscription, rather than the one-time perpetual license standard in the industry when SAS started. This provided a steady income stream and focused attention on customer satisfaction to ensure renewals.

In recent years, much of the software industry has adopted a subscription model under the label of “Software as a Service” (SaaS).  But the triumph of SAS’s pricing approach has been accompanied by new challenges to SAS’s business. Subscription pricing notwithstanding, SAS has largely sold its software for on-premise operation by its clients and required them to purchase a large stack of core technologies. This demanded a high initial investment but made expansion relatively easy – an approach that made sense when SAS's core analytical applications were pretty much essential to many clients. By contrast, the new SaaS vendors run software on their own servers and allow clients to access it remotely. This greatly reduces implementation effort and allows volume-based pricing, both of which lower entry costs to the client. The new SaaS software has also been relatively easy to integrate with other systems through open APIs and standard scripting languages such as Python. This also makes it easier to sell SaaS applications for narrow tasks rather than as part of a massive suite.

SAS’s growth and financial performance have been just fine despite the new competition, thanks to technical leadership in its core analytical products and pry-it-from-my-cold-dead-hands loyalty of its core customers. But the benefits of the new SaaS systems have made new sales harder, especially in peripheral markets such as marketing applications.

I’ve subjected you to this long-winded exposition because it provides context for SAS’s major announcement at its conference: a true SaaS version called SAS Viya.* This is a cloud-native system** that will reproduce existing SAS functionality and be compatible with the existing SAS 9 products. More exciting than the cloud deployment (which SAS had previously offered for SAS 9), Viya will be accessible through open APIs and scripting languages including Python, Java, and Lua, and – gasp – some components will be offered as on-demand services. In the SAS universe, this is truly revolutionary. It should open the door to new clients who were not likely to invest in a conventional SAS implementation.  Initial Viya apps will be available in third quarter 2016.

For marketers in particular, SAS also announced Customer Intelligence 360, a SaaS version of its primary marketing suite. Like Viya, this is a separate product from the existing Customer Intelligence 6 suite, which will continue to be offered. The initial release is not a function-for-function duplicate of CI 6 but a “digital marketing hub” that delivers real-time messages in digital channels (email, Web, and mobile apps). Key features include customer-level data collection via on-page scripts, and applications for marketing tasks such as sending an email, delivering in-app messages, or building Web a/b tests. These applications combine previously separate SAS functions such as model building, visual analytics, segmentation, and content creation. They include some nifty advanced features such as recommending when to run tests and automatically discovering which customer segments are most responsive to each test version. The initial CI 360 release includes two modules, Discover (mobile and Web reporting) and Engage (digital interactions including testings). They will eventually be followed by marketing resource management. CI 360 works on a very flexible customer data hub, although that’s a separate product owned by SAS’s Master Data Management group.

CI 360 uses much of the same technology as Viya, including REST APIs and HTML5 interface. It will officially run on Viya once Viya is released. Like Viya, it does not require clients to purchase the full SAS stack and will be priced on volume rather than a simple subscription. In the case of CI 360, fees will be based on the number of “customer equivalent records” and marketing messages. A minimum installation might start around $10,000 per month, considerably less than the current CI 6 product and competitive with other mid-market digital marketing solutions. The initial CI 360 modules are available now.

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* The name is a little odd but it could have been SASaaS, so I guess we can be thankful for small mercies.

** Viya can run on the Amazon Web Services public cloud, SAS’s own cloud, or a company’s own private cloud.