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TMF Interview With Adobe Systems Inc.
CEO and Co-Chairman John Warnock

August 3, 1999

With Brian Graney (TMF Panic) (TMF Panic)

Based in San Jose, California, Adobe Systems (Nasdaq: ADBE) is one of the country's largest personal computer software makers, with annual sales approaching $1 billion. The company develops graphic design, publishing, and Web imaging software that allows its customers to create, publish, and deliver images and documents across all print and electronic media. We talked with CEO, Co-Chairman, and Co-Founder John Warnock about Adobe's new products, its moves into new business areas, and how the growth of the Web is changing its business.

You're in the midst of introducing a few new products. Can you tell us a little about Photoshop 5.5 and also ActiveShare? What they're going to allow users to do and how Adobe developed these products?

Warnock: The major focus in Photoshop 5.5 is actually making it very, very straightforward to optimize images for the Web. So essentially what we've done is we've taken the traditionally very strong Photoshop product and we've integrated in another product that we had that was sold separately, called ImageReady. We've made those sort of very seamlessly integrated so that it's very easy to optimize images for Web deployment.

I think if you've ever built a website, you find yourself going back and forth between lots of different applications -- you have your Web layout program, and that could either be Front Page, or GoLive, or Dreamweaver, or one of those, and you're always bouncing back and forth between Photoshop and that program. What we tried to do is integrate GoLive and make it easy to get into Photoshop. But once you're in Photoshop, [we've] integrated that with ImageReady so it's very easy to optimize and resize and figure out what the right color combination is for the images you're going to present on your website.

Our customers really were asking for this because of the workflow. They said they were going between applications too much. There are other really nice goodies in 5.5, like very intelligent masking operations that allow for manipulation for mass in a way that hasn't been possible before.

So the reviews potentially have been very good. The Web developers love it, and about 60% of the people who are buying Photoshop these days are for Web deployment.

TMF: Another product that's going to be introduced is InDesign, which you're targeting at the professional desktop publishing segment. How's that anticipated launch going, and what's going to set that product apart from the competition?

Warnock: That's a product that we've been working on for five years with a fairly substantial team. We're trying to redefine page layout with that product and also really build it on a very, very modern code base that has enormous flexibility. It will probably be shipped this month. And we've tried to just do things with a view toward integrating our products, Illustrator and Photoshop, with InDesign. In the past you used to have to convert to EPS files in Photoshop and then import them into your page layout program. Now you can open up within InDesign any kind of file out of Photoshop or Illustrator and place it into your document.

The other thing InDesign has done is sort of taken the next step in typography. It really has features that no other page layout program has in terms of really building beautiful type and very readable type. I think magazine publishers and catalog publishers are really going to like the type features in InDesign. It's a very rich, deep product. It's very much like Photoshop in a lot of ways and it's a very, very deep professional product where a lot of care has gone into getting the details right.

We've also looked at our major competitor there, QuarkXPress, and made it very easy to import Quark files and Quark shortcuts and templates and things like that, so the transition process should be straightforward.

TMF: What do you think is probably the main threat for Adobe right now? You mentioned QuarkXPress, but are there other specific companies or specific technologies that are threats as well?

Warnock: I think in the Web space Macromedia (Nasdaq: MACR) is the competitor in the professional Web layout arena. I think we have a very strong product offering there, and we're putting a lot of energy toward Web authoring.

TMF: You've been very active in combating software piracy and you've recently won some judgments against some software resellers. What do you think should be done either by the industry or by the government itself to combat piracy?

Warnock: We actually just did a press announcement yesterday [introducing] a new program called Robin Hood. Let me tell you the way it works. If somebody says, "Gee, my corporation is pirating a whole bunch of this software and not paying for it," if they blow the whistle on that corporation and we actually get the corporation to pay for the software they're using, we donate a like amount of software to K-12.

TMF: From an outsider's point of view, it's a bit hard to tell where Adobe's business ends and where the enterprise electronic document management market begins. Could you maybe shed some light on that issue, and do you see Adobe eventually jumping head first into that market?

Warnock: Well, I think the first place we'll enter the document management market is in the publishing arena, where the magazine publishers really have to have asset management systems. The personal computers now, their file systems have just run out of gas. You cannot manage the number of files that publications have to manage on the desktop. And so there really is a need that our customers have expressed to us for having a Web-based asset management system so that they can manage their assets across their publication group. So I think that's the first place where we will enter it.

The Acrobat business is incredible. It's growing very rapidly. It's very, very strong, and that business is sort of in the generic document management space. And with insurance companies and pharmaceuticals and government agencies, we're sort of taking the space that we know, which is certainly the publishing space. As we see applicability to the broader spaces, we'll probably enter [those spaces] as well.

TMF: You mentioned Acrobat, which is probably the product I most associate with Adobe as a typical Web user. How do you intend to leverage the brand name you've built with Acrobat in the future?

Warnock: Well actually it's starting to work. Most people don't know this -- we download about 3/4 million Acrobat readers per week off of our website. And that's just our website. That's none of the ones that are shipped with Compaq (NYSE: CPQ) and Dell (Nasdaq: DELL) [computers] and things like that. Nor does it account for the sort of mirror sites that are out there downloading it. So it has become almost as ubiquitous as the browsers.

The authoring of Acrobat files is starting to get more and more visibility and, since the introduction of Acrobat 4.0, the sales have really sort of taken off. Last quarter's revenue from Acrobat was twice that from the largest previous quarter and the sales rate into this quarter has been sustaining itself very well. We think that corporate America, when they want to have very reliable document communication and they want to post documents on their websites and they want to communicate with customers where they know that the content is going to arrive intact, are turning to Acrobat. And that's happening in the government sector and the sort of heavy-duty paper sectors.

TMF: Could you maybe share some of your thoughts on how the computing innovation environment of yesterday compares and contrasts to the environment that's in place today?

Warnock: Well, I think there's a huge amount of innovation going on today. We have a venture group in Adobe and we look at about 50 companies a week, and that's probably about a quarter of the companies that are getting started in the Valley. I mean, it's amazing. So there's a great deal of economic activity around new companies and a lot of new ideas that the Web is enabling. How many of those will survive and how many of them are viable businesses is hard to say. But we think that whole process of running a large company and communicating with customers is going to become very, very Web-centric -- at least for us -- over the next couple of years. We're putting a great deal of our development effort into the Web and how our tools and expertise apply to content creation on the Web.

TMF: What do you think is going to be Adobe's biggest challenge in the next couple of years?

Warnock: Attracting and keeping people is tough in the Valley right now. It's a very competitive environment. I saw today that the Internet stocks sort of took a beating, so that always helps us a little. [Laughter.] So I guess our recipe for success is to continue to produce really great earnings, provide revenue growth, look for a P/E that's reasonable, and try to give the customers great value. It's sort of a very dull business strategy, but it seems to work.

TMF: It certainly seems to have been working for you guys lately. Thank you very much for taking the time to talk to us today.

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