The Man Behind the Turnaround at Adobe; Shantanu Narayen has reshaped Adobe, helping to nearly double its stock price in two years, after a very public dispute with Apple’s Steve Jobs in 2010

SATURDAY, AUGUST 24, 2013

The Turnaround Artist

By ALEXANDER EULE | MORE ARTICLES BY AUTHOR

Shantanu Narayen has reshaped Adobe, helping to nearly double its stock price in two years, after a very public dispute with Apple’s Steve Jobs in 2010.

Shantanu Narayen tends to fly under the radar in Silicon Valley, so he was in uncharted waters when Steve Jobs dragged him and his company, Adobe Systems , into the headlines in 2010. The dispute centered around Flash, Adobe’s Web software standard for enabling video. In an open letter on Apple‘s website, Jobs blasted Flash as flawed technology. Narayen was left to defend his company, which once had a close partnership with Apple.The soft-spoken engineer was no match for Jobs’ bravado. And even with market-leading products like Photoshop, Illustrator, and Acrobat, Adobe lacked the popularity of the maker of iPhones and iPads to sway the public to its side. Looking back, Narayen says of Jobs, “I think he was an incredible visionary in terms of what he wanted to do, and we disagreed on some business issues.”

Sure enough, Flash has largely faded away, as has the once-strong relationship between the two companies, which dates back to the 1980s, when Apple (ticker: AAPL) owned about 20% of the fledgling Adobe (ADBE). “There’s no drama,” says Narayen, playing down the dispute. But it’s perhaps no coincidence that he uses a Lenovo laptop and a Samsung Galaxy smartphone.

Winni Wintermeyer

Narayen is taking Adobe’s desktop software into the cloud. “You can’t preserve the status quo,” he says.

Don’t get the wrong idea; Narayen is no pushover. Colleagues call him quiet but incredibly competitive. Since becoming Adobe’s CEO in 2007, he has led a dramatic transformation at the San Jose–based company.

Like Jobs, Narayen tends to see trends long before the market does. In May, Adobe announced it was pulling the plug on its boxed software, the products that had been its mainstay. Narayen was going all in on the cloud.

Years before, when photographers were still relying on Kodachrome to capture images, he staked his career on a filmless future. In 1996, he co-founded Pictra, software for sharing digital images over the Internet. The product generated a lot of buzz in the industry but never reached critical mass, no doubt because dial-up modems were still the way people got on the Internet, and affordable digital cameras were several years away.

Photo sharing went on to be the hottest play in Silicon Valley. Last year, Facebook bought photo app Instagram for $1 billion.

Pictra was a defining moment in Narayen’s career, nonetheless. While marketing the product at a 1996 industry trade show, he met Bruce Chizen, an executive at Adobe. At the time, Chizen was focused on launching Photo Deluxe, one of the first image-editing products for consumers. Photo sharing was not on his radar.

“Look, what you guys are doing is really interesting,” Chizen recalls telling Narayen. “But, if you want me to integrate it with our product, it’s going to have to be delivered by next week.” Chizen assumed that was the end of the conversation. But Narayen, he says, “ended up pulling it off.”

“That one feature he delivered on, ended up setting the stage for him becoming CEO,” says Chizen, who preceded him as the company’s chief. Narayen, who holds an undergraduate degree in electronics engineering from Osmania University in his native India, officially joined Adobe in 1998 to run its cross-company engineering team. In 2005, he was named chief operating officer.

Today, the 50-year-old CEO is concerned about fending off new, young entrepreneurs. “I always worry about the start-ups,” he tells Barron’s during an interview in Adobe’s Times Square office, “the people who are in the garage right now inventing new products and not having a business model to preserve. You have to think about larger companies, but if you are going to be paranoid about somebody, it might as well be about somebody who has nothing to lose, and is able to start fresh.”

Never in his 25 years in the tech industry, Narayen says, has so much been up for grabs. “There are three tectonic shifts that are happening in technology,” he says, citing mobile devices, cloud computing, and social networking. “That’s never happened in congruence.”

BUT WHERE THERE’S change, there’s opportunity. Narayen took the reins of Adobe in December 2007, as the economy was falling apart. Within 15 months of his appointment, Adobe shares fell 60%, to a six-year low of $17. The crisis gave Narayen the catalyst he needed to remake the company. Today’s Adobe is virtually unrecognizable from the firm that pioneered desktop publishing in the 1980s.

Last year, it was Adobe’s new marketing segment that took center stage. The unit grew 16% to $1.1 billion in 2012, a quarter of total company sales. The products, known as the Adobe Marketing Cloud, help advertisers track and measure digital campaigns. The marketing business comes from Adobe’s 2009 purchase of Omniture for $1.8 billion, a deal that was far outside Adobe’s traditional scope. Narayen persuaded Adobe’s board that it was a necessary move.

“We said, instead of just focusing on enabling people at the front end of that creation process, why don’t we really look at what role we can play in the management, monetization, and mobilization of all of this content.”

This year is bringing more change, and plenty of controversy. When Adobe announced it would no longer produce boxed software, the company was taking a risk with some of the most successful software ever produced. The last-ever boxed version of Creative Suite went on sale in May 2012. Until now, the products had been generating about $2 billion a year in sales for Adobe.

But Narayen understood that it’s better to drive change from strength than from weakness. Adobe’s core products are now available by subscription only, a package the company calls Creative Cloud. “Our brand is so incredible on those desktop products. That’s the blessing,” Narayen says. But he adds, “You can’t preserve the status quo.”

The transition will cost Adobe some $770 million in sales this year and shave per-share profits by $1.20. The company is now expected to earn $739 million, or $1.45 a share, in 2013 on revenue of $4.1 billion. It has also cost some good will. A vocal group of customers is up in arms; 38,000 people have signed a petition at Change.org begging Adobe to reconsider. Users say they don’t want to rely on rented tools for their creative work. And then there’s the cost. Creative Cloud, which becomes the only way to get Photoshop, is now $50 a month, or $600 a year. On its own, the boxed version of Photoshop had been $699. Hobbyists and smaller design shops, though, were always able to skip upgrade cycles, and the software continued to work. Now, they’ll have no choice but to spend the full price every year or lose access.

Adobe has tried to cushion the blow. It’s continuing to sell Creative Suite 6, but it won’t be updating the product, so CS6 will eventually grow obsolete.

DESPITE THE OUTCRY, Narayen isn’t pulling back: “There’s no doubt in our mind, and my mind, that it is the right way to innovate for a broad community.” He points out that the subscription model allows Adobe to make updates—minor or major—and immediately push them to customers. Adobe thinks subscription revenue will essentially replace retail box sales by 2016. The direct-to-consumer model will also be more profitable than the traditional model.

The Creative Cloud includes Adobe’s well known products like Photoshop, Illustrator, InDesign and Dreamweaver. (The programs still run on local PCs, but the subscription model means that Adobe’s servers check in with the programs every month to ensure customers have paid.) The package also has tools for building Websites and mobile apps, and offers cloud storage as well as services that sync files across computers. “We are trying to attract that next generation of creators, who think about creation very, very differently,” Narayen says.

Chizen, the former CEO, notes, “What Shantanu has been able to do is deliver the right thing for the customer— ultimately, I think—and deal with the needs of the financial community.” He adds that investors had long punished the company for its upgrade cycles. “I think it was important to bite the bullet and look for a mechanism to smooth out the revenue.”

But “I’m glad I’m not the one who had to make that decision,” jokes Chizen.

Sure enough, Wall Street has already rerated the stock, which is up 101% in the past two years, to a recent $46. Adobe now fetches 27 times next year’s earnings estimate. A year ago, the price/earnings was 12. Meanwhile, Microsoft (MSFT), which has struggled with its own transition to the cloud, is getting left behind. The market values the software giant at a paltry 12 times earnings estimates.

Dan Rosensweig, who was Yahoo’s chief operating officer from 2002 to 2006 and now sits on Adobe’s board, says Narayen doesn’t get enough credit among Silicon Valley’s top leaders. He groups Narayen with John Donahoe, who has turned eBay (EBAY) from an online auctioneer into an e-commerce leader. Both men joined companies with strong brands in need of new direction. “They have done the two best nonfounding turnarounds in Silicon Valley history,” says Rosensweig, who now runs an education company called Chegg.

NARAYEN GREW UP IN Hyderabad. His mother was a professor of American literature, and his father owned an industrial plastics business. “I was a voracious reader growing up,” he says. And for several years he wanted to be a journalist.

Before finishing his interview with Barron’s, he was eager to talk about the future of print journalism. Adobe is already helping newspapers and magazines create digital versions for tablets. And he asked this reporter his opinion for how Adobe could help newsrooms continue their digital transitions.

Narayen’s formal training was in electronics engineering and computer science. He came to the U.S. in 1984, after college, to pursue a Masters in computer science at Bowling Green State University. Narayen met his wife, a clinical psychologist, at the school. The couple has two sons, 18 and 22.

By 1986, Narayen had made his way to Silicon Valley. His first job was with Cupertino–based Measurex Automation, a maker of computer control systems for automotive and electronics customers. Three years later, Narayen was working for Apple on networking products while getting an M.B.A. from the University of California at Berkeley.

Narayen’s time at Apple—seven years, when Jobs was out of the company—seems like one more relic in the Apple-Adobe history. The two companies, which partnered on Apple’s first laser printer, are credited, along with Canon, with launching desktop publishing. Asked about relations between Apple and Adobe today, Narayen says the companies still collaborate on a few products, but “the interaction is less than it once was.”

And what did he take away from the public dispute with Jobs over Flash? “Apple made a business decision not to support that format because they wanted native applications,” meaning apps that they could control. “I think people see that now. So, yeah, it was very high profile. You also realize you don’t play these things out in the press. You go back and you focus on what you can do, which is building a company for the long run.”