The platform war regarding Adobe Flash seems to have ended without a struggle. Adobe can thank Steve Jobs and Apple for making the end short and sweet. The past few months have been filled with intense debate and technical analysis of Flash versus HTML 5, but at a high level it boils down to the fact that Flash is old and HTML 5 is new.
From a personal standpoint I’ve always found Flash to be mildly annoying as applied to most websites (do I really need to watch animation to find out if the place is open on Mondays?) and fairly complicated to implement. However, for some applications Flash creates very impressive and easy to use presentation and navigation services. But the learning curve is steep and of course one has to pay Adobe for the privilege.
Flash would have probably stopped growing and more gradually faded as a deployment technology over time. Apple and the letter from Steve Jobs made the process happen faster and more crisply. Not everything that is outlined in the letter is strictly true but the veracity is enough to be conclusive for most readers.
So what does it mean for Adobe?
It will be important for Adobe to accept and embrace HTML 5, as many infrastructure and content providers are doing. They will gain nothing by being opposed to it. I think of HTML 5 as just another visual rendering method. Flash has more in it but that doesn’t mean content and applications can’t use HTML 5 instead. So Adobe should end up being part of the solution rather than a problem if they are smart about it.
Flash is also only a small part of what Adobe offers today, so the sooner the focus shifts off Flash and to the larger set of products in the Adobe Creative Suite (Photoshop, Illustrator, Designer, Acrobat, DreamWeaver, etc.) the better. Adobe also has an under-appreciated franchise in the enterprise with LiveCycle and some collaboration products.
As for Flash and Adobe Air, they will continue to be of interest to developers who want to build applications that run across platforms. Although Steve Jobs rests his argument in large part on the inefficiency of not writing directly to a specific platform, the fact is the cost of supporting multiple platforms is very high and for many applications the differences between platform-specific implementations might be slight anyway.
From a stock standpoint, Adobe (ADBE) is trading at a discount as investors digest all this controversy and try to measure how much impact it will have on the Adobe business and/or the multiple afforded it. I’d say the current price represents some extra value for investors since it makes the upside to our Intrinsic Value estimate of $42 pretty attractive.
As long as Adobe management seizes the opportunity they have to take a leadership role in helping the creative world move forward with more powerful tools like CS5 and with support for new standards like HTML 5, stockholders are likely to be rewarded from current levels.
[Disclosure: The R2 Model Portfolio has long positions of both Apple and Adobe as does the author at the time of this writing.]