Inside Adobe’s ‘Burn the Boats’ Bet

Plenty of companies talk about changing their business models to adapt to new technologies, but few actually pull it off. Netflix shifted from DVDs to streaming, and Apple survived the transition from the personal computer business to mobile. 

A possible new success story: Adobe Systems. In 2013, amid lagging sales, CEO Shantanu Narayen said the company would stop investing in new versions of traditional software—the kind you pay for and download once—and focus on selling subscriptions to new, perpetually updated versions of Photoshop, Illustrator and other software in its “Creative Cloud.” 

Most old-school software companies from Microsoft to Oracle evangelize cloud-friendly software-as-a-service as well. But revenue from those companies’ cloud services has yet to amount to more than single-digit shares. 

Adobe has gone head first, taking a hit on profits and revenues, the latter of which fell from around $4.4 billion annually in 2012 to $4.1 billion in 2013 and 2014. But subscribers—some 3.45 million—are growing quickly, and investors are betting that the shift will pay off. Sixty-six percent of the company’s revenue is from recurring sources.

Challenges remain. As Adobe pushes into new areas, like tools for digital marketers to manage ad campaigns across search, display and social media, it’s competing with giants like Salesforce and Oracle. Adobe is betting on brand loyalty from the creative professionals who already use its tools. But while Adobe was first, Salesforce and Oracle have bought their way into the market through acquisitions of companies like Buddy Media and Datalogix.

The Information spoke with Mr. Narayen, 51, about lessons from the ongoing transition, red-hot competition for deals and what he likes to call the “sharing economy for content.” Mr. Narayen worked at Apple and Silicon Graphics and co-founded an early photo-sharing site Pictra before joining Adobe in 1998 and becoming CEO in 2007. Edited excerpts below.