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Morningstar | Adobe’s successful transition to the cloud reinforces the firm’s wide moat.

Adobe is the king of creative software, and we think its Creative Cloud is the gold standard for web designers, app developers, photographers, animators, videographers, and others. We have been able to witness Adobe’s transition from an on-premises business model to become a software-as-a-service heavyweight. Creative Cloud, housed in the digital media segment, has benefited Adobe by offering customers more attractive prices, locking in customers for the long haul, curbing piracy, and providing management with more visibility into future revenue. Customers can increasingly pick applications to suit their needs, and a subscription model removes the large, up-front cost that existed with Creative Suite. Through acquisitions, such as Macromedia in 2005, Adobe has built the most comprehensive suite of creative software, and we believe the segment is supported by switching costs and a network effect.Great software companies have more than one act, and act two for Adobe has centered around its analytics and digital marketing initiatives, which are housed in its digital experience segment. Adobe’s prowess in creative content has allowed it to nab synergies in the digital marketing space, cross-selling to enterprise CMOs already using Adobe’s software. The product, now dubbed Experience Cloud, operates in a nascent and growing industry, but Adobe’s end-to-end functionality, built internally and through acquisitions, such as Omniture, TubeMogul, Magento, and Marketo, has meant it is largely regarded as the industry leader. As companies look to create targeted, omnichannel ad campaigns, Adobe’s marketing software has become a mission-critical offering for major brands and enterprises. Experience Cloud spans marketing, advertising, and analytics, to name a few.Adobe’s digital media (Creative Cloud and Document Cloud) and digital experience (Experience Cloud) segments are multibillion-dollar businesses. Experience Cloud competes with the likes of Salesforce.com and Oracle, which compete in the broader customer relationship management space, but we think a rising tide can lift multiple boats, with the opportunity for Adobe to cement itself as a digital experience leader.