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STRATEGY

Case Study: Choosing to Compete with a Former Partner
 

Was going head-to-head with the industry giant the best move?
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For 10 years, Karl De Abrew and Sam Chandler had a happy, productive relationship with Adobe, developing plug-ins to enhance Acrobat PDF software and consulting with the software giant, based in San Jose, California, on developer support. And Adobe seemed just as happy with ARTS PDF, De Abrew and Chandler's Melbourne, Australia-based company; it even sponsored ARTS PDF's online community of PDF users, Planet PDF. By 2003, ARTS PDF had 30 full-time employees and half of its $3 million in annual revenue came from Adobe-related projects.

But the two partners were plotting a move that once would have seemed insane--severing the relationship and instead competing with Adobe with a PDF product of their own. The problem was the way Adobe had begun treating third-party developers like ARTS PDF. Since the release of Adobe Acrobat in 1993, such developers had been key to Adobe's strategy. The company created the application with an open standard, giving any developer access to the software's specifications and a free license to create applications to extend its capabilities. Hundreds of third-party developers had based their businesses on Acrobat. ARTS PDF, for example, scored a big hit with a plug-in that, among other things, allows users to activate Web links in PDF documents, and sells the software on its own website, PDF Store.

But Adobe's CEO, Bruce Chizen, who took over from co-founder John Warnock in 2000, had grown wary of working with outsiders. Warnock used to refer to the hundreds of third-party developers as Adobe's "ecosystem." Under Chizen's leadership, however, the company began reengineering the third-party plug-ins itself, incorporating them into new and increasingly complicated versions of Acrobat. That sparked concern among developers. If consumers could buy Acrobat software loaded with the latest extras, they would no longer need plug-ins.

De Abrew and Chandler were as tuned into the PDF community as anyone, and they knew what was coming: Their plug-in business was disappearing before their eyes. At the same time, they sensed that there was a market for an Acrobat alternative. People were changing the way they used PDF applications. Instead of using the software simply to create and read files, more businesses were embracing the PDF format as a collaboration tool to let workers share digital documents, inserting revisions and comments along the way. Acrobat can do all those things, but the cost can sting when a company needs to push out the software to large groups of employees. What's more, many companies don't need Acrobat's whiz-bang graphics capabilities, which tend to slow down performance.

De Abrew began asking customers what they thought about Adobe. Their responses backed up his hunch. He says he heard complaints from many executives who were tired of paying between $350 and $450 per user to license the software. Acrobat, they said, was sometimes overwhelming and confusing. They wanted a cheaper version that was faster and easier to use. And if ARTS PDF built it, they'd buy it.

De Abrew and his colleagues had been kicking around the idea of creating an alternative to Adobe for years but had never seriously pursued it. Now it seemed like a good idea. Adobe was huge, with revenue of $700 million. But a 2003 research report found that the PDF market had the potential to reach $1 billion. De Abrew and Chandler were confident that ARTS PDF had the industry knowledge and engineering chops to pull off a cheaper, scaled-down version of Acrobat. What's more, the open PDF standard meant anyone could develop applications to compete with Acrobat, so there was little possibility of a lawsuit.

The way De Abrew and Chandler saw it, they had two options. They could stick it out and hope that Adobe reconsidered its approach toward third-party developers, the chances of which seemed pretty slim. Or they could try to get a slice of the PDF market for themselves. That would mean alienating their biggest partner. It would also mean refocusing most of their limited resources on developing the new product and all but abandoning the plug-in business that had been so profitable. The stakes couldn't be higher: If the competing product failed, Adobe wasn't likely to let them return to the fold. There would be no turning back.

The Decision

One muggy afternoon in December 2003, in the 100-plus-degree heat of the Australian summer, De Abrew and Chandler sat down with their four-member board of directors at the company's headquarters and began sketching out a strategy for going up against Adobe. The mood was tense, but as the group looked out a conference room window at the city's skyline, they knew there was nowhere to go but forward. "We decided we'd rather have our own Acrobat and a shot at a growing market than a slice of a declining one," De Abrew recalls.

Shortly after the meeting, the company's engineering team, which is based in Nitra, Slovakia, started work on the new product, Nitro PDF. It would be a leaner version of Acrobat's powerful and feature-rich software and would retail for $99, less than a third of the price of Adobe's entry-level offering. Thanks to their contacts with Acrobat users and developers worldwide, they already had a strong sense of what the market wanted, not to mention an instant test group for prototypes. De Abrew and Chandler were up front about the move with their contacts at Adobe, which was putting most of its effort into pricier, high-end offerings, and the business relationship between the two companies remained intact.

Meanwhile, ARTS PDF went through a radical restructuring, redirecting 80 percent of the company's employees and cash flow--which formerly had been spread evenly among its plug-in business, Web store, online community, and consulting group--to developing and marketing the software. The other divisions continued to exist, staffed by a skeleton crew and receiving minimal marketing and development dollars. Thanks to this strategy, ARTS PDF was able to stay profitable throughout the entire ramp-up process--and it didn't have to lay off any full-timers.

Eighteen months after starting, ARTS PDF's team of 60 part-time and full-time engineers completed the application. But the real work was just beginning. In the past, the business had sold its products only through its online store, telephone sales, and a global network of corporate resellers. Now, De Abrew and Chandler began courting big-box retailers. Since they had no retail contacts, they hired a publishing and distribution partner with an established network to negotiate deals for them. They also added staff to their small sales office in San Francisco to establish a bigger U.S. presence and started a word-of-mouth marketing campaign by distributing free beta versions of the software to hundreds of users through the Planet PDF website.

In April 2005, De Abrew and Chandler officially unveiled Nitro PDF at a software trade show in Orlando. An Adobe executive speaking at the event mentioned the release in her keynote speech, briefly referring to new competition as she talked about the changing PDF industry. She didn't show a hint of hostility, but the general reaction from the Adobe team was chilly. In years past, the two groups would have greeted each other like old friends. This time, the conversation was curt.

Throughout the conference, the ARTS PDF booth was packed with people interested in learning more about Nitro PDF, and the company left the event with dozens of sales leads, Chandler says. It needed them. Shortly after the conference, Adobe pulled its sponsorship of Planet PDF and launched a competing site, AcrobatUsers.com. It also stopped giving ARTS PDF consulting work. Ricky Liversidge, a director of product marketing at Adobe, says the company's decision to compete with Acrobat did not come as a surprise. "That changed the relationship to a form of 'coopetition,' " Liversidge says. "In this industry, that's nothing new. We face that with many different companies."

ARTS PDF isn't quite the "other Adobe," but the company is on track to sell 100,000 units this year, according to Chandler. De Abrew and Chandler expect revenue to ramp up significantly this year, fueled by sales at nine major retailers, including Amazon, Office Max, and Circuit City, and 19 corporate resellers around the world. The company's main concern, Chandler says, continues to be its loss of revenue from the plug-in business. ARTS PDF will eventually start to feel that loss as its Acrobat plug-ins, which the company is no longer developing, become obsolete. "We've bet the farm on Nitro and restructured the entire company around our new direction," Chandler says. "We are playing with the big boys now, but we remain utterly convinced that it was the right decision."

The experts weigh in

Corporations won't buy it

ARTS PDF has bet the store on this strategy. There is demand for a lower-cost version of PDF software. That said, I don't think many large corporations will jump over to Nitro, even if the lower price means they can buy more copies for their employees. Corporate users expect a high level of service from software providers--that's one of Adobe's strengths. Smaller companies can't deliver the same service.

Tim Bajarin
President
Creative Strategies
Campbell, California

It's a matter of trust

It's a double-edged sword. Increasingly, I get calls from clients who are upset with Adobe's pricing model. There are many companies that will say, "Hey, we just need these basic functions and we don't want to spend the extra money for Acrobat." On the other hand, Adobe is an extremely well-known company. It's very hard to overcome that kind of brand loyalty. It's almost like somebody coming out with an office suite to compete against Microsoft. People know Adobe. I'm not sure they would trust another brand.

Rita E. Knox
Research vice president
Gartner Research
Van Nuys, California

Creative marketing is key

It sounds like a smart strategy, but it won't be easy. De Abrew and Chandler saw some chinks in Adobe's armor, studied the marketplace, and found out what people wanted. The question is whether they have the resources to promote Nitro PDF with enough marketing and advertising. They really need to get their message out if they are going to make inroads against a big company like Adobe, which has much deeper pockets.

Dave Dolak
Founder
Marketing by Dave Dolak
Charlottesville, Virginia

What do you think? Should ARTS PDF have gone head-to-head with Adobe? Sound off at casestudy@inc.com.

Last updated: May 1, 2006




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