BY SILICON VALLEY standards, Adobe is a dull company. Nudging 40 it is middle-aged. It does not make headlines with mega-mergers or have a swashbuckling chief executive. “I feel very comfortable not being out there pounding my chest,” confesses its boss, Shantanu Narayen, in a rare interview. All the while, Adobe has quietly managed to adapt to the age of cloud computing. It has done a better job of reinventing itself perhaps even than Microsoft, the technology industry’s best-known comeback kid. Microsoft’s CEO, Satya Nadella, is said to have examined Mr Narayen’s handiwork closely—and not just because he attended the same secondary school in India as Adobe’s leader, albeit a few grades down. Since 2007, when Mr Narayen took the helm, Adobe’s market capitalisation has swelled from $24bn to $276bn. In the past ten years it has outperformed both Mr Nadella’s Microsoft and Salesforce, another rival business-software maker.

To most ears, Adobe is synonymous with desktop publishing. Founded in 1982, it set key standards, in particular PostScript, which tells printers where to make the dots, and PDF, the “portable document format” that allows printed documents to be distributed online. It also developed programs for editing digital content. One, Photoshop, became a verb. Adobe’s pricey software was installed on desktop computers, and updated with new versions every year or so. By the late 2000s this model itself looked in need of an update. Smartphones unleashed people’s creativity far from their desks and cloud computing enabled software to be offered as a service over the internet.

Rather than cling to the lucrative legacy business, Mr Narayen embraced a chance “to reimagine ourselves”. Putting Photoshop and other popular but complex applications, such as Illustrator, fully into the cloud would have been technically too tricky. But Adobe still found a way to use the cloud to improve its products. Today Adobe’s two original software businesses have morphed into two subscription-based “clouds”. The smaller “Document” cloud provides services ranging from the mundane (converting a PDF into a word-processing file) to the mission-critical (managing the digital documents of government agencies). All have seen a boom during the pandemic-induced shift to remote work. The other, much bigger “Creative” cloud lets users edit all sorts of digital content, from websites to videos. Since this content no longer lives on hard drives but in data centres, it can be worked on from different devices and by several people at a time.

Adobe’s transformation would not be half as successful, however, without other innovations. One is what the firm calls its “data-driven operating model” (DDOM), jargon for using data generated by its digital services to improve them and develop new ones in a perpetual feedback loop. Adobe has mastered this both internally and by developing a third cloud, which allows other firms to optimise their digital offerings. This “Experience” cloud lets its subscribers, among other things, track how online buyers behave and how they might best be guided to making a purchase.

Another innovation was its management structure. Some tech firms, such as Apple, espouse top-down micromanagement. Alphabet, Google’s parent company, is almost anarchic in its bottom-upness. Adobe is a healthy mix. Mr Narayen sets out the destination, and the managers of the three clouds chart the exact course. To make DDOM and the Experience cloud work, for instance, he set a goal that was both precise and exacting: Adobe’s data platform must be able to serve up content in less than one-tenth of a second. How that objective was reached was then up to the engineers.

Adobe’s three clouds, operating model and management style help explain why it offers, in the words of Mark Moerdler of Bernstein, a broker, an “unusual investment combination in software”: high margins and good growth. Its latest quarterly results are emblematic. Revenues rose by 22% year on year, to $3.9bn, while the operating margin edged up to 46%, according to Bernstein.

Possibilities for more data-driven growth abound. On October 7th Adobe completed the $1.3bn acquisition of Frame.io, a video-editing service. Artificial intelligence, which extracts patterns from digital information, will underpin many new services (such as Adobe’s recent offering that turns PDFs into web pages, which can then be more easily navigated on smartphones). Similar algorithms could help professional content creators be more productive and also make Photoshop more accessible for newbies. The “creator economy” is only just getting going. And then there is the much-hyped “metaverse” of interconnected virtual worlds, which will be full of digital objects Adobe’s tools help build.

Head in the cloud, feet on the ground

As Mr Narayen would be first to admit, the software business is full of risks. “Software follows a sort of S curve,” he observes: performance eventually moves sideways if “you do not invest in the right opportunities”. The Creative and Document clouds, which together generate 73% of Adobe’s revenues and 80% of its gross profit, are a ripe target for competitors. Startups such as Figma, a website for designers of online services which is fully cloud-based, are betting even more than Adobe on online collaboration. With 14 years under his belt as boss, talk of succession is in the air. It would be as big a transition as the handover from Steve Jobs to Tim Cook at Apple, says Brent Thill of Jefferies, an investment bank. It is anyone’s guess whether it could be as successful.

Investors have indeed cooled a bit on Adobe of late. Its market value is down by $40bn from a peak in September, a steeper decline than at most other tech giants. Yet the company has proved time and again that it can prosper by embracing change rather than fighting it. That has made Mr Narayen the darling of investors and analysts, as well as a role model for tech bosses such as Mr Nadella. Nothing dull about that. ■

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This article appeared in the Business section of the print edition under the headline “Silicon Valley’s quiet reinventor”