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.]

The last couple of months have been marked by a broad set of positive developments for the GPU makers, especially Nvidia and AMD. Some of the highlights have been:

Application acceleration goes mainstream. – The leading creative application providers, Adobe and Autodesk, are embracing the GPU and driving the requirement for one into space of generalized computing. This actually started with prior generations of the software but we’ll see more of this in products like Adobe Creative Suite Version 5 but even Flash will take advantage of the GPU to improve performance and the experience.

Internet video gets serious. – Video is one of the leading new applications for the Internet today and it is shifting from the short grainy YouTube content of yesterday to high definition, in some cases even 3D, content. This level of digital video demands more processing power to produce and even to view properly. Everybody want’s video, more so than even text and browsing, and it’s another good reason to have a GPU in computer, especially mobile Internet devices.

GPU in the cloud. – Until recently it wasn’t clear if GPU computing power would be available in the cloud. Given the success of generic on-demand offerings from Amazon, Google and others it seemed only matter of time before we would begin to see it. Both AMD and Nvidia are working closely with the major players and we will see GPU processors on-demand and in the cloud pervasively in 2010.

Cloud-based GPU applications are shipping. – Mental Images has announced and is providing Reality Server which represents the high end of digital image rendering in the cloud. Some companies are using it today with their own cloud servers. Application platforms like OTOY are enabling the highest end of gaming even on mobile devices like the iPhone using cloud-based GPU software and acceleration. Here is a link to a Techcrunch post on OTOY back in June of 2009. We also covered a demonstration of OTOY in our short research report on the 2009 Gilder Telecosm Conference. It’s available in the sample publications section of our website.

3D content has arrived. – The cinema industry has embraced it. Avatar is in theaters this week. A big difference today is that the cinema industry creates content in native digital form which means that content can be moved rather than redeveloped into other formats for games, short videos, images and other forms of consumer entertainment content.

Standards are emerging. – Although there is still plenty of bickering over PhysX versus OpenCL and DirectX versus others, these technologies are settling into mainstream software like applications, browsers, and operating systems. In cases were two important standards make it, it looks like they will both be supported. This makes it possible to deliver high-end graphics and 3D applications to a large market.

We expanded on the mobile 3D theme further in a report published yesterday by GigaOM called: 3-D Untethered: A Look at Mobile 3-D Technology (GigaOM Subscription).

On top of all the industry adoption Intel settled with AMD and paid them $1.25B, scrapped their Larrabee-based plans to enter the discrete GPU market and is under further FTC investigation for trying to screw Nvidia.

Put simply the industry is shifting to video, 3D, and mobile and right now this leaves Intel mostly out of the action. It’s great news for Nvidia, AMD, ARM, Imagination Technology, Qualcomm and a host of other semiconductor makers.

When it rains, it pours.

[Disclosure: The Research 2.0 model portfolio has positions in both Nvidia and Qualcomm.]

The tepid reaction to Adobe’s (ADBE) good 2Q revenue and earnings results on June 14 (traded down after hours according to SeekingAlpha) is a result of taking the longer view. And I don’t mean the 3Q outlook. Those looking back at the trailing 12 months saw only 5-6% revenue growth adjusted for the late 2005 Macromedia acquisition, about the same as or a little below the software market average. Those looking ahead don’t see a Software as a Service (SaaS) strategy for Adobe. And the very buzzword dependent didn’t hear the words “service oriented architecture (SOA)” at all during the quarterly conference call.

Here’s Adobe’s challenge: It’s longtime bread and butter, the “creative professional,” is a dinosaur. Adobe’s doing all it can and doing it well to keep a high penetration of the desktop publishing market but the people count is shrinking. But not to worry. Seeing this and similar trends related to its Acrobat business, Adobe is rightly moving to emphasize what it calls “enterprise solutions.” It acquired Macromedia (with Allaire built in) and companies such as Accellio before that to help build a business process management (BPM) middleware capability. Both Acrobat and Flash are a key part of that capability. Last month Adobe announced the first truly integrated version of Livecycle, bringing this story to life.

But the question is, “What to do with the capability?” Adobe is a key part of the IT industry supply chain and knows its role and its strengths. It will gradually replace the creative professional with the professional developer as its key audience. The announcement a month ago that Flex would go open source is one example of this strategy. It has recently completed a revamping of its direct sales force to support this strategy and is beefing up partner programs such as the agreement with SAP. As another example, Adobe talked about the MISMO mortgage banker arrangement during the conference call. It talked about it while discussing the information worker segment, but MSMO is a BPM story long-term. Of course, Adobe can’t come out and say all of this because enterprise solutions are only 20% or less of the action at this point.

We conduct most of our research and analysis by first putting software suppliers into one of two buckets: technology providers and services providers. We think Adobe wants to be a technology provider so no SaaS strategy is needed. Adobe can make money putting its user and middleware technology into other suppliers’ SaaS services. This characterization is the kiss of death in Silicon Valley. It’s kind of like being in a windowless plant in Fort Wayne instead of in the pit at Monte Carlo. But it’s profitable in a good old Fort Wayne sort of way. The comparison with Microsoft’s and Google’s margins at similar revenue levels demonstrates their heads-down approach.

For those waiting for an IBM (IBM) bid, I can think of a few reasons why IBM would not do it. One, IBM wants its software group to contribute 50% of EPS by 2011. An Adobe acquisition—with the creative-professional-dominant revenue stream and related earnings for the next five years—would make that harder to accomplish. Two, IBM acquisitions are strategically as much about supporting business transformation services and whatever IBM calls IGS these days with BPM technology than they are about software. Although Adobe’s BPM technology is good, IBM already has more BPM technology to integrate than it can handle. On the other hand, I didn’t understand the IBM MRO acquisition at all.

And for those who want an SOA story, there is one in Adobe’s enterprise solutions but given its heritage, Adobe speaks to users not to technologists.

–Dennis Byron

Tags: Adobe, Flash, Flex