Over the last year, graphics software heavyweight Adobe Systems Inc. has been rumoured to be contemplating a takeover bid for struggling Corel Corp. and has fended off an acquisition bid by rival Quark Inc. Meanwhile, the company aims to ship Adobe InDesign, code-named K2, during the second quarter of 1999 in a bid to challenge Quark in the high-end publishing market. Adobe President and Chairman Charles Geschke met with Computerworld Hong Kong Senior Reporter Sumner Lemon during a recent visit to the SAR (special administrative region) to talk about these issues, as well as the company's ongoing battle against software piracy. Computerworld Hong Kong (CW): What can you tell me about the recent rumours that Adobe has been mulling a takeover of Corel? Charles Geschke (CG): Why would I want to do that? First of all, the standard response for a U.S. publicly listed company has to be "No comment." If we sort of step back from the actual quotes and rumours that were out there, my only guess is that somebody was trying to speculate in Corel stock. And that's just a guess. I don't have any evidence of that. If you look at our product line and who our customers are, first of all, we don't have a lot of overlap with Corel -- maybe a little bit in what we call the business publishing segment of our business, but it's a relatively modest overlap. Just from a customer-focused point of view from Adobe's side, I wouldn't see a lot of interest in Corel. Adobe was the object of an acquisition bid last year… The infamous Quark bid… Yes, exactly. What was going on behind the scenes? Our stock was clearly terribly undervalued. We had just had to pre-announce what was going to be a very difficult third quarter. The bulk of that had to do with the business drop-off in Japan. Our annual revenue rate dropped by US$70 million last year just from the Japanese business. What was behind the drop-off in Japan? They just stopped buying. Just nothing. We wanted to be very careful that we had cleaned out all the channels in Japan because it's a multi-tier distribution channel and you can find yourself, as some software companies like Informix and Sybase have, where they've gotten a lot of product in the channel and it wasn't selling through and they had to restate earnings and so forth. We got very aggressive more than a year ago to make sure that those channels were cleaned out, but there was no pull through. They just stopped buying. It wasn't that we were losing to a competitor or to something else. They just stopped. Has that business recovered yet? A little bit. We've done a couple of things. We changed our corporate structure there and (we can now) write contracts in Japanese under Japanese law and that tends to widen your distribution channels. We think that's going to help stabilise the market, but I don't frankly see any evidence the Japanese economy is turning around yet. We've put together a very conservative business plan for 1999 on the assumption that we're not going to get a lot of up-tick there. We're going to have to focus most of our revenue growth in the U.S. and Europe and, to a certain extent, here in Asia-Pacific. Returning to the subject of Quark, what was the rationale behind their attempt to acquire Adobe? I think it was pretty clear that they were hearing very uniform signals back from their customers that they had seen the K2 technology, they were evaluating it. I think a lot of companies were deciding not to upgrade their Quark systems until K2 was announced and ready for shipment (as Adobe InDesign during the second quarter). And the reason that they were using was that they were seeing superior technology from a company they were already very comfortable doing business with. Quark has a pretty well understood reputation among those that's not very good. That all combined together has caused them to postpone their buying decisions. Quark saw that as a significant threat, they saw a weakened stock price -- it's not normally the way you would go about a takeover, but they did. In other words, you believe they reacted to an opportunity that had presented itself? Right. Frankly, what happened was that the customers and the shareholders spoke pretty uniformly that they didn't want it to happen, so it didn't. What are your expectations for Adobe InDesign once it starts shipping? We're not naïve about the fact that when you have to dislodge a well-entrenched competitor, it's not easy. It takes time. You not only have to build a superior product, you have to put around it all the ancillary support pieces. I feel pretty good about that. We have most of the major plug-in developers that historically have done Quark plug-ins already on board doing the K2 plug-ins. The other good element for us is that every one of those Quark customers is already an Adobe customer, so we have all their names and we know how to communicate directly with them. My opinion is that it will take a couple of years before we can demonstrate that we've taken significant market share back, and that's just because this is a mission-critical application for every newspaper and magazine that uses that product. What are your thoughts on software piracy in Asia? Have things improved in your estimation? Well, that's what the statistics tell us. As you know, we are members of the BSA (Business Software Alliance) and, for that matter, the SPA (Software Publishers Association). All of the data that we've been exposed to says that the situation has been improving. Clearly, any of us in this industry knows that it still has a long way to go. One of the statistics that was shared with me a year and a half ago when I was in Beijing is that if you look at the computer industry in Mainland China and you take the number of units of PCs that ship into that market and divide it into the total revenue produced by software, it averages $5 per machine. In fact, I just saw in our office today a CD that's got essentially every Adobe product, plus a bunch of our partners like Extensis' and Metacreations' products, and I think it was bought for $2.50. It's a big issue. I think the good news is that the governments, particularly here in Hong Kong and for that matter in Malaysia and Singapore, are starting to get more aggressive, and support legislation that helps defend (intellectual property rights). Some of these economies want to participate in the software industry, and the more they begin to realise it impacts their own indigenous business -- I mean, if you look at the retail software business it's pretty well known what the discounts are in retail distribution, so it's not only impacting our revenue, it's impacting the revenue of all of the electronic sellers here in the local markets. There's a vested interest in trying to fix it. Estimates tell us that instead of being roughly a US$1 billion company, Adobe would be about three times that size if we were paid for the software that's used. Where is most of the piracy taking place? It's all around the world. The United States may have slightly better statistical data -- in fact, in many cases quite a bit better. It's still everywhere, in certain parts of Europe as well as Asia. It's not just (Asia). Now, what the governments have gotten a lot more aggressive about is shutting down the pirate plants, but then there's a whole second tier of that and that's getting local industry and the local educational institutions and everybody else legal internally. Now, the U.S. government just put out a decree requiring that all U.S. government agencies get legal, so now it's a little easier for people like me to travel around the world and say "You can at least get your government straight." How credible do you think the BSA has been in terms of fighting software piracy? I think the issue there as I understand it -- and I don't claim to be an expert -- is that obviously Microsoft has a major impact on how the BSA operates. They've been certainly the major player. They seem to be focused a lot on the piracy part in terms of protecting retail distribution, and not quite as aggressive in getting the "soft copying" and practices and so forth enforced. From our point of view, those are at least as important, and for most of our customers they're a little easier to identify in that category. From that point of view, I wish they would balance their efforts a bit. There have been some cases in the past where they have perhaps been inappropriately aggressive, and my understanding is that's been toned a bit -- which makes sense. It's not very comfortable for someone like myself to walk into this environment and say, "You're all pirates." That's a very unpleasant position to put yourself in. Where did that call to tone down the BSA's tactics come from? Partly because of the reaction that they got from people like yourself, the press writing about the way they were approaching it. They're smart people so they understand that perhaps they'd have to change their tactics a bit. But again, I don't claim to be an expert on the BSA. I guess the other comment I would make is that, in general, my view is that the best way to deal with this is to deal with it as a business proposition. That's why I remarked earlier that this isn't just Adobe that's getting revenue lost -- so are the retail distribution partners and the systems integrators and the other people here in this market. Let's find a way to get everybody's interests aligned. That's probably the best way to fight it.
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