New Adobe Flash Player Could Boost Rich Internet Application Licenses

| About: Adobe Systems (ADBE)

Adobe’s (NASDAQ: ADBE) Flash Player is a software tool used for developing interactive web sites, videos and games for PCs and mobile phones. Adobe recently released Flash Player 10.1, which consumes fewer CPU and battery resources, includes multi-touch capability for smartphones and tablets, and provides more efficient memory management.

While we expect these improvements to boost Flash Player’s sales, we see limited upside for Adobe’s stock. However, we do expect the new Flash Player to spur license demand from developers of rich Internet applications. In the most optimistic scenario, we would expect this sector to drive a 2% upside for Adobe. Our detailed analysis follows below.

The new and improved Flash Player features…

1. Less CPU and battery consumption

Adobe claims that Flash Player 10.1 consumes significantly fewer CPU and battery resources. When the user opens multiple Flash-enabled browser windows, the new version helps lower power consumption for the content running in the background or when the browser window is idle.

2. Multi-touch capability

Flash 10.1 supports a broad range of smartphone operating systems, including Google’s (NASDAQ:GOOG) Android OS, RIM’s (NASDAQ:RIMM) BlackBerry OS, Palm’s (PALM) webOS, Nokia’s (NYSE: NOK) Symbian OS, and MeeGo. Many mobile phone companies as well as computer makers are beginning to roll out touch-enabled devices like smartphones and tablet devices, as well as PCs like the HP (NYSE:HPQ) Touchsmart. Flash Player 10.1 allows users to play Flash games or watch Flash videos through the device’s touch-screen interface.

3. Better memory management

Flash Player 10.1 addresses the issue of browser crashes, which are generally caused by high memory usage. It does so by shutting down instances of Flash which uses more memory than is available on the device. This feature prevents browsers from crashing, which could otherwise cause users to lose valuable information

Implications for Rich Internet Application and Mobile Phone Markets

Although we believe Flash Player’s new version will help increase its sales, we see little upside for Adobe’s stock. However, here are two sectors to keep an eye on:

1. Rich Internet Applications on PCs

Flash Player is one of the tools used to build PC-based rich media applications such as online games and interactive Websites. We estimate that Rich Internet Application (RIA) licensing constitutes around 5% of the $38 Trefis Price estimate for Adobe’s stock.

We believe Flash Player’s improved features will help Adobe sell more RIA licenses. There could be an upside of 2% to the $38 Trefis Price estimate if the number of RIA licenses increases at a faster rate to reach 2.5 million by the end of the Trefis forecast period, instead of the 1.8 million that we currently forecast.

2. Flash for Mobile Devices

Flash for Mobile Phones constitutes less than 1% of the $38 Trefis Price estimate for Adobe’s stock. We believe Flash’s penetration in Mobile Phones will continue to increase from around 53% in 2009 to around 87% by the end of Trefis forecast period. We believe that with Flash Player’s improved features, the Flash penetration rate could accelerate even further. However, since Flash for Mobile Phone sales contribute less than 1% of Adobe’s total revenues, we don’t see much upside for its stock price.

Recently, there was a controversy around Apple’s decision to exclude Flash Player from Apple devices like iPhone, iPad and iPod Touch. Apple (NASDAQ: AAPL) claims that Flash Player slows down mobile phones and quickly drains their battery life. In another article, we argued that because mobile Flash is such a small market for Adobe, the absence of Flash from Apple devices will not have a material impact on Adobe’s stock .

Disclosure: No positions