Adobe And Microsoft: 2 Great Buys After This New Announcement

by: Cris Frangold

It is fair to say that Apple's (NASDAQ:AAPL) nonstop improvements and rollouts of new products pushes other companies to do the same. At the very least, it has everyone rethinking marketing and R&D strategy. With the release of the new iPhone 5, competitors such as Samsung (OTC:SSNLF) and Sony (NYSE:SNE) have focused on attacking other Apple products such as the iPad. Both companies have developed products that do everything the iPad does and sell them for a few hundred dollars less.

Even so, price cutting is not as strategic as Adobe's (NASDAQ:ADBE) stealth yet powerful move against Microsoft (NASDAQ:MSFT) this week. Adobe recently issued a statement that the most recent version of its powerhouse design and distribution products, Creative Suite 6, will be the last one to support a Windows XP operating system. Effectively, Adobe is hedging out Microsoft products as well as other companies that are dependent upon older Microsoft products.

Adobe is already a strong performing stock, closing last week at around $33.30. I predict this announcement will have two effects - first, it will offer a boost in stock performance for Adobe, as sales will increase for consumers wanting to invest only in CS6 software and not upgrade their entire OS. In addition, I see Microsoft answering in the coming quarters with its own roll outs, such as Office 365 and other versions of its tablet devices.

What is Happening

Several news outlets took notice of Microsoft's decision earlier this year to invest $300 million in a joint venture with Barnes & Noble (NYSE:BKS). While its intent was no doubt to spread the use of Windows 8, it also was a first move in competing with Sony and Samsung readers, as well as the market-dominating iPad.

But Adobe has had an almost uncontested monopoly of document formats. Anyone clicking "save as" on his/her computing program or word processor has the option to "save as PDF" - an Adobe created format. Moreover, by making Adobe Reader such a widespread and easy to install/use program, it has solidified its place in online document production, transfer and sharing.

While Adobe has made no mention of changing the operating systems compatible with Acrobat, its elimination of XP as a supporter of Photoshop and other Creative Suite products will be huge in the web and material design industry.

What it Means

Computers are generally sold with a built-in operating system (OS). Partnerships between computer manufacturers and software developers structure the market. The "usage share" for operating systems is the percentage of which operating systems are used in which computers. Microsoft is the dominant force here, as more than 90% of all personal computers and laptops come standard with an Microsoft OS (Windows XP, Windows 7, etc). It is estimated that about 21% of all systems sold this year alone run on Windows XP.

The potential profit impact on Microsoft is incredible. Whereas most developers prefer the higher caliber machines that come standard with a Microsoft platform for file transfer protocol (FTP) and web deployment, they will now be looking for a machine that is compatible with the web design suite of choice - Adobe's Creative Suite. Microsoft will now be forced to move ahead with operating system upgrades, or risk negative impacts on that 21 percent.

What to Watch Out For

Currently, Amazon (NASDAQ:AMZN) controls about 60% of the e-book business in North America. Most of its e-books come in the widespread and user friendly format of a PDF or EPUB documents - both by Adobe.

With the Microsoft/Nook deal, Microsoft will be not only have another device that runs Windows (as Windows 8 is the likely OS for future versions), it will also impact a market that is currently dominated by Apple. Microsoft is already actively involved in Intel's (NASDAQ:INTC) Ultrabook product designs, hoping to work out some notable kinks in the touch-enabled features.

If Microsoft got everyone thinking its name in combination with the reader, this would be a stepping stone to an ever-expanding market share. In other words, Microsoft's forward thinking could prevent a profit hit from Adobe's announcement, and steal away a sizable market share from Apple all in one process that started back in April.

Another possible outcome is that both companies, Adobe and Microsoft, could see positive movement from the choice to discontinue support of XP.

Through announcing far in advance, and through careful explanation and "bridging" for its customers, Adobe is viewed as an ever-improving company focused on innovation and exceptional service. Adobe has been very transparent in its communication for its decision. The reason, as per Adobe spokespeople, is that modern software that gives a superior level of development, display, and functionality requires modern hardware and OS graphic user interfaces (GUIs) that Windows XP simply does not have.

Adobe wants to benefit customers by delivering the best product(s) possible. In order to do so, it must leverage the advances available on newer operating systems. At the same time, it wants to ensure customers understand the move and continue to grow with the company.

In the same way, Microsoft can benefit by encouraging migration to its new operating system, Windows 8. The problem with trying to have such a wide customer base is that companies often fall into the trap of trying to be "all things to all people." Microsoft is feeling the effects of trying to support too broad a scope: XP is 11 years old, which, in the technology world, is well past its age of impact. As it has been trying to encourage users to purchase its newer versions, Adobe's announcement might be just the push consumers need.

Final Thoughts

I believe Adobe's announcement will result in the latter: a positive outcome for both companies. Adobe's strategy is bold and well-implemented. In the same way, Microsoft's ability to foresee and make preemptive moves to take advantage of competitors' decisions is yet another example of powerful and strategic leadership that will undoubtedly result in positive performance for the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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