Adobe throws in towel to Apple in Web software war

Customers check Apple laptops at the new Apple Store at Pudong Lujiazui in Shanghai July 10, 2010.

NEW YORK (Reuters) - Adobe Systems Inc halted development of its Flash Player for mobile browsers, surrendering to Apple Inc in a war over Web standards as the company surprised investors with a restructuring plan.

While the matter might seem like inside baseball for the average person, it is likely to improve the browsing experiences of tens of millions of iPhone and iPad users, who have trouble accessing sites built with Flash.

That is because Adobe's decision means Web developers who currently use Flash tools to produce Web content will likely move over to the newer HTML5 technology, which Adobe embraced on Wednesday.

Adobe's concession to Apple and its late founder Steve Jobs, who famously derided Flash as an inefficient power-hog, came as the design software specialist warned that revenue growth will slow next year.

That is because the company is scaling back development of some products and shifting toward leasing other types of software via the cloud on a subscription basis, instead of selling licenses up front.

The news, detailed Wednesday at the company's annual analyst day, sent shares in the company tumbling nearly 8 percent.

Adobe announced a restructuring plan on Tuesday that involves laying off about 7 percent of its workforce.

Adobe said revenue growth is expected to slow to 4 to 6 percent in fiscal 2012 -- below the roughly 9 percent Wall Street was projecting, on average.

The company said the revenue shortfall is partly because it plans to scale back promotion of its LiveCycle business process management software and Connect web conferencing businesses. It will stop marketing those products to most customers, though it will continue to support them.

Analysts were uncertain when Adobe's moves would deliver, despite executives saying that top line growth should return to normal in 2013.

"Shifting from a license model to a recurring model is hard," said Brigantine Advisors analyst Barbara Coffey.

"Longer-term, Adobe will be a stronger company. However, in the meantime we believe that the shares will languish until revenue growth is evident."

VICTORY FOR JOBS

Adobe's surrender signals the end of a long-running war with Apple that has overshadowed the software maker's other activities.

At one point in the battle, Steve Jobs wrote a nearly 1,700-word "manifesto," calling Flash unreliable and ill-suited for mobile devices. Adobe retaliated by taking out newspaper ads saying Jobs was just plain wrong.

Analysts say the cessation on Flash development might be a setback to rivals of Apple who tout the ability to support Flash as a reason to buy their equipment. They include Asustek Computer Inc, Google Inc, HTC Corp, Motorola Mobility Holdings Inc, Research in Motion Ltd and Samsung Electronics Co Ltd.

"It certainly changes the position a little bit for those who said that iOS products such as iPhone and iPad were disadvantaged for not supporting flash," said Michael Gartenberg, an analyst with Gartner.

While Adobe only publicly conceded on Wednesday that HTML5 has become the preferred standard for creating mobile browser content, it has long been investing in the technology.

For example, it worked with magazine publisher Conde Nast for about year developing software that allows for the use of HTML5 technology to publish digital editions of magazines, including the New Yorker and Wired.

This means any content producer can use Adobe's publishing software to build video and motion graphics suitable for the iPad, as well as most other mobile devices.

Plus, Adobe incorporated HTML5 into its popular Illustrator and Dreamweaver software programs and highlighted an HTML5 program dubbed Edge for creating animated Web content it highlighted at its analyst meeting.

The company said it plans to infuse HTML5 technology across its entire product line over the coming years, offering increasingly sophisticated tools and services to design professionals, publishers, retailers and other businesses.

David Wadhwani, head of Adobe's digital media business unit, said the company was in "close collaboration" with Apple as well as Google, Microsoft Corp and others as it developed these new products.

"There is rocket science in this," he said. "There is enough innovation here to last a decade."

He said the company would continue to invest in Flash technology for use in mobile applications that would run on devices through its Adobe AIR platform. To access those applications, a user must first install Adobe's AIR software.

It will also invest in technology to produce Flash applications for desktop computers, including ones that render 3D graphics.

Adobe shares closed down 7.7 percent at $28.08 on Nasdaq, while Apple shares were down 2.7 percent at $395.28.

(Additional reporting by Yinka Adegoke and Jennifer Saba in New York and Poornima Gupta in San Francisco; editing by Edwin Chan, Lisa Von Ahn, Gerald E. McCormick and Andre Grenon)

(This story was corrected in the ninth paragraph to change the name of LiveCycle software)