Why Adobe, Macromedia united for video-software fight

Adobe Systems Chief Executive Bruce Chizen says it took the Sept. 11, 2001, terrorist attacks for him to end a two-year feud with Macromedia's Rob Burgess. Three years later, a new threat from Microsoft convinced them to combine the software companies.

"He called me and said, 'Hey Bruce, in the scheme of what's going on in the world, do you really think we should be suing each other?' " Chizen said in an interview last week at Adobe's San Jose, Calif., headquarters. "We got to know each other."

Chizen and Burgess had clashed in 2000, when Adobe sued over a patented method for organizing information. Video-program maker Macromedia filed its own claim over graphics and sound-editing software the following year. The two settled in July 2002.

Chizen said the company's April 18 agreement to buy Macromedia for $3.4 billion was spurred in part by Microsoft's plans to introduce software that competes with Adobe. Adobe also wanted to expand its products to take a larger share of the market for digital content such as the Flash video software that Macromedia makes.

Seven days after Chizen announced the purchase, Microsoft Chairman Bill Gates demonstrated Metro, a technology like Adobe's Portable Document Format (PDF) in the next version of Windows, due in late 2006. The plan sets up a fight to control how files from word-processing documents to video will be created and distributed on PCs and mobile devices.

Microsoft's $36.8 billion in annual sales dwarfs Adobe's $1.67 billion. Microsoft, the world's biggest software maker, spent $7.78 billion on research and development to Adobe's $311 million. If Microsoft includes PDF-style features in Windows, the technology will be distributed as widely as Adobe's.

Adding Macromedia's Flash enables Adobe to bring its technology to non-PC devices much faster than the company could do on its own, Chizen said in the interview last week.

Adobe will pair PDF, a file format that Chizen calls the "de facto standard" for sharing documents, with San Francisco-based Macromedia's Flash software, used in 98 percent of PCs to play videos. The programs will tie into more than a dozen products the companies offer to assemble documents, videos and animation.

Adobe, the world's largest maker of graphic-design programs, introduced the PDF in 1993. PDF lets creators distribute a document without requiring PC users have the program that built it.

"Adobe is the standard," said Piper Jaffray analyst Gene Munster in Minneapolis. "To unseat the standard, you'd have to have a compelling reason."

Acrobat, the program sold to designers and business users to create PDF files, accounted for 39 percent of Adobe's sales last quarter, up from 16 percent five years ago.

Reader, used to display and print PDF files, is free on the Web and is included on PCs sold by Dell and Hewlett-Packard, alongside Windows. Adobe says more than 500 million copies of Reader have been distributed.

"I don't know how Microsoft comes in there this late in the game and ends up being successful," said Chizen, 49, a former sales director for Microsoft who joined Adobe in 1994 and took over as CEO five years ago.

Microsoft's efforts to sell Windows to mobile-phone and handheld-device makers haven't gained much traction, Oppenheimer & Co. analyst Sasa Zorovic said.

Microsoft's share of the market for mobile-phone and handheld-computer operating systems dropped to 18 percent in the first quarter, ranking the company a distant second to Symbian's 61 percent, according to U.K. researcher Canalys.com.

The Metro program will improve the printing technology built into Windows in 1997, said Greg Sullivan, Microsoft's group product manager for Windows. "Today when we create and share and print and archive documents, we lose a considerable degree of fidelity," Sullivan said. Users "would like to see the kind of plumbing for this end- to-end document management improved in Windows."

The program's success depends on how quickly users switch and on persuading printer and handheld-device makers to add code that makes it possible for their products to display or print documents in Metro format.

To spur acceptance, the company is offering Metro free to developers.

Microsoft's past success using its Windows monopoly to crush competitors may have left developers leery, Chizen said.

"Everyone sees Microsoft as a threat to their own franchises," he said.