Adobe and Magento Team Up to Go After Shopify

Adobe announced this week that they would acquire Magento for $1.68 billion in their biggest bid for a foothold in the e-commerce industry yet. This deal, which has been rumored for over 12 months, is one that we are excited to see confirmed, as it will not only bring Adobe into the digital-commerce playing field against giants like Salesforce, but will provide an influx of resource for Magento as it competes with platforms like Shopify. Adobe’s acquisition of the private equity-backed company is demonstrative of its determination to garner more of the digital commerce market share from Oracle and Salesforce.

Why Not Shopify?

While Shopify covers more of the smaller e-commerce merchants, Magento is often considered the better option for merchants who require a more full-featured and customizable platform. Shopify has long been funneling customers from the bottom of Magento’s market, as it presents a lower barrier to entry for smaller merchants; ultimately, Magento was going to have to find its role in the market in order to adequately compete with Shopify. As a more complex system, Magento attracts larger merchants, allowing the platform to currently support more than $155 billion in gross merchandise volume. While Magento did split into the M2 community for smaller merchant stores, the platform still remains more advanced and expensive than its Shopify counterpart and is better suited to larger stores. This does mean that Shopify Plus customers are ideal candidates for Magento, and that they will likely choose the more sophisticated of the two platforms. Additionally, the influx of funding and capabilities from Adobe means Magento has additional resources to go after the enterprise market. Shopify’s size, combined with their low barrier to entry, has allowed them to steal market share from Magento for a while. These factors, combined with Magento being an open-source platform, meant that Magento has been reserved for larger e-commerce merchants, a strategy which the deal with Adobe further supports. Adobe is targeting enterprise-grade digital players with this acquisition, coming up against giants like Salesforce and Oracle and locking Adobe in as a certain contender for market share in the space.

Expanded Enterprise Market Operations

Adding Magento to the Adobe creative cloud experience means the partners will eventually be able to seamlessly integrate e-commerce, marketing, analytics, and advanced UX into the platform to create a powerful and effective experience for both B2B and B2C customers across the globe. Magento’s platform provides digital commerce, order management and predictive intelligence to supplement the marketing and outreach functionalities already available on Adobe. In the press release, Adobe cites Magento’s capabilities for enablement and order orchestration of physical and digital products across industries as a key value-add. It makes sense for Adobe to invest in a platform like Magento; Magento’s biggest differentiator from Shopify and other platforms is that it is scalable and customizable for larger businesses. Shopify’s current position in the market could be compared to platforms like Etsy, where it is easy to enter and create a store but barriers to scaling up have the potential to become prohibitive. The integration will bring with it customers who already share the platform and who boost Magento’s perception in the top end of the market: Nestle, Warner Music Group, Coca-Cola and Cathay Pacific are all customers of both Adobe and Magento.

With over 600,000 businesses on the platform, Shopify is technically the larger of the two platforms by merchant count, though its low barriers to entry mean that many of its stores are brand new merchants. This is clearly driving growth for Shopify, however, as revenue from merchant solutions grew 86% in 2Q’17, primarily driven by growth in gross merchandise volume. Still, BigCommerce and Magento Commerce are considered two of the most powerful platforms in the e-commerce space. According to Magento, over 260,000 merchants use the platform—notably, less than half of Shopify’s claimed merchants. Broken down by market share, however, Magento comes in the lead. Shopify reports $55 billion is sold through their platform, while Magento’s self-reported volume in 2016 comes in at $101 billion.

What of Salesforce and Oracle? Magento’s clear strategy to compete with the enterprise cloud giants has been to capture market share down the funnel. Salesforce and Oracle do not have a particularly strong claim to the marketing end of the e-commerce sales funnel. Magento, on the other hand, is a leading provider of functionalities that, combined with Adobe’s comprehensive analytics capabilities, will allow the partners to effectively compete on Salesforce’s grounds, giving Adobe a revenue opportunity of nearly $13 billion in the same space as the CRM giant.

Market Reaction and Consumer Impact

Magento has been backed by private equity firms since it was sold by eBay in 2015. Chinese investment firm Hillhouse Capital invested $250 million in Magento in 2017, bringing the company’s valuation to around $700 million at the time, but the investment firm will be selling its stake in the company along with the Adobe deal.

Regarding the acquisition, Wall Street reacted with negativity for Shopify; the stock fell 3.8% to $139 following Adobe’s announcement. Wall Street’s outlook is generally positive for Magento and Adobe, as Adobe shares rose 1% to $240.50 following the announcement, with the platform having just received approval to administer an $8 billion buyback program that will run through 2021; the current $2.5 billion buyback will end this year. The deal will be Magento’s biggest in nearly a decade.

Of the strategic acquisition, Adobe’s Executive Vice President for Digital Experience Brad Rencher stated “Adobe is the only company with leadership in content creation, marketing, advertising, analytics and now commerce — enabling real-time experiences across the entire customer journey.” The company expects the deal to close in the September quarter. This undoubtedly gives Adobe a leg up over non-vertically integrated Salesforce and Oracle, two of the largest players in the enterprise space Adobe is now targeting.

The question now will be whether smaller stores will begin to migrate to Magento as they grow in size. Shopify is generally regarded as a site for non-technically skilled e-commerce store owners, while Magento requires in-depth knowledge to set up hosting and configuration. While this means a low barrier to entry for burgeoning Shopify store owners, it also indicates much higher competition. The average Magento store generates a 30% faster sales growth than other websites, likely due to the level of dedication and expertise required for each Magento store. They do not, however, cater only to larger stores; in fact, Magento offers an array of training courses available to online stores with less than $500,000 in sales. Magento’s USP is the part Shopify leaves unspoken-for: scalable, customizable and with a strong agency network of Magento specialists.

Magento’s claim to the top end of the market lies in the size of many of its customers—Louboutin, Coca-Cola and Burger King to name a few—but banked heavily on its extrication from eBay in 2015 to help it make a name for itself, no longer encumbered by the e-commerce giant. With an Adobe-led vertical integration strategy at its fingertips, Magento now stands to become the designer e-commerce platform from a brand positioning perspective alone. Store sizes vary widely, ranging from a few hundred thousand to hundreds of millions in online revenue. Larger customers like Nestle and Rosetta Stone give the now fully-vertically integrated Adobe enterprise cloud systems a say in the entire digital commerce experience. Adobe is the leader in content creation, marketing, advertising and now commerce for the large stores with the resources to leverage the full suite of tools to its fullest extent—meaning Adobe will have no shortage of customers with cash to invest on the platform. Obviously, this makes their B2B strategy clear: capitalize on upselling customers with the resources to spend, a gamble that would not necessarily have played out in Adobe’s favor had they instead opted for an acquisition like Shopify.

Magento customers can likely expect to be carried through each step of the marketing journey, making it more accessible to them to optimize marketing, branding and the overall construction of their customer acquisition strategy.

The Magento Opportunity

Across the board, 59% of customers want personalized marketing and promotional offers – an area where MageMail is a market-leader on the Magento platform. Several of Magento’s clients are publicly funded companies (Canon, Nestle), meaning as market caps increase and funding fluctuates, stores will continuously have the resources to spend on testing and optimizing their marketing strategy using Adobe’s suite of tools. Indeed, this is likely to be one of the more lucrative points of the acquisition for Adobe. Copycat behavior, that is, high-value enterprise stores switching or growing on Magento, are decisions that take time and represent a slow but steady opportunity for Magento/Adobe growth. The acquisition instead plays to a more immediate strategy of capitalizing on the ability to market to Magento’s current high-value merchants. Adobe now has essentially unlimited access to marketing to its own customers, able to offer discounts, advice and perks for using the whole suite of tools rather than isolated aspects.

Final Thoughts

The movement in the SaaS space for e-commerce solutions presents a growing opportunity for key enterprise players to serve each aspect of the B2B and B2C markets available. Ultimately, the acquisition demonstrates both Adobe’s and Magento’s understanding of their core customer. Adobe saw the opportunity to play to high value, high revenue stores and lead the market share in each part of the customers’ needs. Customers in turn benefit from Adobe’s offerings in the way of optimizing their marketing strategy. Across the board, the deal presents a symbiotic opportunity, and is likely to yield the long term growth Magento is banking on as the e-commerce space continues to grow.

We’re excited to see how it plays out and hope the new owners will help take Magento to the next level!

Showing 2 comments
  • Les Henderson
    Reply

    While I found the article informative in many ways, I felt that you lacked any awareness of the Shopify Plus enterprise tier that has been available to, and successfully utilized by major brands such as Nestle, Budweiser, Mondelez and GE for several years.

    https://www.shopify.com/plus/enterprise-ecommerce

    Your apparent categorization of Shopify as only an entry-level e-commerce platform seems to mirror the uninformed views of short-seller Andrew Left at Citron Research.

    Still, I do think it was a coup for Adobe to acquire Magento in order to influence their subscription-based website developers doing work for merchants, especially if they offer an affiliate type reward to steer clients to their platform.

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