Apple, Adobe, Flash and HTML5

sixmileugliestInternet and Web Development

Jun 24, 2012 (5 years and 1 month ago)

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Di d S t ev e J obs j us t k i l l F l a s h?

Prepared for:

MBA 211
-
1 Game Theory

Prepared by:

Arjun Gupta, Tony Mignot, Hiroshi Shono, Apinun Tachaplalert

Date: May 14, 2010

Proposal #:





Introduction


Per
haps Adobe should focus more on creating great HTML5 tools for the future, and less on criticizing Apple for
leaving the past behind.”
-

Steve Jobs.


For many years now
, Apple and Adobe have been in a tug of war
pu
lling
their preferred platform to be the industry’s
de facto standard for
the
delivery of video content
via internet and the development of mobile applications
.
However, w
ith the

rapid expansion of the
mobile market
, the rivalry is taking a
new

turn. By levera
ging the
increasing market share of iPhones and the recently
launched
iPads
, Apple has begun to take aggressive actions
toward Adobe.

In this paper, we look at the dynamics of
how
this game between Apple and Adobe has played out so
far and also attempt to
forecast
how the game will play out in the future.


Players

Apple

Apple Inc. designs and manufactures consumer electronics, computer software, and personal computers. The
company's best
-
known products
are
Macintosh computers, the iPod, the iPhone and the
iPad. Apple’
s is
unique
when compared to o
ther manufacturers of similar products in that
they have

a highly vertically integrated business
model.
Apple’s
products often run on proprietary operating software and are distrib
uted

through their own
distribut
ion channel. Apple has sold over 35 million iPhones and over 50 million iPod Touches
to date
and expect
s

to
sell 6 to 15 million iPads
this year. All of these products run on
Apple’s proprietary
operating
software. Given their
signifi
cant outreach and t
he consumer l
oyalty that they receive, Apple products’ platforms
and ecosystem
s

are a huge
market for application developers and advertisers


Adobe

Adobe Systems Inc. is a California
-
based computer software company focused upon the creation of multimedia
and
creativity software products, with a more
-
recent foray towards rich Internet application software development.
Their main source of revenue is the Creative Suite which allows web and application developers to
create
content
s

on
Adobe’s Flash platform.

The sales of Create Suite
are
estimated to
have
account
ed

for 60% of
Adobe’s
total revenue
in 2009.
1

Adobe’s
proprietary
Flash platform
is increasingly competing

for the delivery of multimedia content over
the internet

with an
emerging open technology
called HTML5, led by a consortium that includes companies such as
Apple and Google
.

H
owever

Flash is

estimated to claim a dominant
market
share of 75%

as of today
.


The Game




1

http://www.businessweek.com/news/2010
-
04
-
12/adobe
-
upgrades
-
software
-
to
-
help
-
defend
-
against
-
apple
-
update1
-
.html

Course of events

Rivalry between Adobe and Adobe has intensified when Apple announ
ced in 2007 that its newly released iPhones will
not support Flash.
Apple has been
in
support

of
HTML
5
, an
open platform developed by the World Wide Web
Consortium (3WC).

(
Refer to exhibit A for
the

list of events taken by both sides in this rivalry.
)


A
pple

ha
s several reasons for trying to keep
the Flash platform

away from its products
.

First, it will allow Apple to tie
down application developers to the HTML platform

and to the Apple ecosystem
. Since

it can be costly for the
developers to create applications for both HTML
5

and Flash, developer
s

may opt to develop
contents
only for HTML
5

(however

with the
big
assumption that
Apple user base is attractive enough

for
the developers

to choose them over
ot
her platforms
.
)

This will help Apple differentiate their products
by
offering of unique applications and content
s
.
Secondly, Apple
may be able to
improve the
ir

user experience
by leaving Flash
. The lack of compatibility between
Flash and Apple

operating

software is told to be one of the

major reasons

for
software crashes on Apple products.
Despite repeated signaling from Apple to Adobe to resolve this issue, Adobe had not yet responded

successfully
.


For Adobe, maintaining a dominant share
in the mobile

internet space similar to the one it enjoys

in the desktop
market

is a life
-
o
r
-
death matter. As mentioned above, the sales of Creative Suite make up
the
bulk of their corporate
revenue
.
By
maintaining

and
leveraging the
ir

high market share, Adobe wants
to remain the only game in
town
which
can supply the developer
s

with the
development
software they need.


Strategies for Apple

Apple has two major options to consider.

Option 1: Fight

First
,

they may
choose to fight by continuing

to lock out Flash from Apple products. Although this may create
a
temporary dissatisfaction
on the part of
its current customer
s,
Apple will benefit from
increased flexibility in terms of
what type of content to
offer to
end users. Apple will no longer
have to rely on or be restricted by the development
of subsequent generations of the Flash technology.

Option 2:

On the other hand, Apple may also choose to concede and allow Flash to run
on their products or at least allow
software developer
s

to use
compi
ler software that convert codes originally written on Flash platform to run
using

HTML
5
, hence also
on
Apple products.



Strategies for Adobe

Though in a disadvantaged position, Adobe also has a couple of options to consider.

Option 1: Fight

They may
choose to fight with Apple by suing Apple with anti
-
trust charges. If Adobe wins in court, they will regain
their entry into Apple products
,

which will help them maintain high market share
. Some industry observers suggest
that Adobe is preparing to do so,
however
the general consensus is that
Adobe’s
probability of successfully persuading
the court is low.

Option 2: Wait

Adobe can also passively wait to see how the developer community a
nd the Apple users respond to Apple’s
recent
decision
to ban the use of compiler software
and hope that their voices will force Apple to change their mind. With
this strategy, they will forgo the legal fees and risk of further retaliation from Apple
that
accompanies
the first option.
However, with this strategy, Adobe will likely see continued decline in the Flash
market
share

especially in the mobile
computing space

and

also see

its revenue
significantly
decline over time.


Analysis of the game

Quantitat
ive analysis of the game

Constructing the Player’s Payoffs


Methodology & Assumptions

To arrive at the payoffs for the individual players in such a dynamic game, we attempted to create a dyn
amic payoff
model that

represented the real
situation
. Neverthele
ss given the number of players involve
d,

and to accommodate
the situation within the tools learnt during the course,
the following

assumptions were made:



Apple’s customers were segmented into two



Loyals



stick with Apple irrespective of not having access to tons of Flash based web content, even in
the long run.



Shoppers


not so loyal to Apple, and may shift to competitors if denied access to Flash based content in
the long run



The proportion of shopper
s sticking with Apple’s even in case of continued no Flash access on Apple products,
was deemed to be linearly proportional to fall in Flash’s market share. The reasoning behind this was that if
other platforms like HTML5 took off, and Flash’s dominance re
duced, then a smaller proportion of shoppers
would shift from
Apple products. This
reflects the affect of one player’s position on the payoff of the other as
close to what would be the case in the real scenario



The payoffs for both players were held contin
gent to Flash’s market share for online media



It was assumed that in the remote possibility of Adobe winning the lawsuit over the Apple, Flash would gain
tremendous momentum and the win would propel Flash to becoming the de

facto industry standard.



In the
eventuality that Flash becomes the de

facto standard


Apple concedes or Adobe wins the lawsuit


Apple would incur a loss in value (hold
-
up costs, loss in brand equity, loss in market power, and loss of control
over Apple apps market)


Utilizing the
Payoffs Model

Based on these assumptions, separate models for the payoffs of the two players were constructed. The models are
presented i
n exhibit B & exhibit C. W
hile certain assumptions about the numbers were made for example about the
percentage of Appl
e loyals and loss in value for Apple, these
numbers

were treated as variables
, such as
the Flash
market share, and tested to see the effect on payoffs. Once the payoffs were arrived at, a sensitivity analysis was run
for the payoffs contingent on different

values for Flash’s market share, and plotted on graphs to arrive at the best
strategies for the two players.

Analyzing the Payoffs

The payoff graphs for Apple and Flash are
presented in Fig 4 & Fig 5 res
pectively below. The graph for Apple’s payoffs
clea
rly indicates a dominant strategy of fighting for market shares of Flash below the 79
-
80% mark. For market shares
of Flash more than this indifference point, Apple is better off conceding with the knowledge that Adobe would in that
case always accommodate
them.

One of the primary reasons why Apple is still in a good position to fight even though Flash has such high
dominance in the online media space is its brand equity. The Apple brand is so strong, and has such a strong customer
base, that the percentage

of die hard loyal Apple users
is high enough for Apple to get
. In case the Apple brand equity
is lower or the loyalty of Apple customer is assumed to be lower, the slope of the payoffs for Apple fighting reduces.
The indifference point (originally at arou
nd 79%) then comes down even further, making it rational for Apple to
concede even for lower market shares of Flash.


Fig 4: Apple’s Payoffs vs Flash’s Market Share


The graph for Adobe’s payoffs revealed some counter
-
intuitive insights. Even though Adobe dominates the online
media content market with its Flash platform


much more than Apple dominates the mobile internet market


they
have very little to no effective
power to influence Apple unless they take control of almost the entire market. It

i
s only
when their market share crosses the 80% and it becomes rational for Apple to concede, that they exercise some sort
of influence.

For most of the other scenarios, we
know from Apple’s payoff chart, that they have a dominant strategy of fighting
and maintaining the standoff/ban. Given Apple’s dominant strategy, Adobe’s payoffs suggest that their rational
$1,400,000,000
$1,500,000,000
$1,600,000,000
$1,700,000,000
$1,800,000,000
$1,900,000,000
$2,000,000,000
99%
79%
59%
39%
19%
Flash Market Share (%)

Apple Fights,
Adobe Waits
Apple Fights,
Adobe Fights
Apple
Concedes,
Adobe Waits
strategy would be to fight. Nevertheless the additional benefits f
rom fighting for Adobe are quite marginal. On the
other hand
,

going into legal battle with Apple might have negative repercussions like bad press and publicity, burning
of bridges with Apple and negative reaction by other players in the space. Therefore ev
en tho
ugh rationally it is better
for Adobe to fight Apple, looking at the whole picture they might be better off to wait and pursue other soft tactics to
get Apple to concede. Having said that, if Adobe could increase their probability of winning the laws
uit against Apple
through actions like rallying support from other players/stakeholders in the space, lobbying or ‘bribing’

(in the corrupt
world), then their expected payoff for Adobe from fighting increases. If the probability increases enough, then the
additional benefit to Adobe from fighting might become high enough to warrant such an action, even taking into
regard the negative intangibles indicated before.


$-
$500,000,000
$1,000,000,000
$1,500,000,000
$2,000,000,000
$2,500,000,000
99%
89%
79%
69%
59%
49%
39%
29%
19%
9%
Flash Market Share (%)

Apple Fights,
Adobe Waits
Apple Fights,
Adobe Fights
Apple
Concedes,
Adobe Waits
Fig 4: Adobe’s Payoffs vs Flash’s Market Share

Even though Adobe dominates the market (75% o
f web videos), they have no effective means to retaliate.

Given Apple’s dominant strategy is fighting (for MS < 84%), rationa
l
ly Adobe should fight, but the benefits are very
small, so it might be better for Adobe to just wait (legal fees, Adobe’s odds of

winning if they sue Apple is 10%).



Qualitative analysis
of the game

Apple and Adobe were once complementary.
In 1990, Adobe purchased Photoshop, which was then exclusively
available on Apple’s Macintosh Operating System (OS). This move allowed Apple to
survive in an environment that was
dominated by Microsoft’s Windows OS. Apple created the computers that creative professionals loved, while Adobe
created the software that creative professionals craved.


Today, Apple sees Adobe’s strategy as a threat.
Th
e desktop era is stagnating and is being taken over by mobile
platforms. Apple is determined to embrace this new market opportunity, to such an extent that Steve Jobs, Apple’s
CEO, declared that his company was now a mobile device company when he launched
the iPad in January 2010. While
Adobe is not a direct competitor to Apple’s trendy devices, it is enabling others to be. Adobe’s vision with Flash,
similar to what it accomplished with the pdf file format, is to enable developers to write applications once
, using its
proprietary tools, and then to run them on any platform, whether it’d be a desktop or a smart phone of any kind. The
only problem is that Apple has established a strong brand by “thinking differently”. Losing differentiation is death by
low mar
gins. While Adobe’s value proposition is appealing, it completely undermines Apple’s effort to differentiate its
products, and in particular the iPhone OS, which runs on the iPhone, the iPod Touch, and the iPad. Apple doesn't yet
dominate the smartphone ma
rket, and while the iPad is already surprisingly successful, increasing market share and a
profitable lineup is far from given.


With competitors like Google, which develops Android (a smart phone OS competing with iPhone OS) and makes it
available for fr
ee to handset manufacturers such as HTC and Motorola, or Rim, the maker of the Blackberry, not to
mention an expected mobile shift from Microsoft and Dell, Apple must attract and retain Apple
-
focused developers or
face being commoditized.
(See exhibit D fo
r trend in market share of mobile devices operating software)


Meanwhile, Apple has built a strong reputation.
While its original desktop computing business has been lagging
behind Microsoft, Apple has radically and lucratively reordered at least three
other markets in the past 10 years: music,
mobile phones, and recently print. Over the course of 2001, Apple launched the iTunes music software and the first
iPod. When the iTunes store went live in 2003, paying for music seemed a quaint idea, but pricing
music at 99
cents/song and making it simple to acquire got people in the habit. Today, Apple’s music business represents $4 billion
revenues per year (excluding iPod sales).
2

Similarly, since the iPhone first launched three years ago, it has had a huge



2

2009 10
-
K
Apple
Annual Report filed October 27, 2009

imp
act on the industry. Apple’s iPhone was the first touch
-
focused phone, allowing to pinch
-
zoom with fingers into
maps and web pages. With its app store, Apple was the first to make an application platform that was easy for
developers to write apps for, and
a store that was easy for consumers to browse, purchase, and download apps from.
In 2009, iPhone generated $6.7 billion revenues, making Apple the most profitable mobile company, in spite of having
a mere 2.5% worldwide market share
3
. Finally, when Apple r
ecently entered the ebooks market with its iPad, Amazon,
the incumbent, was forced to switch from a wholesale model to an agency model.


Apple warned Adobe, but Adobe missed the signal.
When Apple first introduced the iPhone in 2007, it made it clear
from day 1 that Adobe’s Flash was not supported. Google accepted to re
-
encode all its Flash videos on YouTube to
another format, H.264, which was supported by the iPhone. This move was meant
to deter Adobe from trying to enter
the nascent platform. Considering that both companies have opposite strategies
-

Adobe is after a dominant market
share while Apple favors high profit margin by cultivating a sense of exclusivity
-

Adobe should have inte
rpreted
iPhone’s lack of Flash support as a warning sign. However, it chose to ignore it and was a victim of the winner’s curse.
After dominating the web video market with its technology on the desktop (85% of websites are said to use some
form of Flash),
Adobe was blinded by its success and failed to see that Apple was gradually locking it out of what is
today’s leading mobile platform. Even worse, Adobe wasted tremendous resources creating tools to enable
developers to generate iPhone apps, ignoring Apple
’s requirements.




3

Apple's iPhone Operating Profit Beats Nokia For The First Time, Business Insider, Nov 10
, 2009,
http://www.businessinsider.com/apple
-
iphone
-
operating
-
profit
-
nokia
-
2009
-
11#ixzz0nh2XhvC6

While Apple was cautious at first, uncertain of the traction it would be able to generate with the iPhone, it gradually
increased the pressure on Adobe following a Brinkmanship strategy, as it sold more devices and applications from its
a
pp store
-

The iphone now has 64% of the mobile browser market
4
. In April 2010, Steve
Jobs made it exceedingly
clear in a note called “thoughts on Flash”, that Apple wasn’t going to make Flash available for the iPhone, iPod Touch,
and iPad, not now, not ev
er (Apple would promote the emerging web standards instead, called HTML5 and H.264).
Ironically, in the process of signaling its position explicitly, Apple even reached cooperation from its rivals against Flash
.
Microsoft, which has a competing technology
called Silverlight, rallied to Apple when Dean Hachamovitch, general
manager of internet explorer, wrote on a blog: “the future of the web is HTML5”. In addition, Google, another
proponent of HTML5 followed through.


All in all,
in order to achieve its pre
ferred outcome to render Flash obsolete and better differentiate its products,
Apple made a risky bet and showed no mercy in the face of a business threat. It leveraged its strong reputation and
acted rationally to avoid finding itself forced to be a niche

player as it had been in the desktop business.
This strategy
seems to be paying off. As of today, it is estimated that about 2/3 of web videos are iPad
-
ready, ie they don’t need
Flash whatsoever
5
.




4

All things digital, May 10, 2010,
http://mediamemo.allthingsd.com/20100510/is
-
android
-
really
-
outselling
-
apple/


5

TechCrunch, May 13, 2010
-

How Much Web Video Is iPad
-
Ready? About Two
-
Thirds. Really.
http://techcrunch.com/2010/05/13/web
-
video
-
ipad/#ixzz0nswMoVnt
http://techcrunch.com/2010/
05/13/we
b
-
video
-
ipad/

Adobe on the other hand missed the signals that were meant

to deter its entry on iPhone’s market, and has been
punished accordingly.

Its only hope now, as indicated by
a letter written by Adobe’s founders on May 13, 2010
6
,
is to
entice consumers to boycott Apple products by depicting the company as the “bad guys”
.


What’s next: Adobe and Google

"Fortunately, the iPhone isn't the only game in town. Android based phones have been doing well behind the success
of the Motorola Droid and Nexus One, and there are a number of Android based tablets slated to be released
this year.
We are working closely with Google to bring both Flash Player 10.1 and Adobe AIR 2.0 to these devices, and thus far,
the results have been very promising,"

Mike Chambers, the principal product manager for developer relations for Adobe's Flash pl
atform

It is not at all
surprising to
see what Adobe has planned to do next after Apple banned Flash from iPhone. From
Adobe’s standpoint, Google is the only ally it has that has any chance to compete with Apple. So

partnering with
Google makes

perfect sense. Although it is not obvious that iPhone will lose to android any time soon, there ar
e still
long
-
term possibilities

that could perhaps change things. To us, by emphasizing that it is now working closely with
Google, Adobe was trying to signa
l to its developers and Apple that it does not need Apple

so

badly and that it really
stopped focusing on Flash
-
to
-
iPhone technology. However, this signal is not so strong since some might view it as a
strategic decision while other might see it a desperat
e move from Adobe as it really did not have
any other choice.




6

“Our thoughts on open markets”:
http://www.adobe.com/choice/openmarkets.html

Google, on the other hand, is a clear winner here. Google has been trying catch up with Apple in mobile market for
years. Google's open
-
source operating system is the chief rival for iPhone OS

r
ight now
. Obviously, Google is happy to
have Adobe as a partner since it will help them more effectively compete in the market by building Flash into its
Chrome browser and ensuring Flash Player 10.1 integrates smoothly with Android. This alliance perfectl
y fits a
common pattern of convenience in the technology industry, with challengers working together to take on an
incumbent. It is true that the availability of Flash
alone if not a factor that would
allow
Google to catch up with Apple,

b
ut it will at lea
st help Android to catch up.

If we were Steve Jobs, we must have felt the threat from this partnership by now. It is true that

Jobs has done what
he thought wa
s best to protect his platform and continues to differentiate his products from the crowd. The re
ality
will reveal itself in a very short time to come whether pushing away Flash was one of his right moves or not. Soon,
all the major
cell phone

manufacturers besides Apple will sell cellphones that use Android 2.2, including full Flash
support. Also,
Android will be running on tablet computers that will cost much less than the iPad. The potential is
there for Android
-
based cellphones to outpace the iPhone by the end of 2011 in terms of worldwide sales, and
Android
-
based tablet computers will do almost
everything the iPad do
es but will cost US$200 cheaper
. However,
from Jobs’ reputation of being
bull
ish

in the industry, we are pretty sure that he still has some tricks in his pocket to
prevent that from happening.

Other options for Ad
obe?

Apart from what Adobe has d
one so far to respond

to Apple banning Flash from its mobile devices, here are some of
potential moves that Adobe might consider pursuing in order to regain some power.



Continue working on improving Flash



The first option is that Adobe continues to signal and prove its
commitment on Flash. It could try to add new features to keep it ahead of the Open Web technologies the same
way it made Web video simpler to use in the past. The fact that Adobe has comp
lete control over Flash makes it
much faster for Adobe to develop the platform. HTML5 on the other hand is not in complete control by a specific
company. There are quite a few organizations su
ch as Apple and Google involved

in the process. So, Adobe might
be able to use this difference as an advantage to make it difficult for HTML5 to keep up with its new compelling
features. With this option, Adobe would fight to protect their platform but the downside is that it would have to
write off all

the potential
profits from the Apple platform.




Shift focus to HTML5



From all the signals and actions that Apple has sent and done to Adobe, Adobe should have
realized by now that Apple will never allow Flash to be on its mobile devices. Apple has made it very clear that it
has opted to support HTML5, JavaScript, and CSS

instead of Flash. There is even a rumor recently that Apple is
developing its own Flash alternative
7
. So if it is Adobe’s plan to gain access to a hugely profitable platform and
make a lot of money from Apple, it would have no choice but playing by Apple’
s rules. However, Adobe has ditched
future development of the Flash
-
to
-
iPhone technology, accompanied by some fighting words. Giving in to Apple in



7

http://news.cnet.com/8301
-
13579_3
-
20004509
-
37.html

this case might lead to Adobe losing its reputation for creditability among Apple and other firms. Therefore
, Adobe
might also have an incentive to establish a reputation as someone who never back
s

off and give
s

in easily.




Nuclear option

remove all of its products from Apple machines

-

We don’t think that Adobe will pursue this
o
pti
on unless it really has

no other choice since this option would greatly harm both Apple and Adobe. Apart from
Flash, Adobe’s Creative Suite including Photoshop, Illustrator, Flash Pro, InDesign, Premiere Pro, and Dreamweaver
is considered its cash cow and
is very popular on MAC
s
. These applications give Apple a
reliable
group of
customers who are willing to pay p
remium prices. By no longer making

these applications available on Mac
s
,
Adobe would be able to gain some leverage from Apple since Apple would nee
d to have them on MAC
s
. But at the
same time, Adobe’s sales would drop greatly too.


Conclusion

Through our analysis, we were able to better understand the dynamics of the game and determine what rational
managers at each company should do. Using this as a starting point, we further identified several other factors and
assumptions that are more diffi
cult to quantify but are equally relevant to the outcome of the game such as brand
equity, customer
l
oyalty, and costs/benefits of reputation. We also found counter intuitive dynamics for Adobe, i.e.
e
ven though Adobe dominates the online media content ma
rket with its Flash platform
,

they have
n
o effective power
to influence Apple.

Our analysis showed that Adobe is in a severely disadvantaged position with regards to the
current game against Apple. However, if we change the rules of the game by relaxing
the scope of the game, for
example by introducing players like Google, we start to find new games that Adobe may start in which they may be
better positioned to fight against Apples initial attacks.





Exhibit A



Timeline of events leading up to the case


2007

Apple introduces the iPhone (no Flash support)

2007

Adobe develops cross
-
compiler tool to create Flash content on the iPhone

Apr 8, 2010

Apple bans use of third
-
party compilers on the iPhone

Apr 12, 2010

Adobe releases Flash CS5, a new version
of the compiler

Apr 20, 2010

Adobe announces no additional investments in targeting at iPhone and iPads in
Flash CS5

Apr 28, 2010

Steve Jobs posted an open letter on Flash, listing all the reasons why Apple has
decided not to support it




EXHIBIT B


A
pple’s Payoffs

SCENARIO I: APPLE’s CONTINUES TO FIGHT


Adobe accommodates and waits

Revenue

coefficient for Apple

(R)

400


Apple’s
Payoff =

n*R


where,



n =

#
Loyals +
#
Shoppers



Let total Apple customers be

5
,
000
,
000


Proportion of Loyals


75%


Number of Loyals

(#l)

3,750,000



Proportion of Shoppers (#s)

25%


Total Number of shoppers

1
,
250
,
000


Market share of Flash (Ms)

=

75%


#

Shoppers sticking with Apple

[(1
-
Ms)*#s]

312
,
500




n
= Loyals + Shoppers (with Apple)

4
,
062
,
500





Payoff

for Apple

=R*n

$
1
,
625
,
000
,
000



Adobe fights (sue)



Payoff coefficient for Apple ®

400


Legal costs

$
5,000,000


Probability that Adobe wins

0.1


Probability that Adobe loses

0.9



If Adobe wins, they will take the market (similar to Apple conceding)

Loss in Value for Apple if Flash becomes standard

$ 400,000,000


n =

Loyals + Shoppers

Number of Loyals

3,750,000

% of shoppers sticking with Apple

100%

# Shoppers sticking with Apple

1,250,000


n =

5,000,000





Revenue =R*n
-

V

$ 1,600,000,000


Expected
Revenue (1) = p*Rev

$ 160,000,000





If Adobe loses, then it is back to standoff similar to Adobe waiting




n =

Loyals + Shoppers

Let total Apple customers be

5,000,000


Proportion of Loyals

75%


Number of Loyals

3,750,000







Proportion of Shoppers

25
%


Total Number of shoppers

1,250,000


Market share of Flash (Ms)

75%


Number of shoppers sticking with Apple

312,500





n = Loyals + Shoppers (with Apple)

4,062,500







Revenue =R*n

1,625,000,000


Expected Revenue (2)

1,462,500,000






Net Expected
Payoff for Apple

$ 1,617,500,000




SCENARIO II: APPLE’s CONCEDES

Adobe’s accommodates

Payoff coefficient (R)

400

Loss in Value for Apple if Flash becomes standard


400,000,000




n =

Loyals + Shoppers

Let total Apple customers be

5,000,000

Proportion of
Loyals

75%

Number of Loyals

3,750,000




Proportion of Shoppers

25%

Total Number of shoppers

1,250,000

x Proportion of shoppers sticking with Apple

1

= Number of shoppers sticking with Apple

1,250,000





n = Loyals + Shoppers (with Apple)

5,000,000





Pa
yoff =(R*n)
-

V

$1,600,000,000



Sensitivity Analysis


Apple’s Payoffs vs Flash Market Share

Flash’s Market Share

Apple Strategy/Adobe Response

Fight/Accommodate

Fight/Fight

Concede/Accommodate

99%

$ 1,505,000,000

$ 1,509,500,000

$

1,600,000,000

97%

$ 1,515,000,000

$ 1,518,500,000

$ 1,600,000,000

95%

$ 1,525,000,000

$ 1,527,500,000

$ 1,600,000,000

93%

$ 1,535,000,000

$ 1,536,500,000

$ 1,600,000,000

91%

$
1,545,000,000

$ 1,545,500,000

$ 1,600,000,000

89%

$ 1,555,000,000

$ 1,554,500,000

$ 1,600,000,000

87%

$ 1,565,000,000

$ 1,563,500,000

$ 1,600,000,000

85%

$ 1,575,000,000

$
1,572,500,000

$ 1,600,000,000

83%

$ 1,585,000,000

$ 1,581,500,000

$ 1,600,000,000

81%

$ 1,595,000,000

$ 1,590,500,000

$ 1,600,000,000

79%

$ 1,605,000,000

$ 1,599,500,000

$
1,600,000,000

77%

$ 1,615,000,000

$ 1,608,500,000

$ 1,600,000,000

75%

$ 1,625,000,000

$ 1,617,500,000

$ 1,600,000,000

73%

$ 1,635,000,000

$ 1,626,500,000

$ 1,600,000,000

71%

$
1,645,000,000

$ 1,635,500,000

$ 1,600,000,000

69%

$ 1,655,000,000

$ 1,644,500,000

$ 1,600,000,000

67%

$ 1,665,000,000

$ 1,653,500,000

$ 1,600,000,000

65%

$ 1,675,000,000

$
1,662,500,000

$ 1,600,000,000

63%

$ 1,685,000,000

$ 1,671,500,000

$ 1,600,000,000

61%

$ 1,695,000,000

$ 1,680,500,000

$ 1,600,000,000

59%

$ 1,705,000,000

$ 1,689,500,000

$
1,600,000,000

57%

$ 1,715,000,000

$ 1,698,500,000

$ 1,600,000,000

55%

$ 1,725,000,000

$ 1,707,500,000

$ 1,600,000,000

53%

$ 1,735,000,000

$ 1,716,500,000

$ 1,600,000,000

51%

$
1,745,000,000

$ 1,725,500,000

$ 1,600,000,000

49%

$ 1,755,000,000

$ 1,734,500,000

$ 1,600,000,000

47%

$ 1,765,000,000

$ 1,743,500,000

$ 1,600,000,000

45%

$ 1,775,000,000

$
1,752,500,000

$ 1,600,000,000

43%

$ 1,785,000,000

$ 1,761,500,000

$ 1,600,000,000

41%

$ 1,795,000,000

$ 1,770,500,000

$ 1,600,000,000

39%

$ 1,805,000,000

$ 1,779,500,000

$
1,600,000,000

37%

$ 1,815,000,000

$ 1,788,500,000

$ 1,600,000,000

35%

$ 1,825,000,000

$ 1,797,500,000

$ 1,600,000,000

33%

$ 1,835,000,000

$ 1,806,500,000

$ 1,600,000,000

31%

$
1,845,000,000

$ 1,815,500,000

$ 1,600,000,000

29%

$ 1,855,000,000

$ 1,824,500,000

$ 1,600,000,000

27%

$ 1,865,000,000

$ 1,833,500,000

$ 1,600,000,000

25%

$ 1,875,000,000

$
1,842,500,000

$ 1,600,000,000

23%

$ 1,885,000,000

$ 1,851,500,000

$ 1,600,000,000

21%

$ 1,895,000,000

$ 1,860,500,000

$ 1,600,000,000

19%

$ 1,905,000,000

$ 1,869,500,000

$
1,600,000,000

17%

$ 1,915,000,000

$ 1,878,500,000

$ 1,600,000,000

15%

$ 1,925,000,000

$ 1,887,500,000

$ 1,600,000,000

13%

$ 1,935,000,000

$ 1,896,500,000

$ 1,600,000,000




EXHIBIT C


Adobe’s Payoffs

SCENARIO I: APPLE’s CONTINUES TO FIGHT



Adobe can fight (sue)




Revenue coefficient (r)

2,000

Size of market
-

# users (S)

1,000,000

Legal Costs

$ 5,000,000




Probability of winning

0.1




Probability of not winning

0.9





If they win,

they will capture the market

Flash Market Share (Ms)

100%

Revenue = r*S*Ms

$2,000,000,000

Expected Revenue (1)

$200,000,000








If they don’t win, their market share will drop (HTML will take some share)

Market share (Ms)

75%

Revenue = r*S*Ms

$1,500,00
0,000

Expected Revenue (2)

$1,350,000,000





Expected Payoff =

$1,545,000,000


Adobe can just wait and be patient




Revenue coefficient

(r)

2,000


Size of market
-

# users (S)

1,000,000


Legal Costs

N/A






Their market share will drop (HTML will take
some share)

Market share (Ms)

75%


Expected Revenue

$1,500,000,000



SCENARIO II: APPLE’s CONCEDES


Doesn’t make sense for Adobe to sue, only option is to accommodate


Revenue coefficient (r)

2000

Size of market
-

# users (S)

1000000

Flash Market Share (Ms)

100%

Revenue = r*S*Ms

$2,000,000,000


Sensitivity Analysis


Adobe’s Payoff vs Flash Market Share

Flash’s Market Share

Apple Strategy/Adobe Response

Fight/Accommodate

Fight/Fight

Fight/Accommodate

99%

$ 1,980,000,000

$
1,977,000,000

$ 2,000,000,000

98%

$ 1,960,000,000

$ 1,959,000,000

$ 2,000,000,000

97%

$ 1,940,000,000

$ 1,941,000,000

$ 2,000,000,000

96%

$ 1,920,000,000

$ 1,923,000,000

$ 2,000,000,000

95%

$ 1,900,000,000

$ 1,905,000,000

$
2,000,000,000

94%

$ 1,880,000,000

$ 1,887,000,000

$ 2,000,000,000

93%

$ 1,860,000,000

$ 1,869,000,000

$ 2,000,000,000

92%

$ 1,840,000,000

$ 1,851,000,000

$ 2,000,000,000

91%

$ 1,820,000,000

$ 1,833,000,000

$ 2,000,000,000

90%

$

1,800,000,000

$ 1,815,000,000

$ 2,000,000,000

89%

$ 1,780,000,000

$ 1,797,000,000

$ 2,000,000,000

88%

$ 1,760,000,000

$ 1,779,000,000

$ 2,000,000,000

87%

$ 1,740,000,000

$ 1,761,000,000

$ 2,000,000,000

86%

$ 1,720,000,000

$

1,7 4 3,0 0 0,0 0 0

$ 2,0 0 0,0 0 0,0 0 0

85%

$ 1,700,000,000

$ 1,725,000,000

$ 2,000,000,000

84%

$ 1,680,000,000

$ 1,707,000,000

$ 2,000,000,000

83%

$ 1,660,000,000

$ 1,689,000,000

$ 2,000,000,000

82%

$ 1,640,000,000

$ 1,671,000,000

$
2,000,000,000

81%

$ 1,620,000,000

$ 1,653,000,000

$ 2,000,000,000

80%

$ 1,600,000,000

$ 1,635,000,000

$ 2,000,000,000

79%

$ 1,580,000,000

$ 1,617,000,000

$ 2,000,000,000

78%

$ 1,560,000,000

$ 1,599,000,000

$ 2,000,000,000

77%

$

1,540,000,000

$ 1,581,000,000

$ 2,000,000,000

76%

$ 1,520,000,000

$ 1,563,000,000

$ 2,000,000,000

75%

$ 1,500,000,000

$ 1,545,000,000

$ 2,000,000,000

74%

$ 1,480,000,000

$ 1,527,000,000

$ 2,000,000,000

73%

$ 1,460,000,000

$

1,5 0 9,0 0 0,0 0 0

$ 2,0 0 0,0 0 0,0 0 0

72%

$ 1,440,000,000

$ 1,491,000,000

$ 2,000,000,000

71%

$ 1,420,000,000

$ 1,473,000,000

$ 2,000,000,000

70%

$ 1,400,000,000

$ 1,455,000,000

$ 2,000,000,000

69%

$ 1,380,000,000

$ 1,437,000,000

$
2,000,000,000

68%

$ 1,360,000,000

$ 1,419,000,000

$ 2,000,000,000

67%

$ 1,340,000,000

$ 1,401,000,000

$ 2,000,000,000

66%

$ 1,320,000,000

$ 1,383,000,000

$ 2,000,000,000

65%

$ 1,300,000,000

$ 1,365,000,000

$ 2,000,000,000

64%

$

1,280,000,000

$ 1,347,000,000

$ 2,000,000,000

63%

$ 1,260,000,000

$ 1,329,000,000

$ 2,000,000,000

62%

$ 1,240,000,000

$ 1,311,000,000

$ 2,000,000,000

61%

$ 1,220,000,000

$ 1,293,000,000

$ 2,000,000,000

60%

$ 1,200,000,000

$

1,2 7 5,0 0 0,0 0 0

$ 2,0 0 0,0 0 0,0 0 0

59%

$ 1,180,000,000

$ 1,257,000,000

$ 2,000,000,000

58%

$ 1,160,000,000

$ 1,239,000,000

$ 2,000,000,000

57%

$ 1,140,000,000

$ 1,221,000,000

$ 2,000,000,000

56%

$ 1,120,000,000

$ 1,203,000,000

$
2,000,000,000

55%

$ 1,100,000,000

$ 1,185,000,000

$ 2,000,000,000

54%

$ 1,080,000,000

$ 1,167,000,000

$ 2,000,000,000

53%

$ 1,060,000,000

$ 1,149,000,000

$ 2,000,000,000

52%

$ 1,040,000,000

$ 1,131,000,000

$ 2,000,000,000

51%

$

1,020,000,000

$ 1,113,000,000

$ 2,000,000,000

50%

$ 1,000,000,000

$ 1,095,000,000

$ 2,000,000,000

49%

$ 980,000,000

$ 1,077,000,000

$ 2,000,000,000

48%

$ 960,000,000

$ 1,059,000,000

$ 2,000,000,000

47%

$
940,000,000

$ 1,041,000,000

$ 2,000,000,000

46%

$ 920,000,000

$ 1,023,000,000

$ 2,000,000,000

45%

$ 900,000,000

$ 1,005,000,000

$ 2,000,000,000

44%

$ 880,000,000

$ 987,000,000

$ 2,000,000,000

43%

$ 860,000,000

$ 969,000,000

$ 2,000,000,000

42%

$ 840,000,000

$ 951,000,000

$ 2,000,000,000

41%

$ 820,000,000

$ 933,000,000

$ 2,000,000,000

40%

$ 800,000,000

$ 915,000,000

$ 2,000,000,000

39%

$ 780,000,000

$
897,000,000

$ 2,000,000,000

38%

$ 760,000,000

$ 879,000,000

$ 2,000,000,000

37%

$ 740,000,000

$ 861,000,000

$ 2,000,000,000

36%

$ 720,000,000

$ 843,000,000

$ 2,000,000,000

35%

$ 700,000,000

$
825,000,000

$ 2,000,000,000

34%

$ 680,000,000

$ 807,000,000

$ 2,000,000,000

33%

$ 660,000,000

$ 789,000,000

$ 2,000,000,000

32%

$ 640,000,000

$ 771,000,000

$ 2,000,000,000

31%

$ 620,000,000

$
753,000,000

$ 2,000,000,000

30%

$ 600,000,000

$ 735,000,000

$ 2,000,000,000

29%

$ 580,000,000

$ 717,000,000

$ 2,000,000,000

28%

$ 560,000,000

$ 699,000,000

$ 2,000,000,000

27%

$ 540,000,000

$
681,000,000

$ 2,000,000,000

26%

$ 520,000,000

$ 663,000,000

$ 2,000,000,000

25%

$ 500,000,000

$ 645,000,000

$ 2,000,000,000

24%

$ 480,000,000

$ 627,000,000

$ 2,000,000,000

23%

$ 460,000,000

$
609,000,000

$ 2,000,000,000

22%

$ 440,000,000

$ 591,000,000

$ 2,000,000,000

21%

$ 420,000,000

$ 573,000,000

$ 2,000,000,000

20%

$ 400,000,000

$ 555,000,000

$ 2,000,000,000

19%

$ 380,000,000

$
537,000,000

$ 2,000,000,000

18%

$ 360,000,000

$ 519,000,000

$ 2,000,000,000

17%

$ 340,000,000

$ 501,000,000

$ 2,000,000,000

16%

$ 320,000,000

$ 483,000,000

$ 2,000,000,000

15%

$ 300,000,000

$
465,000,000

$ 2,000,000,000

14%

$ 280,000,000

$ 447,000,000

$ 2,000,000,000

13%

$ 260,000,000

$ 429,000,000

$ 2,000,000,000




Exhibit D
-

Trend in market share of mobile devices operating software