Is Adobe OpenAI s Sora a game changer?

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Text |Songuo Smart Hub, author | julian lin

Note that investing is always subjective because we need to envision what the future will look like. This means that the scene tends to be gray, not black and white, and this time it won't be any different.

SORA is OpenAI's new text-to-AI generator. SORA allows users to generate based on text prompts. Essentially, it works very similarly to Dalle-E or Firefly (a text-to-image generator), but it's even more impressive because it's a dynamic format that includes interaction and 3D generation. For anyone who has seen these clips, there's no denying that the results of the SORA seem to be very impressive.

SORA is the next step in the trend of so-called "generative AI", enabling inexperienced people to create digital content.

The launch of OpenAI's "SORA" has the market worried about what this means for a number of companies, including film studios, advertising agencies, and editing tools. Adobe belongs to the last group of companies, and I'll summarize in this section what I think are potential problems for the company.

The first, and probably the most obvious, potential problem is that the future looks more uncertain now than it did just a few years ago. AI is breaking down barriers to content creation, and we can't push its limits. One can support or oppose its commodification, but it cannot be denied that we do not know what will happen in the future. Will Adobe continue to lead the creative industry 10 years later? The current development of artificial intelligence mainly affects the generative part of the process, but we have seen some indications that it could also affect the editing phase, where Adobe also earns most of its revenue. Adobe's Generate Fill feature is a great example of these early tips.

That said, since we have to invest with an eye to the future, we have to assess what the future will look like. The first impact on Adobe is that the productivity gains brought about by AI can have a negative impact on the number of seats. The reason is simple: higher productivity means fewer seats needed to perform the same tasks. This is obviously negative for Adobe, as its subscription revenue depends on the number of people using its creative suite. There is a caveat, though.

Adobe management says their goal is to monetize AI through a per-use model in which users spend "X" credits every time they use Adobe's Gen AI features. AI may reduce the number of seats, but part of this "decline" will be offset by higher revenues from bio-intelligence. It's still beyond my ability to judge whether this will be a net gain or a net negative, especially since this commercialization model is new and we don't have much data on its success.

Another potential problem I'm seeing comes from distribution. When artificial intelligence became a buzzword, many claimed that it would revolutionize all software companies. While I understand these concerns, I never imagined that AI would be the destructive force that many people claim, because distribution is so important.

If a company builds the best AI model but doesn't have a distro, it's likely that players with a distro will be able to commoditize it quickly enough that it won't gain widespread adoption. That's why I'm not too worried about AI startups competing with "big companies". That said, OpenAI has a relationship with probably the biggest "guy" in the enterprise software space: Microsoft Corporation. This makes OpenAI not just an AI startup, but an AI startup with significant distribution channels.

Admittedly, the future looks more uncertain today than it did just a few years ago. AI may put pressure on the number of seats in the industry, and OpenAI should not be relegated to the status of an "AI startup without distribution"; This is definitely a potential threat.

As with all things investment-related, there is another side to the coin. The debate in the investment landscape is rarely one-sided, and this one is no exception. There's also reason to believe that Adobe will continue to thrive in the future, and that this "AI wave" will ultimately benefit the company.

The first is that generative AI is unlikely to deliver the end result that the idea seeks. SORA (or any other generative AI model) may provide a creative based on a text prompt, but it's unlikely to be exactly what the creative is looking for. This difference (between what the creative wants and what they get) may be acceptable in the non-professional world, but I highly doubt that the professional will take this output as their end result.

This gap or discrepancy means that the creative toolkit may still be relevant, as generative AI can only "solve" the first step. This has already happened in AI-generated images, and it's hard to imagine that it won't happen in **. Note that this is especially true considering that ** is a richer format with more potential points of divergence. This begs the question......

When OpenAI released DALL-E, everyone thought it would revolutionize Adobe. However, the company's response was to launch Firefly, commercialize it, and embed it into its creative suite. Management has repeatedly said that ** will be the next format for generative AI applications, so why is it different this time? If anything, AI-generated images are (to date) advantageous for Adobe.

SORA may be "commoditized" like Dall-E, and we shouldn't forget that Adobe owns the entire value chain (via Experience Cloud) from build to edit to measurement. The entire value chain is very relevant to professionals and customer groups, and most of the monetization opportunities lie here.

Generative AI makes the creative industries more accessible by lowering the barrier to entry. This has its advantages and disadvantages. The main disadvantage is that the conversion cost is reduced, so the moat may shrink somewhat. The main advantage is that the potential number of seats is likely to expand significantly. The only caveat here is that most of this pool may not be monetizable, so this article relies on how Adobe prices to assess the value of its AI products to a monetizable user pool.

The good news for companies is that these users care more about the entire value chain than just the generation phase. There is a clear synergy of putting all stages under the same umbrella.

Another point worth mentioning is that Adobe believes that while AI brings more productivity, it may expand its user base as companies look to engage in more content generation. This is nicely summed up by Scott Belsky, Chief Product Officer at Adobe (emphasis added):

Now, this is consistent with the job growth in previous platform shifts, whether it's engineers becoming more efficient over the past few decades, or the advent of no-web builders in the early 2000s, or the rise of social and user generation in the early 2000s. The last 20 years. With all these changes, the demand for more engineers, more web developers, and ** professionals will only continue to grow.

The actual results of our own customer surveys are also encouraging. We started to really connect with our customers. We tried to ask them what it all meant to them, how they felt.

Will the AI wave eventually lead to a deterioration in Adobe's business? I don't know the answer to this question yet, and if dall-e is used as a precedent, I think we tend to overestimate the threat. If I was convinced that generative AI would hurt Adobe's business, I would definitely sell my position. I wouldn't mind doing it at a 20% or 30% lower share price; This is something I'm willing to pay to avoid missing out on the upside.

When Adobe announced the acquisition of Figma, I had already adjusted it. As it turns out, this is a costly mistake because that has been dramatically since I've been. Then there was DALL-E, which I thought I had made a good decision, but Adobe was quick to launch Firefly and keep the entire value chain. High-quality business needs to be taken substantively, so I'm willing to stand my ground and wait to see strong evidence of this deterioration.

Also, I'd like to wait for Adobe's earnings report to see what management thinks on this topic and get a clearer picture of the company's progress on text-to-machine intelligence. Adobe will report earnings in a few weeks' March 14 after its launch.