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My thoughts on Adobe buying Magento for $1.68 billion

Adobe acquires Magento for $1.68 billion

Yesterday, Adobe announced that it agreed to buy Magento for $1.68 billion. When I woke up this morning, 14 different people had texted me asking for my thoughts on the acquisition.

Adobe acquiring Magento isn't a surprise. One of our industry's worst-kept secrets is that Adobe first tried to buy Hybris, but lost the deal to SAP; subsequently Adobe tried to buy DemandWare and lost out against Salesforce. It's evident that Adobe has been hungry to acquire a commerce platform for quite some time.

The product motivation behind the acquisition

Large platform companies like Salesforce, Oracle, SAP and Adobe are trying to own the digital customer experience market from top to bottom, which includes providing support for marketing, commerce, personalization, and data management, in addition to content and experience management and more.

Compared to the other platform companies, Adobe was missing commerce. With Magento under its belt, Adobe can better compete against Salesforce, Oracle and SAP.

While Salesforce, SAP and Oracle offer good commerce capability, they lack satisfactory content and experience management capabilities. I expect that Adobe closing the commerce gap will compel Salesforce, SAP and Oracle to act more aggressively on their own content and experience management gap.

While Magento has historically thrived in the SMB and mid-market, the company recently started to make inroads into the enterprise. Adobe will bring a lot of operational maturity; how to sell into the enterprise, how to provide enterprise grade support, etc. Magento stands to benefit from this expertise.

The potential financial outcome behind the acquisition

According to Adobe press statements, Magento has achieved "approximately $150 million in annual revenue". We also know that in early 2017, Magento raised $250 million in funding from Hillhouse Capital. Let's assume that $180 million of that is still in the bank. If we do a simple back-of-the-envelope calculation, we can subtract this $180 million from the $1.68 billion, and determine that Magento was valued at roughly $1.5 billion, or a 10x revenue multiple on Magento's trailing twelve months of revenue. That is an incredible multiple for Magento, which is primarily a licensing business today.

Compare that with Shopify, which is trading at a $15 billion dollar valuation and has $760 million of twelve month trailing revenue. This valuation is good for a 20x multiple. Shopify deserves the higher multiple, because it's the better business; all of its business is delivered in the cloud and at 65% year-over-year revenue growth, it is growing much faster than Magento.

Regardless, one could argue that Adobe got a great deal, especially if it can accelerate Magento's transformation from a licensing business into a cloud business.

Most organizations prefer best-of-breed

While both the product and financial motivations behind this acquisition are seemingly compelling, I'm not convinced organizations want an integrated approach.

Instead of being confined to proprietary vendors' prescriptive suites and roadmaps, global brands are looking for an open platform that allows organizations to easily integrate with their preferred technology. Organizations want to build content-rich shopping journeys that integrate their experience management solution of choice with their commerce platform of choice.

We see this first hand at Acquia. These integrations can span various commerce platforms, including IBM WebSphere Commerce, Salesforce Commerce Cloud/Demandware, Oracle/ATG, SAP/hybris, Magento and even custom transaction platforms. Check out Quicken (Magento), Weber (Demandware), Motorola (Broadleaf Commerce), Tesla (custom to order a car, and Shopify to order accessories) as great examples of Drupal and Acquia working with various commerce platforms. And of course, we've quite a few projects with Drupal's native commerce solution, Drupal Commerce.

Owning Magento gives Adobe a disadvantage, because commerce vendors will be less likely to integrate with Adobe Experience Manager moving forward.

It's all about innovation through integration

Today, there is an incredible amount of innovation taking place in the marketing technology landscape (full-size image), and it is impossible for a single vendor to have the most competitive product suite across all of these categories. The only way to keep up with this unfettered innovation is through integrations.

Marketing technology landscape 2018
An image of the Marketing Technology Landscape 2018. For reference, here are the 2011, 2012, 2014, 2015, 2016 and 2017 versions of the landscape. It shows how fast the marketing technology industry is growing.

Most customers want an open platform that allows for open innovation and unlimited integrations. It's why Drupal and Acquia are winning, why the work on Drupal's web services is so important, and why Acquia remains committed to a best-of-breed strategy for commerce. It's also why Acquia has strong conviction around Acquia Journey as a marketing integration platform. It's all about innovation through integration, making those integrations easy, and removing friction from adopting preferred technologies.

If you acquire a commerce platform, acquire a headless one

If I were Adobe, I would have looked to acquire a headless commerce platform such as Elastic Path, Commerce Tools, Moltin, Reaction Commerce or even Salsify.

Today, there is a lot of functional overlap between Magento and Adobe Experience Manager — from content editing, content workflows, page building, user management, search engine optimization, theming, and much more. The competing functionality between the two solutions makes for a poor developer experience and for a poor merchant experience.

In a headless approach, the front end and the back end are decoupled, which means the experience or presentation layer is separated from the commerce business layer. There is a lot less overlap of functionality in this approach, and it provides a better experience for merchants and developers.

Alternatively, you could go for a deeply integrated approach like Drupal Commerce. It has zero overlap between its commerce, content management and experience building capabilities.

For Open Source, it could be good or bad

How Adobe will embrace Magento's Open Source community is possibly the most intriguing part of this acquisition — at least for me.

For a long time, Magento operated as Open Source in name, but wasn't very Open Source in practice. Over the last couple of years, the Magento team worked hard to rekindle its Open Source community. I know this because I attended and keynoted one of its conferences on this topic. I have also spent a fair amount of time with Magento's leadership team discussing this. Like other projects, Magento has been taking inspiration from Drupal.

For example, the introduction of Magento 2 allowed the company to move to GitHub for the first time, which gave the community a better way to collaborate on code and other important issues. The latest release of Magento cited 194 contributions from the community. While that is great progress, it is small compared to Drupal.

My hope is that these Open Source efforts continue now that Magento is part of Adobe. If they do, that would be a tremendous win for Open Source.

On the other hand, if Adobe makes Magento cloud-only, radically changes their pricing model, limits integrations with Adobe competitors, or doesn't value the Open Source ethos, it could easily alienate the Magento community. In that case, Adobe bought Magento for its install base and the Magento brand, and not because it believes in the Open Source model.

This acquisition also signals a big win for PHP. Adobe now owns a $1.68 billion PHP product, and this helps validate PHP as an enterprise-grade technology.

Unfortunately, Adobe has a history of being "Open Source"-second and not "Open Source"-first. It acquired Day Software in July 2010. This technology was largely made using open source frameworks — Apache Sling, Apache Jackrabbit and more — and was positioned as an open, best-of-breed solution for developers and agile marketers. Most of that has been masked and buried over the years and Adobe's track record with developers has been mixed, at best.

Will the same happen to Magento? Time will tell.

Working toward a JavaScript-driven Drupal administration interface

As web applications have evolved from static pages to application-like experiences, end-users' expectations of websites have become increasingly demanding. JavaScript, partnered with effective user-experience design, enable the seamless, instantaneous interactions that users now expect.

The Drupal project anticipated this trend years ago and we have been investing heavily in making Drupal API-first ever since. As a result, more organizations are building decoupled applications served by Drupal. This approach allows organizations to use modern JavaScript frameworks, while still benefiting from Drupal's powerful content management capabilities, such as content modeling, content editing, content workflows, access rights and more.

While organizations use JavaScript frameworks to create visitor-facing experiences with Drupal as a backend, Drupal's own administration interface has not yet embraced a modern JavaScript framework. There is high demand for Drupal to provide a cutting-edge experience for its own users: the site's content creators and administrators.

At DrupalCon Vienna, we decided to start working on an alternative Drupal administrative UI using React. Sally Young, one of the initiative coordinators, recently posted a fantastic update on our progress since DrupalCon Vienna.

Next steps for Drupal's API-first and JavaScript work

While we made great progress improving Drupal's web services support and improving our JavaScript support, I wanted to use this blog post to compile an overview of some of our most important next steps:

1. Stabilize the JSON API module

JSON API is a widely-used specification for building web service APIs in JSON. We are working towards adding JSON API to Drupal core as it makes it easier for JavaScript developers to access the content and configuration managed in Drupal. There is a central plan issue that lists all of the blockers for getting JSON API into core (comprehensive test coverage, specification compliance, and more). We're working hard to get all of them out of the way!

2. Improve our JavaScript testing infrastructure

Drupal's testing infrastructure is excellent for testing PHP code, but until now, it was not optimized for testing JavaScript code. As we expect the amount of JavaScript code in Drupal's administrative interface to dramatically increase in the years to come, we have been working on improving our JavaScript testing infrastructure using Headless Chrome and Nightwatch.js. Nightwatch.js has already been committed for inclusion in Drupal 8.6, however some additional work remains to create a robust JavaScript-to-Drupal bridge. Completing this work is essential to ensure we do not introduce regressions, as we proceed with the other items in our roadmap.

3. Create designs for a React-based administration UI

Having a JavaScript-based UI also allows us to rethink how we can improve Drupal's administration experience. For example, Drupal's current content modeling UI requires a lot of clicking, saving and reloading. By using React, we can reimagine our user experience to be more application-like, intuitive and faster to use. We still need a lot of help to design and test different parts of the Drupal administration UI.

4. Allow contributed modules to use React or Twig

We want to enable modules to provide either a React-powered administration UI or a traditional Twig-based administration UI. We are working on an architecture that can support both at the same time. This will allow us to introduce JavaScript-based UIs incrementally instead of enforcing a massive paradigm shift all at once. It will also provide some level of optionality for modules that want to opt-out from supporting the new administration UI.

5. Implement missing web service APIs

While we have been working for years to add web service APIs to many parts of Drupal, not all of Drupal has web services support yet. For our React-based administration UI prototype we decided to implement a new permission screen (i.e. https://example.com/admin/people/permissions). We learned that Drupal lacked the necessary web service APIs to retrieve a list of all available permissions in the system. This led us to create a support module that provides such an API. This support module is a temporary solution that helped us make progress on our prototype; the goal is to integrate these APIs into core itself. If you want to contribute to Drupal, creating web service APIs for various Drupal subsystems might be a great way to get involved.

6. Make the React UI extensible and configurable

One of the benefits of Drupal's current administration UI is that it can be configured (e.g. you can modify the content listing because it has been built using the Views module) and extended by contributed modules (e.g. the Address module adds a UI that is optimized for editing address information). We want to make sure that in the new React UI we keep enough flexibility for site builders to customize the administrative UI.

All decoupled builds benefit

All decoupled applications will benefit from the six steps above; they're important for building a fully-decoupled administration UI, and for building visitor-facing decoupled applications.

Useful for decoupling of visitor-facing front-ends Useful for decoupling of the administration backend
1. Stabilize the JSON API module
2. Improve our JavaScript testing infrastructure
3. Create designs for a React-based administration UI
4. Allow contributed modules to use React or Twig
5. Implement missing web service APIs
6. Make the React UI extensible and configurable

Conclusion

Over the past three years we've been making steady progress to move Drupal to a more API-first and JavaScript centric world. It's important work given a variety of market trends in our industry. While we have made excellent progress, there are more challenges to be solved. We hope you like our next steps, and we welcome you to get involved with them. Thank you to everyone who has contributed so far!

Special thanks to Matt Grill and Lauri Eskola for co-authoring this blog post and to Wim Leers, Gabe Sullice, Angela Byron, and Preston So for their feedback during the writing process.

We spent the weekend exploring Tuscany by car. Each day we drove through vineyards, hilltop towns and medieval cities on narrow, winding roads that often turned into unpaved backroads. Wanting to get the most out of the trip, we stopped from time to time to take in the amazing views and eat pecorino cheese.

Rolling hills with vineyards
Terracotta roof tiles

How the iMac was Apple's financial lifeline
© Asymco

I love this graph. It shows that for some time, Apple's primary source of revenue was the sale of the Macintosh computer. The Macintosh provided Apple with a bridge between the desktop era and the mobile era, represented by the two clusters on the graph. That bridge was a financial lifeline. Without it, Apple might not have survived.