Did Steve Jobs just kill Flash?
Prepared for: MBA 211-1 Game Theory
Prepared by: Arjun Gupta, Tony Mignot, Hiroshi Shono, Apinun Tachaplalert
Date: May 14, 2010
Proposal #:
Introduction
”Perhaps 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 pulling 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, with the rapid expansion of the mobile market, the rivalry is taking a new turn. By leveraging 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 other 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 distributed through their own
distribution channel. Apple has sold over 35 million iPhones and over 50 million iPod Touches to date and expects to
sell 6 to 15 million iPads this year. All of these products run on Apple’s proprietary operating software. Given their
significant outreach and the consumer loyalty that they receive, Apple products’ platforms and ecosystems 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 contents on
Adobe’s Flash platform. The sales of Create Suite are estimated to have accounted 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. However 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-appleupdate1-.html
Course of events
Rivalry between Adobe and Adobe has intensified when Apple announced in 2007 that its newly released iPhones will
not support Flash.
Apple has been in support of HTML5, 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.)
Apple has 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 HTML5 and Flash, developers may opt to develop contents only for HTML5
(however with the big assumption that Apple user base is attractive enough for the developers to choose them over
other platforms.) This will help Apple differentiate their products by offering of unique applications and contents.
Secondly, Apple may be able to improve their 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-or-death matter. As mentioned above, the sales of Creative Suite make up the bulk of their corporate
revenue. By maintaining and leveraging their high market share, Adobe wants to remain the only game in town
which can supply the developers 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 customers, 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 developers to use compiler software that convert codes originally written on Flash platform to run using
HTML5, 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 and 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
Quantitative 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 dynamic payoff
model that represented the real situation. Nevertheless given the number of players involved, 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 shoppers 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 reduced, 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 contingent 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 in exhibit B & exhibit C. While certain assumptions about the numbers were made for example about the
percentage of Apple 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 respectively below. The graph for Apple’s payoffs
clearly 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 around 79%) then comes down even further, making it rational for Apple to
concede even for lower market shares of Flash.
$2,000,000,000
$1,900,000,000
Apple Fights,
Adobe Waits
$1,800,000,000
Apple Fights,
Adobe Fights
$1,700,000,000
Apple
Concedes,
Adobe Waits
$1,600,000,000
$1,500,000,000
$1,400,000,000
99%
79%
59%
39%
Flash Market Share (%)
19%
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 is 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
strategy would be to fight. Nevertheless the additional benefits from 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 even though 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 lawsuit 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.
$2,500,000,000
$2,000,000,000
Apple Fights,
Adobe Waits
$1,500,000,000
Apple Fights,
Adobe Fights
$1,000,000,000
Apple
Concedes,
Adobe Waits
$500,000,000
$99%
89%
79%
69%
59%
49%
39%
29%
19%
9%
Flash Market Share (%)
Fig 4: Adobe’s Payoffs vs Flash’s Market Share
Even though Adobe dominates the market (75% of web videos), they have no effective means to retaliate.
Given Apple’s dominant strategy is fighting (for MS < 84%), rationally 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. The 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 margins. 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 market, 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 free 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 for 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
impact 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 share3. Finally, when Apple recently 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 interpreted
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.
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
3
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
app store - The iphone now has 64% of the mobile browser market4. 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 ever (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 preferred 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 whatsoever5.
All things digital, May 10, 2010,
http://mediamemo.allthingsd.com/20100510/is-android-really-outselling-apple/
4
TechCrunch, May 13, 2010 - How Much Web Video Is iPad-Ready? About Two-Thirds. Really.
http://techcrunch.com/2010/05/13/web-video-ipad/#ixzz0nswMoVnthttp://techcrunch.com/2010/05/13/we
b-video-ipad/
5
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, 20106, 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 platform
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 are 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 signal 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 desperate 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 right 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 perfectly 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,
but it will at least 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 was best to protect his platform and continues to differentiate his products from the crowd. The reality
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 does but will cost US$200 cheaper. However,
from Jobs’ reputation of being bullish in the industry, we are pretty sure that he still has some tricks in his pocket to
prevent that from happening.
Other options for Adobe?
Apart from what Adobe has done 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 complete 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 such 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 alternative7. 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 backs off and gives in easily.
 Nuclear option –remove all of its products from Apple machines - We don’t think that Adobe will pursue this
option 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 MACs. These applications give Apple a reliable group of
customers who are willing to pay premium prices. By no longer making these applications available on Macs,
Adobe would be able to gain some leverage from Apple since Apple would need to have them on MACs. 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 difficult to quantify but are equally relevant to the outcome of the game such as brand
equity, customer loyalty, and costs/benefits of reputation. We also found counter intuitive dynamics for Adobe, i.e.
even though Adobe dominates the online media content market with its Flash platform, they have no 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 – Apple’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
Payoff =(R*n) - V
$1,600,000,000
Sensitivity Analysis – Apple’s Payoffs vs Flash Market Share
Apple Strategy/Adobe Response
Flash’s Market Share
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
$1,500,000,000
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
Apple Strategy/Adobe Response
Flash’s Market Share
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
$
1,743,000,000
$
2,000,000,000
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
$
1,509,000,000
$
2,000,000,000
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
$
1,275,000,000
$
2,000,000,000
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