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Adobe in battle royale with Apple

So what 's the deal with this ongoing spat between Adobe and Apple? Do investors need to worry?

So what ‘s the deal with this ongoing spat between Adobe and Apple? Do investors need to worry? Right now, no your positions are safe (or at least as safe as they can be in this market) but you do need to keep your eyes open because in the tech world, a minor event can become a major trend overnight.

Quick backstory: Apparently basking in the afterglow of a successful iPad launch and the continued strong sales of the iPhone, Apple has publicly declared that it won’t allow Flash (a multimedia platform for adding video, animation and interactivity to Web sites) on its devices. It wont even allow on its platform apps that are originally developed in Flash but converted in code to make them Apple compliant. The latter prompted Adobe to drop the iPhone app building technology included in the authoring tool Flash CS5. Apple CEO Steve Jobs then used an open letter to launch a very public attack against Flash, citing various alleged shortcomings. This in turn prompted a small ad campaign and open letter from Adobe’s founders on May 13. All this over the span of a couple of months or so.

It used to be that Apple was the computing industry’s underdog because of its puny desktop marketshare. Actually, Apple’s desktop share remains puny, but over the course of about a decade the success of its iPods, iTunes and iPhones has propelled it to Goliath status and now the company is flexing. According to comScore, Apple commands 25% of the mobile market, second to RIM’s 40%. That’s 25% of the market and growing that won’t accept Flash. With the introduction of the iPad, it’s looking like Apple is going to run away with the tablet market as well.

Where does this leave Adobe? Fighting mad, but oh so civilly. (In its ad campaign, Adobe claims to still “heart” Apple.) I spoke via e-mail with David Wadhwani, VP and GM, platform business unit, and as a result got mostly boilerplate out of him, but some of it is useful boilerplate. He said one counter against Apple’s mobile dominance is the Open Screen Project, where Adobe is essentially partnering with every other Apple competitor, such as Google, RIM, Microsoft and HP, to develop a standard for delivering Web content and standalone apps across all types of devices.

Another strategy Adobe is pursuing is to develop tools for the new Web development language HTML5 (which is supported on Apple devices). The business downside for Adobe is that, unlike Flash, Adobe doesn’t control the standard. Might Adobe be shooting itself in the foot? Ron Rogowski, principal analyst at Forrester Research, says not only will HTML5 not be ready for prime time for many years at best, but that “HTML5 development won’t hurt Adobe in the near-term. Doing more development there is smart because they have experience building tools that are not Flash experiences.” And Wadhwani said, not unreasonably, that “HTML and Flash have coexisted for over 10 years we believe they are mutually beneficial and will continue to coexist.”

A third strategy is to pump up Flash capabilities so that the 90%+ of the desktop world that currently uses Flash just can’t say no. Wadhwani points to a significant increase in the announced feature set for CS5 and a product called Adobe AIR that extends Flash outside the browser and includes the touch-screen functionality Jobs argued was missing from Flash.

So far, all of this has mollified investors. If you look at the recent performance of Adobe stock (Nasdaq: ADBE), it has essentially tracked that of the Nasdaq, with one exception. On April 29, when Jobs posted his long missive, Adobe took a 5% hit and continued to slide through the phantom mini-crash of May 6. Volumes spiked to 100% above norms through this period. Then on May 13 when Adobe publicly responded to Jobs, the stock halted its slide and today is back to about 95% of its 3-month high of approximately $36.50. Volume is also down to the stock’s historical norms, so it looks like investors are of the belief the Apple tsunami has passed.

All of the equity analysts I talked to were mysteriously unwilling to weigh in on the effects of the boxing match, but it’s worth noting that over the last six months a majority have upgraded Adobe to a buy or better.

Theyre likely correct for a number of reasons. While Apple is a dominant player in the mobile market, it’s not the only one and the others are themselves heavyweights, so Adobe has friends in high places. Even if HTML5 continues to grow, it is many years away from significant market penetration (see here and here) and Adobe is nevertheless positioning itself to cater to, if not capture, that market. Arguably, big companies who currently rely on its Flash tools will be inclined to use its HTML5 tools as well because of integration, experience, support and, quite frankly, brand recognition issues. Finally, Apple’s arrival has given Adobe a kick in the butt and reminded it that resting on its laurels isn’t an option. Adobe appears to be getting into gear.

Maybe it’s Apple’s turn to blink?