November 2004

A Killer Deal for Corel
Or Another Distraction?

Corel completes acquisition of Jasc
and its ultra-popular Paint Shop Pro

A sure sign that a company is operating in the black is when it begins to look beyond its own borders. If nothing else, Corel’s recent acquisition of the Minnesota-based Jasc is a clear indication of Corel’s return to profitability. Beyond that, nothing is quite that clear, and the implications of this move might not be fully realized for years. But watching from the sidelines, we see plenty to like about this transaction...and yes, some risks, as well.

As a private company, Corel is no longer required to report quarterly earnings, and as Jasc was also privately-held, we do not know how much Corel paid to buy the company. But it is common knowledge that Corel has enjoyed four consecutive profitable quarters (for the first time since the heady Linux days of 1999) and we also know that Jasc was not exactly hurting, either, with its low-overhead online distribution channels and its deep penetration of over 30 million registered users worldwide.

In a way, Jasc reminds us of a young Corel: a lean organization that is incredibly focused on the few products that it knows that it can develop really well. When Corel made its mark in the early 1990s, it did so as a company of 40. They were all about CorelDraw and they reached the pinnacle of the PC graphics market with laser-focused goals on developing and marketing it. It was when Corel began to extend its reach that it began to struggle. Moving into the Macintosh market, misguided forays into hardware, and then the WordPerfect aquisition which, literally overnight, turned Microsoft from an ally into a foe.

Jasc avoided such pitfalls. Paint Shop Pro earned acclaim as a $25 download and the Studio version can still be purchased online for just $69. Paint Shop Pro never tried to penetrate the Mac market and it never was transmogrified into some large suite costing several hundred dollars. Paint Shop Pro has earned a reputation as a solid performer in the image-editing space, and more important, has made deep inroads into the retail distribution channels in a way that Corel has not.

Together, Corel and Jasc are a formidable team, well suited to ride the tsunami that is digital photography. Corel president Amish Mehta hints at how product positioning will stack up, at least in the short term: “The Paint Shop family of graphics and imaging software gives us a strong entry level product line. Over the long term, we believe Corel will capture millions of new customers and greatly expand our footprint with consumers who regularly purchase digital photography software.”

It’s not at all obvious that Paint Shop Pro deserves the subordinate role of entry-level behind Corel’s PhotoPaint, but that is nothing more than a pleasant problem for Corel to have. The fact is that both programs enjoy a high degree of user loyalty among those who feel disenfranchised, alienated, or simply not connected with Adobe and Photoshop. Despite Photoshop’s dominance, those translate to significant numbers — tens of millions of users.

The two organizations also share a common perspective on how to live in Adobe’s shadow: they both believe there is prosperity to be enjoyed in the shade. Jasc has always taken that approach, and once the new leadership stopped the company from chasing those windmills, Corel too has seen the business graphics marketplace as its best destiny.

This like-mindedness is imporant, at least in the short-term, as Corel has made it clear that it intends to keep the entire Paint Shop Pro development team intact as a distinct working entity. They will remain in Eden Prairie MN and will remain focused on the well-defined set of programs that got them to this bigger dance floor.

But the long term is not nearly so clean. Paint Shop Pro can piggyback on Corel’s greater resources, and Corel can take advantage of Jasc’s retail penetration, but at some point, brand identity could become a hindrance, not an asset. And when that happens, the elephant that is already sitting in the living room will need to be regarded: Will Corel roll Paint Shop into PhotoPaint to create a single product? And if it does, how will Paint Shop users respond?

To be sure, this would not produce the anti-christ-like emotion that would result if it were Adobe devouring the program. But the PSP user community has a high-degree of loyalty and enough us-vs.-them mentality to provoke the kind of emotion that was displayed almost immediately on newsgroups:

I don't view this purchase of Jasc as good news at all. If the Corel culture takes over, we can look forward to non-existent support, patches that don't fix bugs, and costly major releases that don't resolve long-standing issues.

I would expect Corel to take good coders away from core Jasc work, and eliminate most of the support personnel to maximize profit. The core product we are accustomed to purchasing alone might be swept into a "suite" so you can no longer buy it for less than $100. The upgrade price will go up, for no additional value.

Time will tell, indeed, but I'm not optimistic.

Corel finds itself in an unusual position — that of the evil empire swallowing up pawns. In truth, Corel and Jasc are more alike than they are disparate. “Technically, Corel is a larger company, but not much larger,” says Kris Zaklika, a visible member of the Jasc product marketing team. “The Corel people are very much like the Jasc people, right down to the winter weather both have to live through at their respective locations.”

There are several components about the purchase that invite optimism:

• Corel has felt the pressure for over a decade to unbundle PhotoPaint from the Draw suite, and save for a brief time in 1998, has been reluctant to do so. Now the company does not have to — PSP is its standalone image-editing program. These two stark evolutionary paths will help ensure that one does not cannibalize the other.

• Corel can borrow tools from its new toys. Take it to the bank that the next version of the CorelDraw suite will include a modified version of Paint Shop Photo Album, replete with a .CDR filter. PhotoPaint really needs a RAW format for importing uncompressed digital photos; PSP has it...

• This might be the first time in Corel’s history that an acquisition has not been undertaken based chiefly on naked ambition, egomaniacalism, or a desperate need to placate public shareholders. As a private company (controlled by a company that measures carefully the value of an investment), our confidence is much higher about the market-driven, business-focused reasons for the purchase.

• Paint Shop gets great shelf space at computer stores — better than CorelDraw gets. We are far from experts on those market forces, but it can only help Corel that it now owns the product getting all of that good visibility.

• And as mentioned earlier, Corel can afford to do this. It is a much brighter time for Corel these days, and the Jasc purchase reflects that as well as contributes to it. As CorelDraw honcho Tony Severenuk said recently, “Straight up, we're pumped. This place is rocking. It’s a buzz, It feels like 1994 again.”

Unlike the WordPerfect purchase, unlike the dreadful hardware acquisitions of a decade ago, unlike the unceremonious Micrografx bailout, unlike the Linux distraction, and even unlike buying Painter, Paint Shop Pro fits hand in glove with CorelDraw. The two could form an unusually strong combination that could resonate loudly throughout the business graphics marketplace.

Corel needs to bring good identity and focus to its marketing efforts and it must avoid confusion about its three programs with “paint” in their names. If it can achieve that, this purchase could be a big win for a company that has fought hard to put itself into a position to enjoy a few victories.