Magento is in the middle of a change – again

Today, Magento is the most commonly used e-commerce platform in Finland. The installation base is broad for both the open source version and the commercially licensed version. Due to the new ownership, the market position of the product changes slightly.Global software company Abode announced an acquisition of e-commerce platform Magento back in May 2018. Adobe has had an extensive offering already before, but it’s been lacking an e-commerce solution. Magento seems to be the missing piece for the puzzle. Now that a year has passed since the announcement, it’s time to reflect the impact of the acquisition and the future of Magento.

North Patrol is a consulting firm specialized in the design of digital services and information systems. We shape ideas into a vision and service concept, find the best architectural and technological solutions, design a functional user experience, and compete to find the ideal partner for implementation work. We do not sell implementation projects, nor do we sell licenses; we are genuinely on the side of the customer.

18 June 2019

Mikko Jokela

The ownership of Magento has changed several times during the last few years. Product development was originally started by a company called Varien back in 2007. The first version of Magento was released in 2008. A multi-national e-commerce corporation eBay acquired Magento fully in June 2011 having invested to the product already earlier. Followed by a series of colorful events, Magento was spun out from eBay as an independent company by a new owner Permira private equity fund in late 2015. During this ownership, the product and especially its cloud capabilities evolved significantly. As a proof of successful development and commercialization, Adobe acquired Magento in a deal that was finalized in June 2018.

Adobe’s acquisition of Magento has gained a plenty of interest but it has also raised a number of questions. During the ownership of Permira, the main target group for Magento were mid-market web shops with revenue less than 100M€. In addition, Magento used to provide cost-effective commercial options for significantly smaller web shops and a separate open source version free of charge.

As Adobe acquired Magento, it also acquired a huge amount of mid-market customers. What does the company plan to do with all these customers? Will the company target increasingly the global enterprise sector clientele also in the field of e-commerce? In the case, it’s main competitors will be the other global giants like SAP, Oracle and Salesforce. Does the focus of the product development move away from the consumer web shops to B2B sales channels? What happens to other software editions of Magento?

License prices have raised

Adobe is striving hard to integrate Magento as a seamless piece to their Adobe Experience Cloud suite. Adobe’s own web site has been talking about Adobe Commerce Cloud for a while instead of Magento. Currently, this is mostly just marketing talk. True integration will take time, but the direction is clear.

Besides marketing efforts, the re-branding of the product is also reflected in license prices that have raised recently. Magento’s license pricing is based on web shop’s revenue. There are certain revenue categories that set the license fees. In lower revenue categories, the increase in license has been relatively moderate, but when we go to slightly higher revenue categories, Magento’s list prices have more than doubled. This means that Adobe is chasing credibility within the enterprise sector clientele.

Challenge is that the higher license pricing will frighten out exactly that clientele where Magento has been as its strongest in the past: the mid-market. Whether a customer really pays a list price or not is another question, but in order to get a potential discount, you need to reach out for Adobe to begin a separate negotiation process directly with them. Previously, the pricing was clearer and more transparent. Now, a potential customer needs to contact an Adobe sales representative in order to get even the list prices.

In a way, this makes sense for Adobe as they get closer to their clients. On the other hand, this kind of process makes the purchase slower and more laborious for the potential customers. The negotiation model works with enterprise-size customers, but I can imagine that, for example, many Finnish buyers will find the model difficult.

What happens to Magneto EE?

Magento Enterprise Edition (EE) is nowadays known as Magento Commerce on-premise. This version of Magento is a commercial edition that can be installed and hosted in customer’s own server environment, e.g. in Azure. EE is used relatively widely but now the future of the edition seems uncertain.

Renewed license pricing for Magento Commerce on-premise is simply non-attractive. The license pricing is in practice at the same level with Magento Commerce Cloud but in return for the money you get less. Magento’s own web site presents a comparison table of open source and commercially licensed editions. In the case of Magento Commerce on-premise, the items under the Magento Hosted Cloud heading in the table are not subject to the license price and therefore remain on the responsibility of the customer. Lack of these items increase the costs for the customer and require more care-taking over the life cycle of the solution.

This is a clear strategic choice from Adobe. They want to steer their customers towards Magento Commerce Cloud. This is understandable in many ways, but at the same time it raises the question of the future of Magento Commerce on-premise. It may well be, that Adobe will bury the on-premise version completely in the near future.

This direction poses a challenge also to the implementation partners. Many of them have productized a hosting solution to their own Magento service offering. Now that Magento Commerce on-premise’s license price has risen dramatically and its future is uncertain, there are very few good reasons for customers to select an on-premise version instead of Magento Commerce Cloud. Part of the overall responsibility is therefore transferred over from the implementation partner to the PaaS environment provided by Adobe. The consequence is, that at same time implementation partners lose part of their business.

The future of the open source edition

Adobe isn’t exactly famous as an open source software owner. However, the company has taken steps into this direction, and it may well be, that the Magento open source solution (former Magento Community Edition, CE) continues alongside the commercial version. However, it is clear that Adobe prefers the commercial Magento Commerce Cloud. The open source version can be seen an easy entry point and a step towards a commercial solution.
It can already be seen that the capabilities of the commercial version differ from the capabilities of the open source version. The features related to B2B online shopping and BI reporting are examples of the future direction as Adobe is developing its product towards the global enterprise sector.

In any case, Magento’s open source version is still suitable for smaller web shops and especially for consumer goods. There are a wide variety of free or inexpensive add-ons available and the open source version offers basically unlimited possibilities for customization.
However, when selecting an open source version, at least the following risks must be considered:

  • No commercial support from Adobe.
  • Implementation requires more customization and utilization of third-party add-ons compared to commercial version.
  • The required add-ons have several different suppliers and there is no certainty about their development and compatibility with each other in the long run.

In addition, a separate hosting solution is required for the web shop.

Should I be worried?

Customers who have already chosen Magento Commerce Cloud solution should be safe. The product will evolve constantly, and its life cycle will be long. Adobe will invest huge amounts of money in product development and integrating Magento into its own Adobe Experience Cloud suite. The only concern with Magento Commerce Cloud is the possible increase in license costs at the time when the the pricing can contractually be revised.

You should be much more concerned if you’re a Magento EE customer. Even though EE is a valid platform today, Adobe’s focus is so strongly in the Commerce Cloud that it seems that Adobe has no interest in EE’s long-term development. The situation is particularly urgent if your web shop is running on Magento 1 whose product support will end next summer. It must be considered whether to upgrade to Magento 2 EE/on-premise or to switch directly to Magento Commerce Cloud. So instead of a big upgrade project, you might be facing a total renewal.

Magento open source users will most likely remain open source users as long as their ecommerce business is relatively small. If the open source related risks have been identified and accepted before, they can certainly be accepted in the future as well. When the business evolves, the transition to a commercial version (read: Magento Commerce Cloud) is a natural step.

Personally, I’m a bit worried about Magento’s position in the Finnish e-commerce scene. At the moment, Magento is the most popular e-commerce platform in Finland. It is inevitably bad news for the Finnish market, if Magento aims to chase bigger and bigger enterprise customers. We’ll have to face the fact that our market is small or medium-sized at the most according to global standards.

Currently, there are several capable implementation partners, but if doing profitable business becomes more difficult, the number of local implementation partners may also narrow. The lighter e-commerce platforms, especially Shopify and WooCommerce, are taking over the market, but at least in the short run, these are not capable in replacing Magento as a go-to platform for mid-market customers.

Also, the fact that Adobe is integrating Magento into Adobe Experience Cloud suite does not really increase the product’s attractiveness. Today, there are only a few organizations in Finland that use any of Experience Cloud’s solutions. It is difficult to see, that the number of these organizations would increase significantly in the future.

We are living interesting times. At this point, I urge those who are making the platform decisions to consider exceptionally carefully in which way to go. If you need external expert view to support your decision-making, do not hesitate to contact North Patrol.

Mikko Jokela

Mikko Jokela is an expert on web and digital business.

Mikko consults the customers on web platform and vendor selections, defining functional requirements, and especially on how digital channels could support business needs more effectively. His areas of expertise include utilizing web and digital channels for better business, and web technology selections.

Mikko has been working for IT vendors in several roles. He has been in charge of a business line, responsible for web business development and a consultant in several web projects. Mikko’s main focus has been in private sector customers but he has also work experience on education and public sector.


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