Zoom’s stock has more than doubled YTD, largely propelled by the COVID-19 crisis. It blew past 300M daily meeting participants, revenue is up 88% in 2020, and net income is up 6x. Those numbers might provide some insight as to why the market is trading the company at over 70x LTM revenue (yes, you read that right), but provides little justification.
The market is trying to bake in the massive shift in communication: Zoom is trying to be your remote office. If Zoom succeeds, the stock is severely undervalued. However, that is a massive if. And for them to do that, they need to start thinking of themselves as a platform. They need a Second Act.
Zoom’s Rise
Zoom’s rise to prominence isn’t a mystery: they focused on ease of use and performance. It’s a very Dropbox-esque strategy to customer adoption, whose product mantra used to be: “It just (somehow) works”. Zoom just works. Compared to other consumer alternatives, Zoom made it easy to just send a link and have confidence it would work for everyone. Zoom’s CIO, Harry Moseley, underscores their focus: “We look at the operating systems, look at the device, tune the communication specifically for that network or for that device”.
In continuing the Dropbox comparison, one would hope Zoom could find safe harbor in just remaining a better product. Dropbox, however, has built its defense not around being easy to use, but around workflow capture, making it hard to replace. For example, they empower cross-company collaboration, enable design and engineering to work together, and offer security management to the CIO. Zoom has yet to capture a workflow.
Network Effects Are Not A Defense Strategy
The concept of Network Effects was coined in the early 1970s as researchers studied telephone networks. A simple definition:
A product displays positive network effects when more usage of the product by any user increases the product’s value for other users (and sometimes all users).
Note that the usage of the product increases the product’s value, not the retentive value to the user. These two are often correlated, but not necessarily causal. Providing value and retaining are two different beasts.
Consider Facebook v Snap. The network effects are the same: the addition of a friend provides you with more value on the platform: another person to connect with. However, the defensibility of the network differs: you stay on Facebook because the product has retentive levers - via public profiles, videos, pictures, life events, etc; whereas, Snapchat by definition stores nothing. This is why nothing stopped users from leaving when Instagram launched Stories.
This is a retentive corollary to Network Effects: Snap’s ephemerality meant a user did not “lose anything” by discontinuing the use of the product, and the same is true for Zoom.
The Second Act - The Platform
Zoom’s immediate market is barreling towards a path of commoditization. And more importantly, a path where competitors have a fleet of retentive and integrated products ready for easy upsell. For them, video conferencing is the free “staple product” in the back of the proverbial storefront used to get users in the door and walking past the real moneymakers.
Zoom needs their Second Act. They need to take their infrastructure investments to power a network-driven retentive product. And this product is usually sitting adjacent in the value chain. To pull a quick excerpt from Clayton Chistensen’s “law of conservation of attractive profits”:
When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.
Businesses initially create value by vertically integrating a product in a space where fragmentation caused undue friction - i.e WebEx’s performance was poorly optimized for the platforms it ran on and the video infrastructure was not reliable. But as those things become more commoditized, the new value lies elsewhere, in the surrounding ecosystem.
The location of the “adjacent stage” is the multi-billion dollar question for Zoom. A series of concerted bets that builds verticalized solutions on top of their infrastructure could deepen and expand use-cases and perhaps provide a substantive moat. Or Zoom can take this opportunity to invest in a platform.
Strategically, they need to look at revenue distribution across the adjacent vertical markets. Does 90%+ of the market reside in 2-3 verticals (for example, sales, corporate telephony, webinars) with the remaining adjacencies accounting for small trickles of business? Or is the distribution across 10+ markets, each valuable, but impossible for one company to parallelize execution across?
If it is the latter, and my hypothesis is that it is, to maximize value capture, Zoom should be focused on enabling others to build these solutions. A few data points that might help justify this path: online event-ticketing, personal training, online collaborative gaming are all $10B+ fragmented markets. The chances they can dominate all those markets is slim. But, they are well situated to provide the infrastructure to power new players.
Focusing on their core competency, video conferencing and telephony, and enabling partners to build solutions that further increase the adoption of their infrastructure moves them into a more defensible and more valuable position.
APIs Don’t Make A Platform
Zoom has developer APIs and a marketplace that purports over 200 apps, but does it have a platform? I would posit, it does not.
Ben Thompson provides a good definition of a platform:
The name “platform” is a descriptive one: it is the foundation on which entire ecosystems are built…platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users
The creation of an ecosystem is important - it means that the platform has to facilitate a relationship in a way that inserts a 3rd-party supplier in a value creative way for all three parties. And doing so is often counterintuitive for companies. They require the addition of a completely new customer to the product strategy: the 3rd party suppliers. Platform teams are often started without a formal commitment to this new customer persona.
When a company starts, its product is the deliverable of the business. However, in building a platform, the deliverable is no longer directly in the hands of the business - the deliverables are the products that developers build on the platform. Their failure is your failure.
The goal of the “platform team” is to provide its partners greenspace to build an experience better than what other internal teams might ship. Without providing this space, developers sometimes end up competing with the company’s internal teams and deadlock into a local-maximum of innovation: an internal team builds a suboptimal native experience, and because something exists, and has distribution the activation energy for a partner becomes too high.
Shopify provides a leading example of what it means to create a valuable platform, having paid over $280M to developers on their platform. I once grabbed coffee with an engineering leader at a competitive ecommerce platform trying to bring life to their developer platform. Half sighing and half chuckling he said something along the lines of:
When we first looked at Shopify, we wrote them off. They didn’t have simple things like abandoned cart management, product recommendations, etc. But now, our individual products can’t keep up with their partners - they have entire companies that are focused on abandoned carts or product recommendations.
Does Zoom provide the necessary greenspace? If you dig the 200+ apps on their platform, the majority are read-only and provide no path for a partner to inject themselves into a value creation journey. Zoom has remained vertically integrated and has failed to create space for a 3rd party to come and provide additional value.
If you look at most of the featured apps on the marketplace Github, HubSpot, Jira, Trello, Zendesk, Epic, the vast majority fall into chat alerts, or the ability to create and link to a Zoom conference. None of these partners are able to create net-new product experiences.
The Whitespace
The open opportunity in video conferencing sits between consumer-facing and developer-facing spaces. It’s easy to point to companies like Agora, PubNub, and Twilio and argue that developer tools in video exist already. This doesn’t explain why dance studios are still sending out two Zoom links for dance classes to get around the 40 min limit and why when playing poker, people have a Zoom instance running behind the poker site. These dysfunctional latent behaviors are the opportunities. As an example, the famed WeChat platform/Official Accounts started when they saw influencers making giant series of ~500 person group chats to do broadcasts.
To capitalize on a platform, it’s important to look at the differentiators they have in the market and make that the cornerstone of their GTM. In this particular case there are two:
- Consumer facing video infrastructure - while this may not last long, Zoom’s video infrastructure is far ahead of their competitors
- Consumer distribution - most people have Zoom installed on their computers and phones
A platform could start with something as simple as discovery tools for Zoom-run events and activities, where the non-video aspects of the event are handled by a partner. With proper integrations to calendaring it could become a hub that facilitates events or breakout sessions. Done properly, it could make a play at the larger online events space.
Or could be focused entirely on providing better in-app controls for developers to tailor the video feed specifically for their activity. This is not an entirely new concept - Twitch’s Developer ecosystem, and specifically their Extensions product is a great place to look for inspiration. In-chat voting, games, better note-taking/diction, moderation, etc are just the start of what is possible.
Conclusion
It’s important for Zoom’s product team to recognize the long road ahead of them. They need to find a way to retain and up-sell existing customers by capturing some part of their workflow. If they decide to move down the partner path, they need to accept responsibilities of adding a new customer. They will not have a voice as loud as another internal team, they won’t be able to fight for surfaces, access to data, or new APIs. But they will be just as important as the first set of customers Zoom started with. It will become the platform team’s job to evangelize for them, fight other internal teams’ scope and prioritize features that wouldn’t make sense for the original users. The priorities may include payment methods that allow consumers to buy experiences, or get past a paywall, universal users across merchants, etc.
The big open question is will Zoom use its position as an opportunity to take a risk and grow into the valuation the market has given them. They could be worth the $50B, or more - if they are willing.