Zoom, Leadership, and the Pursuit of Happiness
Video-conferencing company Zoom has succeeded in building a great product, but also a strong philosophy centered on delivering happiness
An economic moat refers to a company’s ability to sustain competitive advantages over rivals to preserve long-term profitability and market share. It turns out that Zoom, whose mission is to make communication frictionless, effectively exemplifies this notion. A cloud-native platform and modern leader in video-conferencing software, Zoom is defined by its scalability, ability to work across different devices, and easy integrations with physical locations and applications. In their S-1 filing (p. 75), they underline the importance of building greater empathy and trust by delivering a solution that just works.
Zoom (ZM) opened at $65 per share at its Nasdaq debut on April 18th — 80.6% above its initial public offering price — placing it as the best performing IPO of the year to raise at least $300 million, with a market capitalization of $20.68 billion and exceeding both Lyft and Pinterest (two other companies to recently go public); from Bloomberg:
Zoom’s moat is threefold: a freemium pricing model allowing users to test their product on a basic plan with few limitations; intuitive software that is usable across all devices, operating systems, and third-party applications; and integrations with other dominant video and cloud service providers. The high switching costs and network effect resulting from this creates distinctive advantages which allow Zoom to retain customers and improve the value of their many offerings.
Zoom and the video market
The proliferation of mobile devices and next-generation cloud services has been instrumental in breaking down traditional barriers to adoption in the global video-conferencing market, which is forecast to grow at a compound annual growth rate of 12.1% by 2023. Zoom entered a highly competitive market as a cloud-native platform and offers a freemium model with the intention of demonstrating the value of their various offerings. When Zoom launched in 2011, its main differences with competitors were immediately evident:
- The software layer shielded devices from bugs resulting from updates on browsers like Chrome, Firefox, or Safari.
- Zoom’s Web client could figure out instantly what device was in use, and different versions were therefore not required for Mac or PC.
- It could operate on a 40% data loss, working comparatively well on a weak or slow Internet connection.
Early adopters of Zoom video-conferencing like Walt Mossberg hailed the technology’s quality and interoperability in its first few years. In a Wall Street Journal video review, Mossberg noted that Zoom’s freemium model distinguishes it from competitors like Skype — whose group video functionality required a $10/monthly plan (free since 2014) — or Google Hangouts, which is integrated within a broader social network.
Mossberg did, however, point to limitations related to the company’s position in the video communications space or risks to speed and quality as users increase. It seems these threats have not materialized: worries of oversaturation in the video market were offset by Zoom’s attractive pricing model, product expansion strategy (Rooms, Phone, Telehealth), and overall service delivery.
Zoom was founded by Eric Yuan, a former engineer for Cisco’s Webex video-conferencing who emigrated from China to Silicon Valley in 1997. Yuan was tapped to lead Webex’s engineering group after the video-conferencing company was acquired by Cisco, but he soon became unhappy with the circumstances; from Forbes:
“Each time users logged on to a Webex conference, the company’s systems would have to identify which version of the product (iPhone, Android, PC or Mac) to run, which slowed things down. Too many people on the line would strain the connection, leading to choppy audio and video. And the service lacked modern features like screen-sharing for mobile.”
Except Cisco wasn’t interested in letting Yuan rebuild Webex, placing their focus instead on social networking. Faced with a mediocre product and obdurate management, Yuan left in 2011 to create Zoom. During this time, he navigated VCs skeptical of a new entrant in the video market, largely due to the apparent dominance of entrenched incumbents (Skype, Google Hangouts, and Cisco Webex) and promising startups (BlueJeans, GoToMeeting).
Yuan is a strong proponent of the pursuit of happiness. In an open letter from their S-1 filing (p. 74), he states that one of the key takeaways from his experience at Webex — beyond their offering not being in line with customer needs — was that creating a sustainable culture requires intense focus on customers and employees, and that “the sum of their joy is greater than its parts.” The theme of happiness repeatedly comes up in interviews and profiles of Yuan as a key component of the kind of culture that allows Zoom to thrive:
“We believe that our success results from a culture that is focused on customer and employee happiness, a video-first cloud architecture, recognized market leadership, viral demand, an efficient go-to-market strategy, and robust customer support.”
The scalability, user-friendliness, and reliability of Zoom’s services all reflect this objective and have earned the company high scores across customer review sites like Gartner Peer Insights, G2 Crowd, and TrustRadius. In 2018, Yuan won Glassdoor Employees’ Choice Award with 99% employee approval and received praise for building a culture centered around self-motivation and self-learning.
Although the markets in which Zoom operates are highly competitive, their growth has more than doubled in the past two years with rates of 149% and 118% respectively, and the company broke even three years ago on $60 million in revenue. One of the few profitable unicorns expected to IPO this year, Zoom has over 50,000 customers and co-locates in 13 data centers globally, outsourcing some of its data work to Amazon Web Services (AWS) and Microsoft. This distinguishes Zoom’s operations approach from that of other companies like Pinterest, which is running its business entirely on AWS (compute, storage, and data transfer).
In September 2018, Zoom was named a leader in the Gartner Magic Quadrant for Meeting Solutions; from Gartner:
A second distinction comes with Zoom’s attractive pricing model, which starts with a basic ‘free’ tier which offers limited video-conferencing services (40 minute limit on group meetings), and users who are pleased with the service then become advocates and subsequently upgrade to a paid or enterprise plan. Barron’s called this an effective sales strategy, largely contributing to the company’s 118% revenue growth in the January 2019 fiscal year to $330.5 million. By providing a good quality service, Zoom avoids the sticky customer trap: switching costs are highest when cost reduction can be achieved by downgrading plans without sacrificing ease-of-use.
There are nonetheless concerns of being an upstart in a highly saturated video market, which Zoom itself admits on their S-1 filing. The company faces competitors ranging from legacy web-based meeting service providers (Webex, Skype for Business) to video providers with basic functionalities (Google) and point solutions (LogMeIn); from their S-1 (p. 15):
“Many of our actual and potential competitors benefit from competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services, larger marketing budgets, more established marketing relationships, third-party integration, greater accessibility across devices or applications, access to larger uses bases, major distribution agreements with hardware manufacturers or resellers, and greater financial, technical and other resources. Some of our competitors may make acquisitions or enter into strategic relationships to offer a broad range of products and services than we do. These combinations may make it more difficult for us to compete effectively.”
There are two caveats which do allow Zoom to compete, however. First, several alternate services are not direct competitors, providing only comparable features to a component of Zoom’s offering — only rooms, only chat, only telephony, etc. Second, recent forays into new products (e.g. Phone, Telehealth) are putting Zoom in contention with legacy PBX providers like RingCentral or Vonage.
The integrations complication
A robust integration and partner system is necessary for any cloud-based service to grow its reach and spread brand recognition. In enabling organizations to consolidate their third-party applications with Zoom’s own video-conferencing services, Zoom provides an intuitive video, voice, and chat interface for several functionalities: scheduling and starting meetings, room collaboration, content sharing, automating marketing/processes, and unified login. Their platform not only integrates with dominant cloud software application providers (Atlassian, Dropbox, Google, LinkedIn, Microsoft, Salesforce, Slack) but also hardware partners through which Zoom Rooms and conferencing software is deployed.
These integrations may create a risk of overreliance on other platforms, however. Managing the complex web of dependencies across video and cloud service providers will require investing time and resources in operations, IT, and security. Zoom itself admits it could fall prey to the integrations challenge; from their S-1 filing (p. 38):
“We may not be able to integrate acquired businesses successfully or effectively manage the combined company following an acquisition. If we fail to successfully integrate our acquisitions, or the people or technologies associated with those acquisitions, into our company, the results of operations of the combined company could be adversely affected. Any integration process will require significant time and resources, require significant attention from management and disrupt the ordinary functioning of our business, and we may not be able to manage the process successfully, which could harm our business.”
Moreover, user experience is contingent on the interoperability of Zoom’s platform with devices, systems, and applications that they do not control. In cases where integrations prove essential to ease-of-use, an inability to maintain relationships could harm the business. For instance, on May 6th Zoom announced a multi-year extension of its partnership with RingCentral, a leader in global cloud communications solutions, allowing RingCentral customers to continue replacing their existing infrastructure (cloud PBX) with Zoom’s video communications platform. To grow into its valuation, Zoom will need to move into new markets (the way it did with Zoom Phone), to compete with enterprise phone system providers like RingCentral, LogMeIn, and others.
But integration risks rarely outweigh the benefit of having a good quality product, which (alongside a robust partner ecosystem) allowed Zoom to spread like wildfire. In a 2018 Internet Trends report by Kleiner Perkins Caufield & Byers (KPCB) demonstrating the crucial role of video communications in productivity and company culture, KPCB concludes that high growth companies are more drastically impacted by video technology. In listing the benefits of using Zoom, KPCB notes 85% improvement in collaboration and 58% reduced meeting times, with several participants observing that they spend “less time trying to get a meeting started and more time actually meeting.”
Because I’m happy
According to Ben Thompson, the founder of Stratechery, Zoom’s success can largely be attributed to its single-minded focus on product quality:
“The challenge for incumbents, including Microsoft and other companies like Citrix, Cisco, etc., is that years of building their business on leveraging their existing relationships left them vulnerable to a company like Zoom singularly focused on delivering a superior product, at least once a SaaS architecture made distribution so much easier. Make no mistake, enterprise software still requires a sales force, but it is far easier to start with customers that have already discovered and tried the product on their own than it is to sell something without any sort of pre-existing relationship.”
Zoom is not invulnerable, and the largest players (Cisco, Microsoft, Google) still pose a threat to its position in the video market. Third-party integrations may raise additional issues, like when a Zoom service outage occurred in January after an outage of AWS, one of their underlying vendors. Yet, for a company that did not hire a marketing team until 2015, and relies instead on a dependable and well-functioning product that makes people happy, Zoom is set to continue its path to success in the video market.