There are many predictions around the macroeconomic impact of Covid-19 worldwide. From the investment and M&A standpoint, it’s going to affect everyone, however, certain sectors (i.e, videoconferencing) will cope with it better than others. During the following posts, we’ll pick some sectors and dig a little deeper to get a sense of how will they evolve. As an overview, and before getting into the videoconferencing space, here are some quick highlights on the overall effects we’re likely to see (sooner rather than later):
- Some investors will reassess the current valuations of potential new deals
- The pace of new deals will slow down
- The average ticket in certain stages will be lower
- new sectors (i.e., digital health, remote work, etc.) will emerge as the preferred assets for investment
- certain VC funds will stop investing altogether as their LPs freeze their funds
- increased number of bridge rounds to extend a startup’s runway
- An increasing number of corporates are accelerating their digitalization as they cut costs. This might be good for the M&A market in the future.
- General revenues will drop and fast. Those companies that can’t reduce costs quickly will head for bankruptcy.
I won’t go into the macro strategies or will attempt to predict how the markets will react. What I want to explore are the consequences and potential effects on key strategic sectors, one at a time.
As different governments enforce lockdowns, working remotely is becoming the norm for a big part of the population. Remote work comes with a set of remote digital tools that range from shared documents to messaging apps. King amongst them are the video conferencing tools. There are plenty of them with different use cases, and nearly every single one of them is experiencing dramatic growth.
“Microsoft Azure has seen a 500 percent increase in meetings, calling, and conferences on its Teams remote collaboration platform since January 31. In the same time frame, it has seen a 200 percent increase in Teams usage on mobile devices.”COVID-19 stress tests cloud services. Infoworld. Mar 2020
- Video conferencing Startups
- Non-professional: Zoom, Skype, Hangout, WhatsApp
- Professional: Teams, Slack, GoToMeeting, Cisco WebEx
There are many companies in the space, but one name rings stronger than others, and that’s the Zoom.
Zoom is a cloud-based company with a Software as a Service model (SaaS), with different price tiers (ranging from $0 to +$100.000). According to their last numbers, they currently have 12,92 million monthly active users (a 21% growth since the end of 2019).
“Zoom had 12.92 million monthly active users, up 21% since the end of 2019, Chrane and Isaacs wrote, citing data from privately held Apptopia.”Zoom has added more videoconferencing users this year than in all of 2019 thanks to coronavirus. CNBC, Feb 2020.
“The company added 2.22 million monthly active users so far in 2020, while in 2019 it added 1.99 million, according to the note.”
Such rapid growth can put some severe strain on most companies. Zoom is unique compared to other video conferencing companies, as they designed the whole architecture in the cloud. There is a big difference between using some cloud-based services and building the product for cloud architecture. In this case, Zoom can finally rip the benefits from their years of learning.
Still, Zoom doesn’t manage its cloud infrastructure. They have a mix of public-cloud infrastructure providers like Amazon Web Service (AWS) or Equinix.
“Further, as we rely on third-party and public-cloud infrastructure, we depend in part on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of data and information. “
S-1 filing, SEC, Mar 2019.
“These costs are related to our co-located data centers, third-party cloud hosting, integrated third-party public switched telephone network (PSTN) services, personnel-related expenses, amortization of capitalized software development and allocated overhead.”
Adding 2.22 million active users in two months isn’t easy and has a toll on the costs of operation. Lucky for us, Zoom went public not long ago, so I took a look at their numbers from their S-1 filing to check how much they were spending.
I must confess I had never checked their business, but their numbers were impressive. In 2019 they spent 61 million dollars operating their business. However, they brought an incredible 330 million dollars, making them a pretty lean company.
Covid-19 is driving much of the growth seen this month. When analyzing the impact, I look at three big questions:
- Is this rapid growth good for their business in the short term?
- When the recession hits and demand plummets, will they see many of those new users disappear? (churn rate)
- Will the structural costs needed for rapid growth remain if demand drops?
In other words, past, present, and future situation analysis.
I did a quick back-of-the-envelope calculation with their S-1 filing and extracted some interesting figures. Zoom’s average user costs them around 7,56 dollars per year (I’m sure the distribution looks quite different per type of user). Each of these users spends an average of 15 minutes a day doing calls (again, the average masks real usage per user type).
I’m assuming that due to the crisis, users are spending slightly more time, pushing the average towards 20 minutes per day. Also, I’m guessing the scaling of resources, at least at first, is probably driving an increase in the cost per user, let’s say towards 8 dollars per user per year.
The total cost of the surge might be north of some extra 2 million dollars a month (decreasing each month). I’m making plenty of assumptions here thought. The biggest is that Zoom’s architecture (and cloud provider, AWS) can scale linearly to cope with this. I’m pretty sure that’s not the case for other providers (i.e., Microsoft’s Teams recent outages).
“Zoom said the number of paying customers with more than 10 employees using its service rose around 61% to almost 82,000. Customers paying more than $100,000 in trailing 12-month revenue grew to 641, up from 344 in the same quarter last year.”Zoom Video Posts Fourth-Quarter Net Profit on 78% Revenue Growth. WSJ. Mar 2020.
Now the bigger question, what percentage of those are either paying users or will be in the future? That’s anyone’s guess, but I’ll try to do an approximation. Being generous, we’re talking about 15 million dollars per month in new revenue (0,005% conversion rate for +$100k companies, 1,4% conversion rate for Pro users ~$2400/year).
There are many use cases for Zoom, but these are the ones I’m seeing often:
- Online education: As most schools are shut down, those of us with parents are getting bombarded with online activities through, you guessed it, Zoom. The particulars here are important, as, even if the lockdowns are lifted, most schools won’t resume their activities until after the summer, effectively extending the use of online tools like Zoom way beyond the actual lockdowns.
- Team meetings: Many tech teams already work remotely. However, organizations that only collaborated in real life are taking to the tool for the day-to-day.
- Business meetings / Due Diligence: There are plenty of interactions, including introductions, potential leads, networking events, or even due diligence that’s moving online.
- Webinars: As more people are finding themselves without conferences and workshop gigs, they’re taking to online conferencing using tools like Zoom to supplement their income, marketing strategies, or customer support.
As Zoom’s model can be canceled at any point, the question is, how many of these new users will remain on board once governments lift the lockdowns. Let’s assume that the virus will force lockdowns for at least three months. As companies start burning cash, we’ll probably see them cut costs. The good thing for Zoom is, while lockdowns are in place, it’s a cost most companies won’t be able to cut.
Once they’re lifted, the question is how many of those users will go away. I’m guessing most free users will stop being active. Paying customers might probably scale down their costs a bit, but a certain percentage will stay, which is a big win. Will those users, after being more exposed to remote work, change their share of offline/online meetings? Even if a small part does change the behavior, this is already a big win for Zoom.
Zoom is also a partner in Amazon Connect, the automated customer support system from Amazon. Reports say that Connect is growing as customer centers try to automate due to their current lack of workforce. The same question applies here. Will those customer centers return to human labor, or will they retain some degree of automation? I don’t expect this sector to benefit “too much” after the short-term. However, the adoption of automated tools will speed up, which is essential for the long-term.
The Covid-19 crisis is changing the world as we know it. Most people still think the current situation is temporal. I’m not that sure. We will recover, but it will take time. The measures we’ll need to adopt to survive, from business practices to regulations and new social rules, will change us forever.
Will video conferencing be here to stay for all? We can differentiate two intermingling behavioral patterns. On one side, those users that had never experienced remote work, are getting a crash course. The fact that Zoom is the one company that everyone is mentioning is an epic branding win for them. When all is said and done, and if you ever need to do a video conference again, Zoom will be your default choice (not that others won’t be up there with them too). Once you’ve had a continued (like three months forced quarantine) experience with something new, you’re more likely to perceive the value it provides. The mix of face-to-face vs. remote will change. I’m not convinced, though, that we’ll see a sharp turn like everyone is predicting, but more of a gradual shift of the equation during the next few years.
On the other side, remote work increases productivity and lowers cost. It reduces meeting overhead, traveling expenses, and can even cut into expensive office leases. As the looming recession gets closer, remote work and video conferencing might not be optional anymore. Those businesses that want to survive the storm will need to reduce their burn rates. The automation and digitalization of processes, including video conferencing, will become an essential tool to achieve this.
Within this sector, how will Zoom evolve? I made many assumptions with Zoom’s numbers, but I believe their unique architecture gives them a decisive edge. It allows them to keep their costs growing in parallel with their revenue, and it also allows them to scale down accordingly. Zoom will come out of the crisis in better shape, even if they see a potential drop during the likely recession.
Connected with this, the real winner here is Amazon and the AWS division. They’ve already built the capacity, and even if they had to invest in expanding it (they had contingency plans for such situations already), they could recover their investment quickly enough. I’m not that sure about other providers, though. Most companies won’t be able to repay the investment fast enough before the recession cuts their revenue. It will be interesting to watch Microsoft’s Teams evolution, as well as Slack, to see how they cope when we hit the incoming nuclear winter.
Overall, video conferencing space holds plenty of potential, but it’s essential to check under the hood to make sure the company is flexible and adaptable. Any improvement that can save money like efficient compressing or lower latency (less bandwidth use) can have a drastic impact on the survival of the company. Also, keep in mind that human behavior doesn’t change in the short-term. We might adapt to a critical situation, but it takes time for us to adopt new behavioral patterns.