JEAN PIERRE VERSTER: Boom time for Zoom time
The freemium model is a powerful way to gain widespread adoption before monetising your product to a greater extent
Businesses around the world have needed to adapt quickly to the disruptive impact of self-isolation and lockdown. Employees still need to communicate with one another, as well as with service providers and customers or clients, and nothing is as effective as meeting face to face.
Now that this is no longer possible in most cases, companies offering video communication tools have been the rare beneficiaries of less person-to-person contact and widespread adoption of remote working setups.
Consumer video apps — including Apple FaceTime, Facebook Messenger, Skype, Google Duo and WhatsApp video calls — are adequate for one-on-one video chats.
But businesses usually need more extensive functionality, such as auto-recording of video meetings, allowing multiple participants, screen sharing, file sending and desktop support.
The main providers of these premium video communication services are seeing an unprecedented surge in usage and a sharp increase in revenue.
Zoom Video Communications listed on the Nasdaq Exchange on April 17 2019 at $36, under the share code ZM. Now, less than a year later, it is trading at about $150 a share, giving it a market cap of more than $40bn.
It should not be confused with Zoom Technologies, a small Indian IT training firm with the share code ZOOM, which has seen a surge in its share price as traders mix up the two companies.
Zoom Video Communications follows the "freemium" subscription model, as do most cloud services companies these days, where a basic service is offered for free but premium tiers of additional services cost extra.
The freemium model is a powerful way to gain widespread adoption before monetising your product to a greater extent.
It seems to have worked well for Zoom, with recent data from Apptopia indicating that Zoom Cloud Meetings has the largest market share of the app competitors, at roughly 20% of daily active users of video communications apps.
The challenge will be to nudge a lot more users from the free tier toward its premium paid-for services, to justify the current share price.
Microsoft, which offers video communication tools through its Skype and Teams (previously known as Skype for Business) applications, is the other major player in this market. At present, it has almost 20% market share.
While these apps might not be material to the overall Microsoft business on their own, the bundling of Teams with Office 365 helps to make it the quintessential business software suite, which has propelled Microsoft to become the most valuable company in the world.
Even with a market cap of more than $1.1-trillion, we still see value in its shares, given its strong moat, or sustainable competitive advantage.
Microsoft has also become more collaborative under Satya Nadella, recently announcing Teams’ interoperability with Slack.
Slack is a relatively recent listing, trading on the New York Stock Exchange since June 19 2019 (but still near its listing price of $26), with a market cap of $16bn.
It is primarily an instant messaging app, but with video chat functionality as well.
The Slack platform has seen a jump in usage over the past month, though its CEO has cautioned that the increase is unsustainable.
It will be interesting to see if Slack’s interoperability with Teams stimulates further interest in its independent platform or whether it heralds greater integration with Microsoft in the near future.
Slack shares are trading close to fair value, in my opinion.
Cisco Systems is also a notable player in the video communication market with its WebEx service, but the service is estimated to only contribute roughly 1% of Cisco’s group revenue.
Adobe Systems, similarly, offers Adobe Connect, but its revenue contribution is a minuscule part of the group’s earnings.
These companies should therefore not be considered as investments purely because of their exposure to the video communications market.
RingCentral, with a market cap of around $20bn, is another player worth mentioning.
It has a strong position in the cloud-based business phone system market, and the imminent launch of its video product could represent fierce competition for market leaders Zoom and Microsoft.
But as is often the case in the software industry, the disruptors are probably about to be disrupted.
Whether a customer of, or an investor in, video communications providers, choose wisely.
- Verster is CEO of Protea Capital Management
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