What Is the Secret of Zoom’s Success in Video Communications? (Tech Strategy – Podcast 21)

In this class, I talk about why Zoom has been so successful in video communications.

You can listen here or at iTunes, Google Podcasts and Himalaya.

Choose two options for why Zoom has been so successful.

  1. Good Product. Reliable, easy-to-use, high quality video communications.
  2. Viral service
  3. Collaboration / Coordination Platform
  4. Network Effect
  5. Switching Costs

Correction/Clarification: Zoom has been blocked in China for the last couple of months. I know lots of people who are using it because of coronavirus but that is via VPN. So not the same thing. I’m not sure if I mentioned that or said it wrong in the podcast.

This is part of Learning Goals: Level 3, with a focus on:
  • #14 Virality vs. Word of Mouth
  • #15 Collaboration, Coordination, and Standardization Platforms

Concepts for this class:

  • Digital Platforms: Collaboration / Coordination / Standardization
  • Word of Mouth vs.Virality
  • Network Effects
  • Switching Costs

Companies for this class:

  • Zoom


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——Transcription Below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today’s class is, how did Zoom become so successful? What’s the secret of their success? And it’s been pretty remarkable. This is the video conferencing app software. Works pretty much on every device and with every other program it’s widely used. It is a big deal in the news recently because of the coronavirus situation. So people have been shifting to video conferencing and people have been talking a lot about zoom. But I mean, how did this company become so successful? Given that, you know, this was not exactly a new idea. There have been video conferencing services for a long time. And there were a lot of major players out there. I mean, it’s Skype and Microsoft and WeChat and Google and all these. So how did this new company break into an existing market and do so well? I think that’s a really sort of important question because. People like to talk about digital disruption and sort of blue ocean strategies. Here’s a whole new idea. That’s actually pretty rare. You know, most of the time, if you’re going to do something, you have to take the business from somebody else. You’re not going to invent something entirely new. It’s, you got to kind of take it away. And, that sort of attacker versus incumbent question is dramatically more common and I think more important. And I think Zoom is a great example of that. Okay, so that’s what we’re gonna talk about today is what is the secret of Zoom success in video conferencing? The two ideas we’re going to talk about, you know, each of these podcasts slash lectures, I try and talk about one or two companies that I think are important, and then I try to talk about one or two ideas that I think are important concepts. So the ideas for today are virality, viral growth, sometimes referred to as like word of mouth and other things, but those are actually different ideas. Viral growth is what we’re going to talk about. important. And the other is collaboration, coordination platforms. Now we’ve talked about several well. two to three digital platforms thus far. We talked about marketplaces as a type of digital platform, Alibaba. We’ve talked about audience builder platforms on the last week or two, TikTok, YouTube, Youku, things like that. And this is a third type, which is the same idea. It’s a digital platform, but this one we call, people call them different names. They call them collaboration or coordination platforms. Sometimes people call it a standardization platform. is a bit more fuzzy, but it’s a really important type of platform, very, very important in B2B, enterprise, SaaS, stuff like that. So those are the two big ideas for today. We’re going to talk about virality and we’re going to talk about collaboration coordination platforms and then take apart this question of how did Zoom do so well and I’ll do it like I’ve been doing the last couple of these is I’ll give you five choices. I’ll ask you to sort of take a guess. We’ll go about Zoom, then we’ll go through some talking about the theory behind these ideas, and then we’ll sort of vote again. I’ll ask you the same question, the same five choices, and see if your answer has changed, and then I’ll give you my take at the very end. So that’ll be the approach. Okay. But first, if you haven’t subscribed, please do so. I would greatly appreciate it. You can go over to jeffthousen.com, sign up there. There’s a free 30-day trial. And as part of that, I mean, for everything we’re doing on the podcast, I’m putting out probably twice as much content on the same subject just to subscribers. So in the next week, what we’ll be writing a lot about is both of these ideas, virality, things like that, and try and take it to the next level. These ideas, these concepts, these companies, they are actually a little bit complicated. Nobody gets it on the first pass. You know, it’s the kind of thing you want to hit over and over again. Then somewhere on the third or fourth time I’ve talked about it, certain things will become more obvious. But for myself, too, that’s how I learned these things. It takes me multiple passes of these ideas and these companies to really get them. a lot of repetition and a lot of additional sort of passes at this content for the subscribers. Okay let’s get into the case. So I’m going to give you five choices for you know why has zoom been so successful. and choose two. You don’t have to choose one. Choose two that you think are the most important. And usually it’s a lot of different things happening. In most companies it’s a lot of factors, but often when you see such an impressive success, there’s usually some big lever happening. There’s usually one or two that are bigger than the others as ideas. So pick two that you think are the most sort of significant out of the five. So number one. Reason number one that Zoom has been so successful, let’s say ease of use of the product. It’s just a really good video conference app. People like it. It’s fun to use. It’s easy to use. It’s very reliable. No matter where you are, you know it’s gonna work. You know it’s gonna be high quality. I mean, maybe it’s just a consumer facing aspect. Look, people like certain things better than other things. People like Coca-Cola better than Virgin Cola. They just do. Some things are just nicer to use, especially on digital. One of the interesting things about digital software is you really can have a lot of subtleties in the experience. A can of Coke is not going to be that much different than a can of Virgin Cola. But Steve Jobs was always good at building these sort of apps and experiences that just felt a little better. Using the iPhone was just a nicer experience. Things moved around. So ease of use, better user experience, high reliability. I mean, this is kind of their sales pitch to consumers. It’s reliable. It’s high quality. It’s super easy to use. The quote in their 10k and their IPO filing was, the quote was, it just works. I think that’s how people see Zoom. So maybe that was it. Maybe it was mostly a consumer facing reason. Okay, number two, virality. That certain products, services really, their very use brings new users in as customers. This is actually pretty common in communications software services like WeChat, Skype, Payment. you know, if I’m gonna send you money, hey, I’m gonna send you some money, you have to sign in to the same service to receive the money. The very usage of the product by me, the service by me, requires others to join. I wanna send you a message, I wanna send you a file on Dropbox, I wanna send you box.com files we’re sharing with the team. All of those things require you, another person, to sign up because I’m using it. That’s really powerful. If I wanna do a video conference with you, link and you have to sign up for Zoom to do the call. So that’s a pretty big lever which called virality. That’s number two. Number three, we will say it’s the collaboration coordination platform. That, and we’re gonna talk about this in theory, but the basic idea is. Digital platforms, sometimes you’re connecting buyers and sellers and that’s the coordination or transaction costs you’re decreasing by virtue of the platform. I can buy something from Beijing, from Bangkok, because the platform has lowered the interaction transaction costs. Well, it also happens a lot within workflows and working with teams and working in a company, rather than us all going to the office, we can collaborate online through an online tool because it enables us to coordinate complicated tasks together through an app. So that’s actually kind of a big one on the B2B side is these coordination platforms basically enable complex tasks to be done by different user groups in one place. That’s number three. I’ll talk a lot about that because that’s a lot of theory. Number four, we’ll say network effects. Network effects are… the increasing numbers of users or the increasing usage, increasing activity, improves the service overall for everybody. The standard example I always say, if you go to Pizza Hut and I go to Pizza Hut. Me going to Pizza Hut doesn’t make your pizza taste any better. But if you’re on Facebook or WeChat or Skype or whatever and then I join, your service just got better because you can call more people. The very adoption increase of users or usage and activity improves the service for everyone. That’s a network effect. So if more people use Zoom, that means there’s more people I can video conference with. So in theory my Zoom gets better if you join. Okay, number five last one, we’ll just say switching costs, which we’ve talked about before. You know, you start to use something and then it locks you in. Maybe it’s a little subtle, maybe it’s pretty obvious and it makes it very hard to leave. Microsoft Windows, try to switch out Microsoft Windows on your computer for another operating system. It’s next to impossible. Now it’s kind of a hard switching costs. Another one would be subtler stuff. A lot of freemium businesses use this where they will offer you a service. And it will be free to start. Hey, please join for free. Start to use our product for free. And then you kind of find out like it’s actually kind of hard to switch. This will be cloud services. You put all your stuff in the cloud. You don’t really want to change everything to some other cloud. You put stuff in a storage shed. You know, you rent a storage shed. You don’t really want to move the storage shed. So when they send you a little bill at the end of the year saying they’ve raised the rates 8%, makes you a little annoyed, but not enough that you’re going to suck it up and move all your stuff. Switching costs. A lot of B2B, a lot of freemium type services are based on switching costs. OK, so those are your five options. Ease of use, just a high. quality service that’s reliable, good user experience, number one, number two, virality, number three, collaboration coordination platforms, number four, network effects, number five, switching costs. So in a second, press pause, pull out a piece of paper or tap it on your phone and choose your best two. And the list of these are in the show notes so you can look there. Okay, so pause now and then come back. Okay, and we’re back. Hopefully you did it. If you didn’t stop now and go do it now. I’ll keep guilt tripping you until it works. Okay, so let’s talk about Zoom. Now let’s go into some of the info about the company. Now, funny thing is… this question of like how did Zoom break into a very established market? Like Zoom describes its market as communication and collaboration. That’s the market they’re in communication and collaboration market. Okay, what about Skype? Skype has been around since what, 2003? It’s owned by Microsoft? Like, how did you take business from Skype? I use Skype. No offense, Skype sucks. It’s not good. It’s never been, it hasn’t been good in a decade. Skype, and anyways, I made a little joke on Twitter, which was me being snarky, which is why I don’t go on Twitter because I… I become snarky, which is not great. But I kind of joked that like, you know, Skype has retained its, its title as the champion of missed opportunities. Like Skype has missed every opportunity. They missed the zoom opportunity. They missed WhatsApp. They could have been WhatsApp. They could have been WeChat. They could have been Alipay. They could have been WeChat pay. I mean, they, they were around 18 years ahead and they seem to miss opportunity after opportunity, the only company that’s maybe better at missing. opportunities is Craigslist for those of you from the US. Anyway, so I posted this on Twitter and actually the the founder of Zoom like retweeted me. I don’t even know the guy but Eric Yuan, he’s Chinese or Chinese American. I forget which but yeah, I looked up and he had tweeted it out. So anyway snarky is effective, but it’s not always not a great habit. Anyways, okay founded 2011 by Eric Yuan based in San Jose. They went public on the NASDAQ in 2019. And I mean, the language they use in their 10K, I think is just really nice and clear. I love when businesses know who they are. And you know, they are very clean in their language. This is what we do. And it’s very narrow and focused. It’s not 50 things. It’s very like crisp language. I liked their language a lot. They basically say, we are a frictionless video communications company. We are cloud native, reliable, high quality, easy to use, and basically video works with everything. I mean, that’s great. Like I like that a lot. Like one of these questions I always ask my students is, who’s the cheetah? Like businesses that survive long-term. tend to be super specialists. They don’t do five things, they don’t do three things, they maybe do two, they probably do one. And they are super specialized in one activity and that’s the cheetah, right? The cheetah is an animal that survives because it’s super specialized for acceleration. I mean, I always get the numbers a little bit wrong, but they go from something like zero to 60 miles an hour in three steps. That’s what their special, and their whole body is specialized to that, which means giving up a huge number of things to do that, but it allows them to thrive in a little niche because they’re super specialized. So I always ask my students, like, who’s the cheetah? And the answer is usually nobody. Most businesses are messy and… You know, it’s like a lion with wings and gills. You know, it’s a mix of a lot of stuff. But sometimes you come across a cheetah. So that’s kind of something. This looked to me when I read it, I’m like, this is a cheetah. They know who they are. They do one thing. And one of the reasons you can tell a cheetah is. they can say no very very quickly. It’s very easy to say yes or hey that’s kind of interesting we should think about that. Oh maybe we should do that. A cheetah can say no very quickly. You’re Starbucks we should sell sandwiches. No. That’s not what we make coffee. You know we should do something. No. This is like we do video communications. Bam that’s it. I like companies like that. So anyways that was kind of the first thing I noticed. And then of course I looked at their financials because they went public and their financials are beautiful. Like as much as financials can be beautiful, these are pretty great. I’ll pull those up here in a sec. Some other language they use about, so basically they do video communications. That’s what they do. It’s an app. You can download it on your phone, your iPad, your computer, basically any device. and you can easily just do a Zoom call with anyone. You send them a link, you send them a note, it happens, and they integrate to lots of other apps. So if you’re in other online services, especially for businesses, cloud storage, Slack, email, you’ll find that Zoom integrates with all the other business work tools. So it’s just everywhere, it works with everything. They released Zoom meetings in 2013, which is kind of their primary thing. In 2014, they did Zoom video webinars, Zoom room, where they actually can go into a business and set up a special room that you can do the Zoom calls in. So it works in your phone, but it also works in real life. And they sell to sort of two groups, and this is actually important. They sell to individuals, but it’s mostly free. Like, Anyone who wants to make a video call, you can download it. It’s free to use for individuals. There’s a limit though. It’s freemium. So you can download it, use it for free, make some video calls. Certain features you have to upgrade and pay. So that’s, you know, we talked about this before, versioning. One of the nice things about software is you can create multiple versions and give away some for free and charge for others. So they give, you know, freemium model to everybody, B2C individuals, but really, you know, the economic engine comes from businesses. You know, they want businesses to sign up and give them multi-year contracts to handle all the communications so everyone in their company can use this. And one of the interesting things about that I will talk about, but there’s an interesting marketing approach there that plays out. OK, so 2015 they had their 100th employee. They’ve partnered with Slack. They’ve partnered with Salesforce.com. So that’s all interoperable. 2017 they started to developer platform, which basically means you open up your APIs and data and you let other companies start to write apps that run on your system. I don’t know how much traction they’ve got on that really. They have Zoom Phone launched in 2018. I guess that’s a special phone. I’ve never actually seen that. But yeah, I mean it’s um they give it away free to everybody and then they make their revenue from subscriptions from businesses as well as from the purchase of Zoom Rooms and Zoom webinars. And that’s, you know, the paid offerings are pro business and enterprise. And then the basic offering is zoom meetings with limited features. And the nice thing about this business, well, I’ll tell you about the financials now, the nice thing about this business, which is why a lot of people love B2B and SaaS models is you make revenue on day one. You know, there’s none of this. Let’s put up a YouTube channel, try and get a lot of viewers and then sell advertising later. No, I mean, people pay. you upfront. You get money upfront. So one of the nice things about that is you have an obvious revenue stream, which is something that Facebook never had, Google never had, Twitter never had, but these companies have an obvious revenue stream and you also get great working capital because you’re signing these sort of multi-year agreements with businesses and you actually get it shows up in deferred revenue on your balance sheet and you get not only money today but your months in advance, years in advance. That’s great for your finances as a startup when you are basically prepaid. Okay so here’s some of the revenue. 2017 60 million dollars in revenue. 2018 it jumps to 151 more than doubles. 2019 it doubles again to 330 million dollars. So revenue curve shooting upwards. Their cost of revenue because they are basically a digital service from top to bottom. I’ve talked about this before the idea of if you’re going to be a purely digital business you can have outstanding economics because it’s just software, marginal costs are zero, but it also makes the competition harder which is why people go for networks, effects, and switching costs. If you have a hybrid physical digital you may build warehouses, a physical asset which makes your economics not as pretty but you’re more defended. Okay, So in 2019 of that $330 million, $270 million of it was gross profit. That’s amazing. Like that’s cash flooding in. And then after that their numbers are not that important. They spend about 10% on R&D, they spend about 13% on general and admin. and they spend like 56% on sales and marketing, but that’s not necessarily needed. They’re, you know, they’re making good profits. They’re growing fast. They’re flooding money into sales and marketing. So that probably won’t go on forever. Anyways, like beautiful economics, beautiful finances, high growth rate. So that’s kind of the first thing that jumped out at me. Well, the second thing. All right. Now, as I’ve kind of said before. Economics, digital economics, I called it the sexy but dangerous economics of digital. Digital economics, if all you’re doing is software, where it’s just bits and bytes, ones and zeros, the economics can be amazing. It’s a non-rival good. You can do versioning, you can do multiple prices, and you have zero marginal cost. You can make tremendous profits. The problem is, if you’re only software, it’s very easy for others to jump in and do what you do. Any five college students sitting in a garage can start coding, and suddenly you have a competitor. And that’s why if you’re purely software, that’s why most software is in fact free. Most software is a commodity. Most people making software make no money. It’s a brutal business. But if you can get a degree of competitive protection, you can make huge profits. So you’ve got to have like, if you’re going to be a digital business, you’ve got to have competitive barriers. That’s why people talk about network effects and switching costs so much. Okay. So that was kind of the next thing I thought about with this company was, man, that, you know, what’s their competitive situation? And that brings us to the main point of this. They weren’t first to market. They weren’t a first mover that was just ahead of everybody. They came into a business that was already competitive. You know, that’s tough. Like, you know, they had sort of legacy systems like Skype for business, WebEx, web based meetings. I mean, there’s a ton of these companies, Cisco, video conferencing. There was, so those are sort of standalone video conferencing solutions. And if people have been selling these to businesses forever, I mean, the B2B sales teams have been selling this to corporations around the world forever. Then there was like these bundled productivity solutions like Google, where they offer you a bunch of solutions. email, calendar, HR processes, all of this, and within that bundle, they would put video conferencing. And this was something that I’ve talked about in previous ideas that bundling is a big issue in anything digital. It’s a big threat. Then you also have like new potential players. Amazon. Amazon could jump into this business. Microsoft is in this business in a long, in a big way. Companies like Slack, Facebook, any of these companies could offer video conferencing very quickly. So the competitive situation is daunting. And the other thing I always look at is, okay, what are the factors that matter when you compete? And I circled a couple here that I thought were basically the biggest ones I thought. was you have to have a large user base, a lot of adoption. You need adoption. You have to have third party integration. It has to work with everything. Nobody wants a solution that doesn’t work with Microsoft office or doesn’t work with Slack or doesn’t whatever. And then if you can build this into other partnerships, like hardware companies where it’s starting to get preloaded on smartphones, things like that. That’s also helpful. But really the three factors that jumped out at me are it’s a very price sensitive business. Reliability is a big factor. Getting big adoption is a big factor. And then third party integration is a big factor. Those are my four. All right, and that kind of brings us. to the question of interoperability. And this is gonna get us into the theory for today. Now. This is mostly a B2B product. I mean, there’s B2C, yes, a lot of people use it. They call their friends, they call their mom. That’s not where you’re gonna make your money. This is a corporate workflow tool. That’s the people who are gonna pay, that’s where they’re getting their money. So your revenue’s coming from the B2B side. But you do get B2C adoption. Okay. If you’re running a company, could be a big company, Fortune 500 company. Microsoft has been selling productivity tools to Fortune 500 companies for 30 years. You go to any company, they used to sell you the servers, they used to sell you the software. Now they’re moving everything to the cloud and they’re selling stuff there. It has to work with the existing systems. Nobody wants something that’s incompatible. And workflow processes, we send emails to each other, we share documents, we work on documents, we get payroll closed, we do a call with the boss, it’s encrypted, it’s private, it draws off the company emails, so I don’t have to, I can just look up on the email server and call that person directly. I mean, it has to all integrate within the work tools. So that means you have to be sort of within the business processes of companies. Interoperability is a big, big deal. Now, if you’re just selling to individuals around town, one-offs, you don’t have to worry about this, but that’s not really much of a market. So, you know, you want businesses. And then the breakdown comes between big businesses, medium businesses, international businesses, and small businesses. Now, Microsoft. has always dominated the big businesses and so have a lot of these companies, Oracle, you know, all these sort of software vendors. What companies like Zoom and also companies like Slack, Box.com, Dropbox kind of, they’ve targeted SMEs, small businesses where… you know, because it’s free, you don’t have to buy a server. You don’t have to have an IT department. You don’t have to put it by a bunch of legacy software and sign license agreements. You know, this is this is five people with a small business can sign up for Zoom. They can sign up for Slack. They can sign up for Dropbox, Box.com, and it’s free to start. And that’s great. So Zoom had a couple things going for it. One, they were right at the right moment. when people used to companies used to buy servers, legacy installed on-premise software and put them in their businesses and things started moving to the cloud. And suddenly, you know, you didn’t have to buy those servers anymore. Well, they’re basically cloud-based from day one. You don’t have to put in a server to use Zoom. You don’t have to install the software. You can just use it anytime you want. It’s on-demand subscription. That was helpful to them. Another factor that probably helped them out, their technology was designed from my reading to to work in places where maybe wi-fi wasn’t great. One of the issues with this product is reliability. I want high quality video conferencing. Well if I’m sitting in a cafe in Thailand the wi-fi is probably sketchy. As far as I can tell, Zoom was designed from day one with a different technology, which is web-based, cloud-based, that it works even on sketchy Wi-Fi. It was designed with developing economies in mind. It works everywhere. If I use Skype at a cafe in Chiang Mai, it probably doesn’t. It’s glitchy. It fades in and out. Zoom works beautifully. So, OK, developing economies, they probably were at the right moment there, right moment from on-premise to cloud. And the other thing that came in is this idea of, if you have a small company, and keep in mind they had 100 people up for several years, less than 100 people, you don’t wanna send in a sales force to go try and sell the Fortune 500 companies and compete with Microsoft, because that’s actually very expensive. You have to hire a direct sales force. You have to meet with the IT managers. It’s a long sales process. It’s very expensive and it’s hard. But if you’re just getting natural adoption by regular people who are just downloading this users individually, then what you can do, and this is what they do, they call it multi-prong marketing. I call it guerrilla marketing. is you know they just know people are using it everywhere so they look and when a certain number of people within a specific company already have it on their phones then they make the phone call to the IT department and say hey we’d like to talk to you about a corporate account for zoom oh by the way here’s how many of your employees are already using this so they sort of come in through the bottom You know, they get the users in the company and when there’s enough of them, then they make the call, they send in the sales team and then they go for the contract. It’s, you know, it’s a very clever, they call it multiprong. I call it guerrilla marketing. That’s pretty cool. So there’s this idea of how do you get into companies? Well, it has to be interoperable and you’ve got to have some sales mechanism like guerrilla marketing that gets you in the door and they have both of those. So. I think that’s it. The last thing to think about Zoom and then we’ll get into the theory is you have this issue of bundling. Bundling is really powerful. You know, when you say, hey, would you like, you know, this is why cable TV is the way cable TV was. This is why you get 300 channels. Because the economics are better for the seller and the economics are better for the buyer. Instead of saying, please buy this channel, please buy Netflix, $9 a month from me. Please buy Disney Plus, $9 a month from me. Please buy ABC, whatever their streaming service is. People don’t want 10 different products. What ends up happening is they end up getting bundled together and you get like, okay, there’s an Amazon bundle for streaming, there’s a Netflix one, there’s probably a Disney one, and all the rest probably have to bundle up. There’s a lecture on this that we went through before. It’s really powerful. Well, the same thing happens for productivity tools at a business. You don’t want 20 different contracts. So when you have one service like a zoom, a video conferencing, you know, bundling is coming, you know, that people are going to start to sell all the services together, you know, instead of buying each separately by email, web storage, calendar, HR, video conferencing, all together. So and so per month, one fee. So that’s a big issue for them that’s on the horizon and it’s, you know, it’s a big deal. So interoperability becomes a problem and bundling becomes a problem and marketing. Those are all problems. Okay. That’s a bit about Zoom. I’m right on time. Now we’re going to talk about sort of the two big ideas today and then I’ll pull it together. So the first sort of important idea for today’s talk is virality. It’s just a big, big deal. Like not that many companies that have it, but if they do, man, you really do notice it. So I’ve been writing about in the last week or two this idea that like, if you’re a service, let’s say you’re a multi-sided platform or just a regular service, can you turn your customers or users into a marketing agent for your company? That’s in the old days we might call that multi-level marketing. We might, you know, pyramid streams are like that. But let’s, let’s just say you’re a content creator on YouTube or you’re a guy like me. You’re a, you know, you’re a writer and you write on LinkedIn. I’m a user of LinkedIn content creators on YouTube are, you know, video creators. They effectively market your company for you because all the YouTube creators want people to see their videos. So they go out and they share them with everybody. I might take something I write on LinkedIn and share it over lots of platforms. I’m effectively marketing for their company. And if you have millions of users, you can basically get an army of free marketing agents. And that’s amazing. And there’s soft versions of this, like platforms like Content Creators, it kind of happens naturally, but there’s a lot of softer versions of this. a word of mouth where people just share photos that they like because they like them. Well that becomes a form of marketing. So a lot of companies, L’Oreal, Legos, all these, they’ll make a lot of content, photos, short videos with the idea that they hope people share them around. So it’s kind of a form of word of mouth, things like that. But if you can turn your customers or if you’re a multi-sided platform into marketing agents, that’s really powerful. is if you can turn your customers or one of your user groups into sales agents, where they’re not just driving traffic to you or bringing customers to look at you, they’re actually selling for you. That’s actually a better example of multi-level marketing. And that is companies like Groupon, which is group buying. You know, I go online. they’re selling me, I don’t know what they sell on Groupon, a travel package or something, and here’s the price for me, or let’s say something like, I don’t know, towels or sheets or something. Here’s the price for me, but if I group buy with five other people, the price is this much lower. So I then call out and I find four friends and I say, hey, come buy this with me, and we all buy. I’ve effectively become a sales agent. That’s Pinduoduo. People look at Pinduoduo as this sort of really successful rocket ship phenomenon. And when I look at Pinduoduo, I see viral marketing. They’ve basically turned their users. People call it social commerce. No, no, it’s group sales. If you’re on Pinduoduo and you get a discount when you share it with three of your friends and you all buy together, you get a discount. you’re basically turning your users, in this case consumers, into sales agents for your company. You just sit back and let them go sell for you. Now, one of the reasons Pinduoduo gets away with that is because you’re not allowed to really do that on WeChat. Like WeChat doesn’t let you do that, but Pinduoduo is a strategic partner, so they let them do it. Otherwise, every company would love to do that on WeChat to offer whatever it is they’re selling and say, if you get four friends and buy it together on WeChat, easy to share with people, we’ll give you a discount. Totally not allowed. Okay, so if you can turn… users, customers into sales agents, that’s really powerful. Groupon, that’s Pinduoduo. And I think you can def, I mean this is one of the big things about communication services. Communication, I mean I mentioned Zoom is communication and collaboration market. Both of those services tend to be viral. That It’s like the sales agent phenomenon. If I want to use Zoom to call you, I have to send you a link on Zoom, you have to sign up to get my call. The very usage of the product itself gets you new users. It’s not a secondary effect like word of mouth or a recommendation. No, it’s required in the usage of the product. So communication tools are famous for this. WhatsApp, WeChat, Line, all of these. Skype was like that. Payment platforms are like that. If I want to send you $10, you have to sign into PayPal or Alipay to receive the $10. So the very usage itself gets you adoption. And I think that’s the same as the sales agent thing in my mind. Okay, Zoom definitely has that. That’s really a powerful tool. If you can get stuff like that, it’s great. So that’s kind of the first idea to think about for today’s virality. People confuse this with network effects all the time. It’s a different thing. It’s a marketing function or it’s a marketing aspect. It’s not the same as, you can have virality in lots of different types of things. It’s not different than network effects, different than platforms, different thing. And then there’s softer versions of it, like being a marketing agent, but not a sales agent, word of mouth, things like that. Shareability, I think, is even lighter. Okay, so that’s idea number one. Idea number two is collaboration coordination platforms. Now, this is a digital platform, which I talk about all the time. Digital platform. Platform, by definition, is a business model that connects and helps two different user groups interact in some form. could be chatting, social interaction, could be sending a payment, payment interaction, could be watching a video, audience building, it could be selling, I don’t know, an iPhone, transaction, marketplace. There’s lots of different types of interactions you can enable with a platform business model. I keep my eye on about six or seven different versions. People have different definitions for what type they are. Some people say there’s only two types of platforms, transaction platforms or innovation platforms. I don’t really think that’s helpful. I think the more granular you are, the better it is to think about these things. But one of the big types is coordination and collaboration platforms. Okay, so what is that? They basically enable users to interact in complex processes and tasks. Now, that could be one type of user, like people who work in an office. That would be one user group, but you could help them interact and do things together where, hey, let’s all work on this project together. We’re putting all our files in a Dropbox account. Please download it from there, make your edits, and upload it when you’re done, and I’ll look at it from here. The Dropbox account is helping us interact. Or we’re gonna do a video conference because none of us can go to work today because there’s a virus. Everyone’s in their homes. Let’s do a video call the whole team. The tool helps you interact. Now you would call that probably a one-sided platform, that it’s one user group that’s interacting. as opposed to a two-sided platform where you have maybe people selling goods and buying goods or people making videos and watching videos. This is really one group. I still think it’s basically a platform. So it can kind of be one-sided or two-sided. And usually what you tend to see is three groups. Well, let’s say two groups. One is you see a group that’s trying to collaborate on a project. We’re writing a book together. All the files are in the Dropbox account. I will put my files up, you look at them and review them, you make your edits, it automatically syncs back up and we’re coordinating a complex task. Fine. Maybe we’re making a video game and we have a lot of people who are, some people are doing the graphic design, some people are doing the coding and we’re all coordinating on the common product. Architects. You know, we might have the… I don’t know how architecture works, the designer, the structural engineer, you know, we’d all be working together on maybe one CAD file or however that works. But you can see like, you know, you’re going to have a lot of groups and in some cases it can be highly specialized in different groups beyond, hey, let’s edit a document together. Okay, so these sorts of collaboration tools are very powerful, especially when you’re geographically distant. You could work on, I know a… a woman who started a VC firm in Shanghai, and she’s the only person in Shanghai, and they have like one staffer in Japan, one in Hong Kong, one in Taiwan, one in Thailand, one in, something like that. And there’s no office, they all just work together through online tools to evaluate deals. And the benefit of having all your people scattered is they can all hunt their geography for deals and then share them. So that’s actually pretty powerful. Then the three buckets you tend to see are communication tools. Let’s do a video conference, let’s send emails, things like that. Storage and sharing, files, documents, Dropbox, things like that. Collaboration and workflow within a complex process. That’s company like Slack, Microsoft, things like that. We’re designing a movie and we’re doing the whole thing online. Together, that’s where we’re working, things like that. Now this is actually pretty powerful on that side, but it actually gets more interesting because often you can get a second user group joining in. And that might be application developers. Let’s say we’re using Dropbox. All of our files are on the cloud for, I need a better example for a project. Let’s say we are, making a documentary film. No, a video game, that’s a better one. We’re making a video game. So we have a lot of coders. We have people who are doing design. We have people who are doing character design, story, you know, all of that. Copy, right? All of that is together in one group online. We’re all using a tool. Let’s say Dropbox, I don’t think it’s Dropbox. We’ll say that. Okay. When there’s a complicated workflow like that, you can open up the system, the APIs, to other types of developers who can start to write special apps that run on the platform, and those become tools we can use in addition to what Dropbox offers us. That’s basically like your smartphone. You know, Apple makes the operating system, but then the App Store has hundreds of, well, millions of apps, really. That’s what happens when you open up the system and you open up the data. Suddenly our little process by which we are making our movie, suddenly we have maybe tens, hundreds, thousands of other apps that can help us in our process because they’ve opened it up to a new user group, which is application developers. Now you can kind of see Microsoft Windows as a version of that’s what Microsoft Windows was. Microsoft Windows was a collaboration, coordination platform. that users use, consumers, people who buy it, and then they opened it up to app developers who made millions of types of software we could download and use as for anything we wanted to do. I mean, it’s really pretty powerful. Okay, so that’s kind of one way to think about it. Companies, I mean, I go through a lot of companies that are doing this. Most of these companies tend to be outside of China. This is one of the areas where China, I think, is behind. Asia is behind. But it’s fairly robust in the West, like Salesforce.com. You know, that is a Salesforce series of basically subscription tools. They invented SaaS, software as a service. And, you know, there are so many people that use this to manage their Salesforce. And then there’s just so many apps that run on this. So once you get the service, you have all these other apps you can use. Um, that’s kind of a big example. Obviously Microsoft is a big example. Let’s see if I have any others on my list. Slack is one which is a way of collaborating on tools through something that’s kind of like email. Box.com is a good example, that’s storage. A lot of this stuff, these cloud companies, Aliyun, Azure, things like that. Azure, I always say Azure. These are all basically the same type of things. They’re collaboration coordination platforms. Now a simpler version of all of this would be, you know, standardization. This is kind of a subtype of collaboration and coordination. Standardization, which has network effects. Standardization is, I have a document, I wanna send it to you. I save it as a PDF. That’s the standard. I can send it to you, you have tools that can open the PDF file and read it. Now that works because we’ve all standardized to PDF as a format type. It wouldn’t work otherwise, but that type of standardization enables us to collaborate and coordinate very simply because we’re on the same standard. That would be a good example of that. And you see a lot of file types that are this way. We use Microsoft Word, we might use Microsoft Excel. Architects maybe use CAD design, I think they all do. People who make videos use Adobe Illustrator. If the goal of a coordination and collaboration platform is enable people to work together, standardization is usually kind of the first step in that. We all have to be using the same thing. So you’ll notice in… when I talked about Zoom’s language, one of the things they talked about was becoming widely used. And one of the keys to collaboration, coordination, and standardization, you kind of have to become the default standard that everyone uses. So you need wide adoption. You need everybody to use it such that this is a standard. If you want to send a document, you got to send it as a PDF. That’s just what everyone uses. Yeah, but it’s not as good as the other one. Doesn’t matter. uses yours might be better but people don’t use that one so I can’t send it to a lot of people. Right so standardization is kind of a simple type of collaboration and a network effect. The more people that use PDF the more valuable it is to everyone else and that’s kind of a nice thing. So standardization is I consider this basically a subtype of all of this. So Is Zoom a collaboration and coordination tool? Yes. How powerful is it as a collaboration and coordination tool? Remember, they said their market was communication and collaboration. Now those things are kind of not really the same. They are definitely great at communication. It’s a great video conference. People use it. It’s great. Is that the same thing as collaboration? How does that compare to sort of Microsoft Office 365 or Microsoft Teams or Slack or any of these where it’s not just making the occasional video phone call? I mean, how many video conference phone calls do you make in a given week at work? Some companies might use a bunch. Most people, it’s not that frequent for most people. Now compare that to how often you use email if you’re in the West. People in China, we don’t really use email. Email is something you use every hour, every 15 minutes. It is just all the time. So which is really the coordination tool that’s being used in the office? There’s a hierarchy of coordination tools where one is the most important, the most frequently used, and then others are nice, but they’re not as important. And if we’re going to bundle all this together, who really owns the customer? You know, if Slack, I don’t know why I keep using Slack, if Microsoft Office or Microsoft Teams offers a video conferencing service, which they do, Don’t you think people are gonna go for that? How does that compare with a company like Zoom trying to offer all the other tools that Office uses? I mean, in the hierarchy of tools we need to collaborate, video communication is good, but it ain’t the top of the pyramid. And if these things start to bundle together, it’s a matter of kind of ultimately, okay, everyone’s offering a good tool, that’s nice. But who really owns the customer in this situation? Who’s the front of the line? Who’s the back of the line? Who’s in supporting role? Who’s the lead? And I think this is where most people kind of look at Zoom and say, it’s a great communication tool. It doesn’t seem to be a very powerful collaboration tool. That seems to go to other functions like, I don’t know, Adobe Illustrator or. Probably not. I don’t think cloud storage is particularly strong either. I think storage is kind of a commodity service I think it’s it’s the services you use that are really the entire workflow of your core business That’s what’s really powerful, and I don’t think that storage and I don’t think it’s it’s video conference. I think they’re secondary tools So is that really you know if this is Microsoft Windows all over again? Are you Microsoft Windows? Or are you just like Quicken Books and just one app that runs on the operating system, but you ain’t the operating system? Because the operating system’s the person that owns the customer at the end of the day. So it’s not clear to me that Zoom is used as a collaboration tool. I don’t think it’s at the front of the line in terms of owning the customer. I don’t think it is the critical process within most workflows of companies. and I don’t think it is a very frequently used service. So I kind of think of this as a fairly weak collaboration tool, definitely versus its competitors, but a very good communication tool. So what about other competitive advantages? Okay, if you’re not gonna dominate the collaboration interactions, if you’re not gonna be the collaboration platform of the firm, you have other competitive advantages, how about network effects? Network effects is a nice competitive advantage. Does it have a network effect? One of the problems with network effects with communication tools is everyone always thinks it’s how many people are connected. They cite Metcalfe’s law, which I think is totally wrong. And they say, oh, if more people have phones, then your phone is more valuable. It’s the number of users, the number of nodes in the network. That’s not really true. I don’t really care if a bunch of people I don’t know or I’m never going to call are in the network. That doesn’t help me. The value of the network is usually the frequency of the interactions. What interactions are you doing? How often are you using it? How important are those interactions? One of the reasons WhatsApp, now WhatsApp is similar in that it is a communications tool and not a collaboration tool very much. One of the reasons WhatsApp took off so powerfully was because, not because they had like a billion people, which is true. WhatsApp built its network, built its service based on the people you already had in your contact list on your phone. That’s where they built the service. So you put people into your smartphone, they took those and they upload them to WhatsApp and that’s who they connect you with because those are the connections that are most valuable to you. That’s your friends, that’s your family. Right, they didn’t say we have two billion people you can call on WhatsApp. Isn’t that great? They said no, no. All the people that are most important to you in your life, contact list on your phone, they’re on our service. It was a clustering sort of effect, very powerful because of the most valuable connections were there. Okay, and you call those people all the time. How valuable and frequently are the video conferencing connections and communications? It’s okay, doesn’t strike me as awesome. I don’t do video conferences with that many people. Okay, at work I could see that, yeah, I have the team, the core team, that’d be nice. Do we video conference 20 times a day? I use WeChat 20 times a day. How often do I, so, frequency’s not high, not that important. You know, as a communication tool, it strikes me as medium strength, but not like WhatsApp strength. So that’s kind of okay. There’s a network effect definitely by definition. Doesn’t strike me as being overwhelming. What about other competitive advantages? The other competitive advantage you often see with these types of tools are switching costs. at once, I mean, Microsoft really focused on this for decades. They give you some software, you install the servers on your company, you load the software, and it’s basically impossible to switch out, and then you, they upsell you every year, year after year. Okay. If we get you to start using this, are there switching costs? Is it hard to switch to another provider? Go to another, can I, can I go over to Skype and do a video call? Kind of, doesn’t seem like that’s too hard. It’s, you know, if the same people are on Skype, maybe video’s not as good, and I don’t like Skype very much, but it’s easy to do. Are there big switching costs once this is installed on an individual’s phone like mine? Not really. Are there switching costs when you get it into a company? What if it becomes integrated into the workflow of a company? Maybe you don’t control the workflow, you’re not the collaboration platform, but maybe it becomes very integrated into the operations of your company if this is just what we use to talk to each other. You could see that there might be some switching costs within these companies. And what if they do things like, hey, not only should you use our software, you should have a Zoom Room, which is a service they offer where we build a room within your office that you can use this. When I saw the Zoom room announcement, my immediate thing was switching costs. That’s what they’re doing. They’re not going to make a ton of money by building rooms into people’s offices that are perfect for doing video conferences, but they are going to build in some pretty big switching costs because their clients have built these spaces. That’s what struck me there is that’s a switching cost they’re building. So the other thing I looked at was the multi-year contracts. that they have a lot of revenue that’s planned into the future, so they’re signing these longer term contracts. Multi-year contracts are usually a good indication of a switching cost, that you’re locking yourself in there. Most, when you sell most things to businesses, you get a work order or a purchase order every month. They tell you, by the way, we need this many pens this month. Well, what about next month? We’ll talk to you next month. You know, if a business is signing a multi-year, you know, sort of contract, that tells you that you’re pretty locked in. So I actually thought that was pretty interesting. All right, I’m running out of time here. All right, so let’s kind of review here and then we’ll do another vote. The things that jumped out at me here, number one on the list was, I said, ease of use. That was your first option. Now, why is this company so successful? Is it ease of use? Is it reliable? Is the user experience just better? People just like it. That’s a lot of business. Sometimes people just like your stuff. Okay, that was factor number one. Factor number two, they had virality. The use of their product immediately led to more users joining. That’s kind of the big idea for the day, number one. Number three, they’re a collaboration or coordination platform. They’re a digital platform. that is enabling these user groups to work together and be part of the core workflows of a business. And maybe you’re being opened up to app developers. That was number three. Number four, they have network effects. Number five, they have switching costs. Those were the five options. All right, now based on what we’ve talked about, let’s vote again. So the five are listed in the show notes. Hit pause, choose two. really think about it, you know, spend spend 10 minutes taking it apart. And then please come back. OK, pause now. And we’re back and we’re in the home stretch. So if you’re if you’re fading, this is the last bit. Let me give you my take on this. All right. I looked at this company in quite a lot of depth because I think this is an interesting space. And I mean, I’ll let it just read you my notes when I went through it. This was over a year ago. I basically wrote it’s a pure play. It’s a cheetah. Frictionless video communication that’s interoperable with everything. They have better technology for our sketchy connectivity. And they’ve really just focused on one function within business workflow. That’s great. The big power they have is the virality of their service itself. That’s a huge force in terms of marketing and getting adoption. It’s just a big, big deal. They have great economics. It’s free, which is always good. Don’t underestimate the power of free. You can offer people a really nice service like video conferencing for free. People take it. So I said it’s free and then you get pre-paid subscriptions with recurring revenue, good working capital. was like the company has a lot of the best digital characteristics that you see. Digital is very good for certain things. This has a lot of them. It’s powerfully viral. It’s inherently global. There’s no geographic limits to this company. Zero, you know, very small marginal costs. It’s a digital service. It’s free at the beginning. So why not sign up? It creates recurring revenue. It’s interoperable with lots of systems, apps, ecosystems, and there’s lots of compliments. It literally has everything I like about digital businesses. OK, then I get to the but. I wrote, the big problem is its competitive position long term. Yes, it has a network effect. by virtue of communication, but the real power in terms of network effects and in terms of a collaboration coordination platform is not in communication, it’s in the other parts of the workflow. So it’s gonna be, I don’t know, probably Microsoft, something like this, that offers the complete service of everything you need to run your business. That’s gonna be either a bundle or that’s gonna be the person in charge regardless and you’re gonna have to work with them. But you’re not at the front of the line with this. And whether they treat you nicely or roughly, we will see. So that’s an issue. There’s nothing you can do about it, but they’re probably not gonna win as a broader collaboration platform. They probably aren’t gonna own the user beyond a certain extent. That’s fine, you don’t get everything in life, right? This is a really, really good hand. It’s not a perfect hand, but it’s a really strong hand. The other thing I didn’t like about it was that there are actually lots of substitutes and lots of competing products. WhatsApp has video conference, WeChat has video conference, Skype has video. It’s not like you’re the only person that offers this. So going forward, I sort of put the playbook was the most important thing they can do right now is to get widespread adoption as fast as possible. If you can’t become the sort of collaboration platform, become the standardization for this service. Be the thing everybody uses absolutely everywhere. That’s a good play. Just become the standard, get everyone to be on this. Then try and build and switch in costs as fast as you can. Definitely big corporate contracts, multi-year contracts. Get yourself locked into businesses. Once you’re in the business, try and integrate yourself into everything. Put rooms in the offices, put hardware in the offices, tie into all their accounting and I don’t know, anything you can do to tie yourself in everywhere. And then integrate yourself as much as possible with Slack, Microsoft, and all these other companies so you become part of their service as well. I try and get my tentacles into every client as deep as I could, and I try to get them as deep as possible into all the other providers of tools and lock myself in that way. Now that’s pretty much the playbook I said, are they gonna build their own app developer platform? Yeah, I think they’re going to try. I’m not sure they’re going to get that far. But that was my take. So when I look at the five factors, I think number one, ease of use, a high quality product. I think that was actually pretty important. I think they had a good product. People really like it. That’s not a small thing. It’s not easy to do. Virality, I think, was their biggest lever in all of this. That took their part. If you’re viral and people don’t really like your product, it doesn’t work. But they had a good product that’s nice to use, and it was viral, and bam, it took off. Network effects, okay, not overpowering. And then switching cost and collaboration, I don’t think they’re that strong there right now. And then switching costs, I think, are phase two. So that’s kind of how I write the story of this company. Phase one, ease of use, good product, and viral. Phase two, they built into switching cause and they became the de facto standard in huge number of places around the world. That’s kind of their best defense. So one and two, I put those as offense. Number five, switching cause, I put them as defense. And you gotta play both. Play strong offense, strong defense. And that’s it for today. I hope this has been helpful. I think this is kind of the big area, well, one of the big areas for digital China, digital Asia going forward is this B2B side. There’s a lot of really interesting stuff happening in this space right now. And then the coronavirus actually gave it a huge bump because suddenly you’re at home and you gotta communicate and you gotta collaborate. How do you do that? Well, you go for digital interactions, which is what all these tools are designed to do. So there was probably a huge surge of adoption. in this recently. We know Ding Talk and WeChat work definitely posted huge numbers. We’ll see the other results coming in probably in the next month or so, but I think it’s going to be big. I’ve had kind of a, I’ve had a weird thing where, you know, I do a lot of sort of speaking around the world and occasionally I teach a bit too. That’s all, all of that’s about 30% of my time and then I, you know, I’m a deal hunter by day and everything got canceled. Like, you know, the place like Lithuania I was going to and Italy and China and it’s just like everything got shut down and I was like alright that’s fine I’ll work on some other stuff for a while and then it turns out that works both ways I started getting calls from business schools here in Thailand and they use a lot of professors from Europe and the US and they’re like yeah we can’t bring in any of our professors we heard you’re in town so apparently I’m gonna be teaching at some business schools, which I’m excited about. That’s great, because I live here, and I wasn’t really planning on doing this in a major way. And it’s like, all right. So I guess the whole quarantine thing works in both directions. So it’s been, this all happened in the last several days. It’s been kind of interesting. Anyways, I hope everyone is doing well. I hope you’re staying safe. I think I mentioned before an old colleague of mine, Dr. Scott Gottlieb, he’s on CNBC all the time talking about this. I said he was part of the CDC. That was a mistake. I meant FDA. He’s a former FDA commissioner. We went to medical school at the same time. We used to know each other. He’s the best single guy I know about this stuff. I know a lot of doctors and a lot of hospitals. He’s the best person I know on this subject. So if you don’t know what’s going on, just go onto CNBC or YouTube and look up Gottlieb Dr. Scott Gottlieb, former FDA commissioner. I think he is really a wise, reasonable voice on this whole subject. So that’s been sort of my go-to person. Anyways, that would be my recommendation. Okay, that’s it. Have a great week, everyone. Stay safe. Wash your hands, wear masks, and I will talk to you next week.

Leave a Reply