In the Stratechery post “Microsoft, Slack, Zoom, and the SaaS Opportunity”, Ben Thompson presents a compelling thesis that one of Microsoft’s long-term growth challenges is how to acquire new customers.
A key takeaway of the post is an Enterprise Growth Framework. Thompson places Microsoft’s Office 365 and Teams products, along with Zoom and Slack, in a 2x2 matrix with the following vectors of differentiation: the pre-existence of a customer relationship, and the pre-existence of a customer use case.
Source: Stratechery, 2019 (“Microsoft, Slack, Zoom, and the SaaS Opportunity”)
Thompson then gets at the core of his thesis:
The problem is that to the extent Teams is successful it is because it is exploiting Microsoft’s existing customer base, not necessarily winning customers who would have never considered Microsoft in the first place. There is not nearly enough industry-leading technology (as is the case with Zoom) or innovation in new use cases (as was the case with Slack) to engender confidence that the company can grow beyond its existing customer relationships in the very long run. This is why companies like Zoom and especially Slack are so valuable: they create new customers who are primed for growth; Microsoft, meanwhile, is mostly keeping its existing customers in-house.
This, then, is [Microsoft CEO Satya] Nadella’s new challenge: the company could have acquired Slack early in Nadella’s tenure, and considered Zoom, but waited too long on both. Microsoft has figured out how to leverage its existing userbase: how to increase it remains an open question.
In Exponent Episode 170, Thompson and his podcast co-host James Allworth expand on Thompson’s thesis and framework. There were three key takeaways from the podcast:
The dynamics of the consumer market have trickled into the enterprise: whereas enterprise software used to be governed by gatekeepers who had established relationships with CIOs (i.e., distribution), thanks to a business model shift (SaaS), coupled with consumer behavior characteristics (viral nature and the associated lower customer acquisition costs), we are now witnessing market dynamics where the best products & technology win.
An open question of where Microsoft’s customer acquisition engine exists in the product portfolio: there is optimism around Microsoft’s short-to-medium term future because of all the low-hanging fruit to pick (i.e., the business model shift from selling software on a licensed basis to a subscription basis). But, from a larger, strategic perspective, there is still an open question of how to acquire new customers who would never have considered Microsoft in the first place.
Build versus Buy: Microsoft built Teams vs. buying Slack, but Teams is doing well in context of leveraging Microsoft’s existing user base. As the enterprise exhibits more consumer characteristics, the more enterprise companies need to let go of the “let’s leverage our distribution and build it ourselves” mindset and, instead, ought to be more open to an acquisitive approach to thinking about growth strategically.
Importantly, the podcast finishes with Allworth suggesting, “if thinking about acquisitions through this [build vs. buy] lens, it would behoove [Microsoft] to identify a few of these companies that are [acquiring new customers.]”
This serves as the inspiration for this post: we expand on the themes and Enterprise Growth Framework that Thompson puts forward, and attempt to add relevant companies to his 2x2 matrix. For this analysis, we will maintain a consistent theme on productivity tools (e.g., Office 365, Teams, Zoom Slack) as opposed to developer tools (e.g., Azure, GitHub), and focus exclusively on new customer relationships (i.e., customers who would never have considered Microsoft in the first place). We also place less importance on the distinction between existing use case and new use case, though are open to feedback on which quadrant a company belongs in.
| Company | Use Case | Customers/Users | Valuation |
|---|---|---|---|
| Zoom | existing: videoconferencing | 50,800 paid customers | $19.5B |
| Slack | new: internal communications | 88,000 paid customers; 10M DAUs | $16.7B |
| Quip | existing: document/spreadsheet collaboration | 30,000 companies; "millions of users" | $750M |
| Box | new: content management & file sharing | 92,000 paid customers; 64.5M registered users | $2.8B |
| Dropbox | new: file sharing & collaboration | 13.2M customers | $9.3B |
| Okta | existing: identity management | 6,100 paid customers | $12.5B |
| Trello | new: project management & team collaboration | 19M users | $425M |
| Asana | new: work management | 50,000 paid customers; >1M users | $1.5B |
| Airtable | new: hybrid spreadsheet/database "devsumer" tools | 80,000 companies | $1.1B |
| Front | new: external communications | 2,500 customers | unknown |
| 1Password | existing: password management | 40,000 customers | unknown |
| Grammarly | existing: spellcheck & grammar check | 6.9M users | unknown |
Satya Nadella has done an incredible job shepherding in a new culture and cementing Microsoft’s success in the short-to-medium term. Can he, CFO Amy Hood, chief dealmaker Peggy Johnson, and the rest of the executive team conquer the long-term challenge of new customer acquisition? If the LinkedIn and GitHub acquisitions offer any insight, there is reason to be optimistic. It will be unquestionably exciting to see how Microsoft’s acquisition strategy plays out over the following years.
Additional notes:
Zoom: from its S-1 filing, as of January 31, 2019, Zoom counts 50,800 customers with more than 10 employees. Zoom is currently trading at a $19.5 billion market cap (NASDAQ: ZM).
Slack: from its S-1 filing, as of January 31, 2019, Slack counts 88,000 paid customers and over 10M DAUs (including 500K registered developers). Slack last raised capital in August 2018 ($427 million Series H at a $7.1 billion post-money valuation); has recently seen secondary transactions valuing the company at $16.7 billion; and is in the process of a direct listing (NYSE: WORK).
Quip: from its Series B announcement in October 2015, Quip highlighted “millions of individuals” and 30,000 companies as users. Quip introduced native messaging into the product and provided customers with new ways to communicate and collaborate around a document, so new use case could be argued here. Ultimately, existing use case felt more appropriate given the parallels to Office (and supported by interviews with Quip co-founder & CEO Bret Taylor where he intimated that he started Quip with Microsoft Office in mind). To his credit, Taylor was very prescient on the themes in Thompson’s post (e.g., the shift from sales-driven companies to product-driven companies that created a level playing field for new entrants; Microsoft’s strong existing market but challenge in acquiring new customers; Quip’s unique approach to customer acquisition) when starting Quip in 2012. Quip was acquired by Salesforce in August 2016 for $750 million, and Taylor joined Salesforce’s leadership as President & Chief Product Officer following the acquisition.
Box: from its latest 10-K filing, as of January 31, 2019, Box counts 92,000 paying organizations and a user base of over 64.5 million registered users (~19% of its registered users were paying users who registered as part of a larger enterprise or business account or by using a paid personal account). This Stratechery interview with Box co-founder & CEO Aaron Levie is helpful in understanding Box’s position in terms of new use cases, particularly as Levie sees “a tremendous opportunity to enable customers to be able to both directly train and learn from their data and sort of generate the insights that make their information vastly more powerful.” Also potentially noteworthy is the fact that the Stratechery post that underpins this analysis seems to have resonated with Levie. That said, Box sells to customers (CIOs) using a traditional sales force, with the self-serve option effectively serving as a lead generation tool; from its filings: “We offer a limited version of our service to users free of charge in order to promote additional usage, brand and product awareness, and adoption. Many users never convert from a free version to a paid version of our service. Our marketing strategy also depends in part on persuading users who use the free version of our service within their organizations to convince decision-makers to purchase and deploy our service.” Box is currently trading at a $2.8 billion market cap (NYSE: BOX).
Dropbox: from its latest 10-Q filing, as of March 31, 2019, Dropbox counts 13.2 million paying users. Dropbox defines paying users as “the number of users who have active paid licenses for access to its platform as of the end of the period. One person would count as multiple paying users if the person had more than one active license.” Unlike Box, the majority of Dropbox’s paying users come from its self-serve channels. And, Dropbox’s customer acquisition strategy is in-line with the themes from Thompson’s post; from its filings: “our business model has been driven by organic adoption and viral growth, with more than 90% of our revenue generated from self-serve channels. As a result, we do not have a significant outbound sales force, which has enabled us to be more efficient with our sales and marketing spend.” Dropbox is currently trading at a $9.3 billion market cap (NASDAQ: DBX).
Okta: from its latest 10-K filing, as of January 31, 2019, Okta counts 6,100 customers on its platform, with 1,038 customers with an annual contract value over $100k. The parallels to Active Directory and the existing use case of identity management is clear; but, Okta sells directly to customers through a traditional sales force and an ecosystem of channel partners. In fact, in this Stratechery interview with Okta co-founder & CEO Tom McKinnon, he explicitly states that Okta sells to CIOs (versus a self-serve, bottoms-up approach). In that light, what is interesting is that Okta emerged from the need for an independent identity management service to manage the increasing number of disparate SaaS applications in the workplace. Also interesting is the fact that Thompson once recommended that Facebook should acquire Okta. Okta is currently trading at a $12.5 billion market cap (NASDAQ: OKTA).
Trello: in its acquisition announcement, Trello counted 19 million users (Trello was acquired by Atlassian in January 2017 for $425 million). Atlassian could have also been on this chart, but was intentionally left off given the bias toward developer tools (e.g., JIRA, BitBucket). Nonetheless, it is important to acknowledge Atlassian’s similarities to Microsoft as it competes in in the productivity tools and developer tools spaces. Atlassian is currently trading at a $31 billion market cap (NASDAQ: TEAM).
Asana: in a company announcement from September 2018, Asana counted more than 50,000 paying organizations and over one million organizations using the free product. It is easy to see Microsoft having interest in Asana, particularly after the company recorded six straight quarters of accelerating revenue growth and 90% year-over-year growth. That being said, if Microsoft is interested, it would be wise to act quickly before Asana gets too expensive (if it isn’t already) and/or another acquirer like Salesforce or Atlassian steps in first (see: Salesforce-Quip, Atlassian-Trello). Co-founder & CEO Dustin Moskovitz notes that the company was privately valued at $1.5 billion in its Series E fundraise in November 2018.
Airtable: in its Series C announcement, Airtable referenced 80,000 companies using its “devsumer” tools (though it is unclear on how many of those companies are paid customers). The company was privately valued at $1.1 billion in November 2018.
Front: in its Series B announcement, Front highlighted 2,500 businesses using its product.
1Password: the company notes that the product is used by over 40,000 teams and businesses.
Grammarly: in its first round of funding, Grammarly raised $110 million and announced 6.9 million DAUs (“most of whom use the service for free”).