May 10 2020 - Zoom: The Usability Conundrum

Summary

When privacy collides with usability, usability takes a backseat.

Zoom's research and development activities towards evolving as a platform might be tempered in the coming quarters.

EPS will take a haircut as Zoom attempts to balance growth and platform health.

As a result, investors should anticipate more volatility down the road.

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Zoom (ZM) has hit the growth hacking escape velocity that most companies covet. Therefore, it is only apt to expect a significant improvement in operating margin, which will trickle down to the EPS/FCF line in the coming quarter. Marketing ROAS (return on ad spend) will benefit from the WFH (work from home) trend induced by COVID-19. Unless it has some ESG (environmental, social, and governance) or CSR (corporate social responsibility) initiative to run in the coming quarters, I expect OPEX to be geared towards R&D ideas aimed at integrating with third-party platforms to improve its capabilities. Sadly, privacy is now at the center of the conversation.

Investors seeking a convincing thesis to delay profit picking after investing in Zoom will have to explore some capabilities in the platform that can generate the next billion in annual revenue as it is safe to assume that the first billion is already cut and dried.

Zoom's market cap recently eclipsed its erstwhile total addressable market. Safe to say the easy money has been made. Congrats to those who got in early.

There is no doubt the demand for Zoom is going to keep soaring. COVID-19 served as free marketing for Zoom as numerous social media platforms talked about the nimbleness and superior user experience of the platform.

Zoom's brilliance lies in its SaaS business model. However, the next billion will be easily derived if it focuses on its capabilities to become a platform for enterprises to plan, attend, and catalog their meetings and events. This will see it coming in close contact with the consumer and employee experience industry.

It already beats most competitors on distribution and latency. Extending beyond integration, Zoom can explore ideas to help industries build, store, and analyze their meetings and events to drive business transformation and insights.

Starting with educational institutions, remote classes can be stored and transcribed on a central platform. Zoom can essentially become the YouTube of schools and colleges where students will have access to stored meetings and events to facilitate learning. Each school can give the public a sneak preview of top content to attract would-be applicants and researchers. This can only be made more compelling with the infusion of some immersive learning sessions that incorporates elements of AR and VR. Given the drab nature of 2D Zoom meeting, having immersive technologies to create 3D and wide-area live recordings with little hardware cost will put Zoom a step ahead of its current trajectory. Research activities can also be recorded and analyzed for future learning. Platforms like Coursera and Udemy already give students insights, recommendations, and feedback on the optimal approach and experience to improve their online learning activities. However, they are more like Amazon (AMZN) than Shopify (SHOP). They serve as a distribution channel for the best schools to thrive. Schools need a Shopify-like platform for learning that aggregates supply-side tools while giving them the flexibility to set up their product stack in the most optimal way. This will provide the flexibility for schools to edit and update learning content and materials in creative ways without the flat distribution model of platforms like Udemy, which catalogs 2-D content from all content creators.

In gaming, Zoom can create arenas for the increasing adoption of eSport in unprecedented ways. This will require capabilities in AR and VR to create an optimal e-Stadium experience for viewers and fanboys. Having a library of eSport events will create content for newbie game adopters and analysts to chew on as they get up to speed with the pros. This can also open up areas for collaboration with sports franchises and movie makers who want to make training videos and documentaries off the content trove.

Zoom can help enterprises change a lot of the ways they interact with talents, employees, and customers. With talents, recruitment processes can be streamlined and made intelligent with access to tons of practical recruitment exercises (videos) tailored to each candidate and job description. This will help reduce interview friction while standardizing talent onboarding across all stages of the interview process. Also, stored interviews can be cataloged, analyzed, and transcribed for data intelligence gathering and future recruitment optimization. This also applies to workplace training. Employee training and onboarding can be standardized and improved if we have a library of videos where data on education and training materials on company products, meetings, negotiations, and events abound. This will create an established library for companies to track employee growth and productivity. It will also help in business process optimization if data from stored business interactions and sessions are transcribed and analyzed for future learning. For customers, sales and customer care reps can include video sessions and meetings to their lead management process and customer support effort. Data from interactions with customers in both the sales and customer success teams can help unlock new insight to optimize lead generation and improve customer complaint resolutions.

The ideas I've described above will challenge the customer experience and employee experience management market, which represents an additional  billion market opportunity. Zoom can acquire the capabilities described above by partnering with or acquiring a digital experience management platform. Players like Medallia (MDLA) or any of its competitors have the supply side stack to help enterprises derive actionable insights from their events and meetings. Zoom has the demands side firepower as it already aggregates roughly 300m daily meeting participants.

The acquisition of Medallia or any of its competitors will immediately give Zoom more power in the CPaaS space. The rapid growth spurt Zoom has recorded in the past three months represents the only global growth in big data capabilities that have been recorded by a SaaS platform, which isn't using much of the data to drive actionable insights for its users. Therefore, evolving into a data-driven enterprise platform represents the logical next step for the company.

Right now, Zoom is priced like a SaaS application, not a SaaS platform. This means valuation will lead growth if it demonstrates it can unlock the virality induced by the network effect built into its capabilities. This has been achieved after rivaling Twitter (TWTR), and Snap (SNAP) in DAU (daily active users) count. While most SaaS businesses offer end users a platform, they don't offer enterprises a platform. Therein lies their limitation. As a result, their valuation tends to plateau as usability and privacy issues become more pronounced due to their huge MAU count impacting overall app health. Recall that Twitter has spent the best part of the last five years tackling privacy, usability, and product issues after its MAU count peaked. The same trend can be observed with Snap. While Snap moved faster by revamping its app and creating more AR tools to make end-users adopt its product like a platform, the full gains expected from the initiative haven't quite kicked in.

The recent privacy concerns about Zoom might have called the peak to its growth factor, which means that the next few quarters will be a dilemma between focusing on usability and privacy hacks versus exploring ways for users and enterprises to adopt the product like a platform. My guess is that Zoom is going to be stuck in the usability/security trap. After the first bug was found, the incentive for other hackers to prod and probe has increased significantly. Also, some security-conscious enterprises have advised their employees to stop using the platform. These security issues might place a hard cap on Zoom's growth spurt in the near term. This is because engineers at Zoom will be split between prioritizing usability, growth, and privacy. Evolving a product as a platform often involved making a trade-off between the three. Rapid growth means prioritizing usability over security. Fixing public PR means prioritizing security over usability. As a result, I expect Zoom's growth to slow in the coming quarters. An attempt to focus on both will require more hiring in engineering, security, and product. This will further complicate the product evolution priority tree. This will impact EPS. As a result, investors should expect more volatility in coming quarters as Zoom's next growth spurt (as it tries to evolve into a platform) will involve projects that will continue to slip under the priority tree.

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