Zoom Video Communications – Harsh Limelight

Short-term issues mask long-term promise. 

• Zoom has been thrust into the limelight due to the current pandemic and as a result, its shortcomings (typical for any young company), it has lost customers which masks its long term potential.
• RFM is a subscriber to Zoom’s professional service and regularly uses all of the other systems with its clients as the nature of RFM’s business has been remote since it was founded in 2012.
• RFM is also an Office 365 subscriber and as such has access to Microsoft Teams at no extra cost, but this service is not yet close to where it needs to be to convince RFM to switch.
• The user experience on video is mission-critical to RFM’s ability to win and retain subscribers and as such RFM will continue to default to Zoom unless specifically requested to do otherwise by a client.
• Zoom has done what no one else seems to be capable of which is to create a very high-quality video conferencing system that is easy to use and scales well.
• Microsoft, Cisco, Google and so on are all trying but despite huge investment and endless software updates, their services are way behind Zoom when it comes to quality and ease of use.
• This is especially the case when it comes to multiway video conferencing which combined with Zoom’s very generous free-tier offering is why its popularity has skyrocketed.
• Zoom has gone from 10m daily active users (DaU) in Q4 2019 to 200m in Q1 2020 and to Zoom’s credit, the system has not collapsed under the 20x increase in both users and probably much greater increase in total traffic.
• This indicates that the system is extremely robust, but the limelight has also revealed the inevitable holes in the system that any small growing company will have.
• Zoom is not the only one caught on the hop as I have it on very good authority that one of the global leaders in the cloud has completely run out of capacity at one of its global data centres.
• Zoom does have security issues but I suspect that these will be fairly quickly fixed and Zoom has already taken significant action to beef up the security of its service.
• However, I think the short-term outlook may be pretty tough for two reasons:
  • Free tier: a very large part of the 190m increase in DaUs are free users who are using the system to keep in touch with family and friends.
  • For multiway video calls, Zoom’s free service tier is the standout choice and even my parents for whom I provide IT support have had no difficulty in getting it up and running.
  • However, none of these new users are paying Zoom a dime and as Zoom’s platform is running on AWS, its bill there will be skyrocketing as cloud providers charge by usage.
  • The net result is an explosion of use which makes variable costs rise but with very little, if any, increase in revenues.
  • For a very highly valued young company, this is not a good state of affairs and I expect to see some signs of this when Zoom reports Q1 2020 results.
  • Hence, I expect Zoom’s profitability to deteriorate in the short-term and it is very uncertain whether it will be able to convert all of this new traffic into revenue.
  • Security: Zoombombing has become a pandemic pastime which combined with traffic being routed through its servers in China and easily accessible personal data has raised security concerns.
  • Zoom has moved to address these concerns, but it has already taken a hit to its reputation and has lost some clients.
  • I think it has a good chance of winning these back once its security can be demonstrably as good as everyone else’s because its user experience remains that much better.
• The net result is that I think that there is a lot of pent-up demand and potential for switching to Zoom in the long-term, but the short-term looks like it will be difficult.
• Rising costs and without a commensurate increase in revenues is worrying for a young company and I think that this will take a large piece out of Zoom’s valuation when this becomes clear.
• However, in the long-run, I think Zoom is still in a position to take a lot of clients from Cisco, Microsoft and Google as its offering remains head and shoulders above the rest.
• Zoom has set a standard for the user experience which will generate significant dissatisfaction with users if they are forced to use other offerings.
• As long as the others don’t catch up, I will be having a good look at Zoom once the market realises that providing a free medium for families and friends to hang out together is costing Zoom a lot of money.