This article first appeared in The Edge Malaysia Weekly on April 13, 2020 - April 19, 2020
UNLESS you have been hiding under a rock, chances are you have not only heard about Zoom Video Communications but probably regularly use it to communicate with colleagues, business partners, family and friends. The videoconferencing software firm’s daily active user base ballooned over 20-fold from 10 million in December to over 200 million in late March. Viral adoption has turned Zoom into a verb, so these days you Zoom someone just like you Xerox or Google something.
Will Zoom redefine how we communicate in a post-coronavirus world the way landline phones changed how people communicated after World War II or the way mobile phones became ubiquitous in the late 1990s?
Zoom’s software connects people through video, voice, chat and content sharing, and enables face-to-face video experiences, with the goal of making meeting through Zoom better than in-person meetings.
We have all chatted with colleagues, friends or family members over WhatsApp video, Skype or FaceTime, Apple’s proprietary software that allows video calls from iPhones, iPads or Macs. But you cannot attend a yoga class on WhatsApp video or attend a board meeting on FaceTime. What makes Zoom different is that it is a professional software that can easily be scaled from two users to thousands of people joining virtual corporate meetings that can be recorded and even archived.
The coronavirus pandemic has precipitated the largest global work-from-home experiment in history. Companies, governments and schools around the world are sending employees, public servants and students home to prevent infections and to work or study. “Working and studying from home requires software that works anywhere and enables collaboration,” notes James Wang, an analyst at ARK Invest, an asset management firm in New York. Zoom is one of the biggest beneficiaries of the work-from-home and stay-at-home trends, he argues.
Originally aimed as a video conferencing software for businesses, Zoom is gaining traction from new use cases, including remote education where it is used by universities to broadcast lectures or conduct classes, or for virtual doctor’s consultations in telehealth, therapy sessions with psychiatrists, as well as social activities like virtual happy hours dubbed “Zappy Hours”, and even virtual funerals.
By one count, tens of millions of students in over 90,000 schools across 20 countries were studying remotely through Zoom video software last week. More schools around the world are switching to virtual classrooms as the lockdowns drag on. Cabinet meetings around the world have been conducted over Zoom and directors are conducting corporate board meetings using the software. And plenty of Zoom weddings videos have been uploaded on YouTube.
Because of the lockdown and social distancing, everyone is flocking to Zoom. It is being used to broadcast music concerts, religious sessions from churches, temples and mosques, as well as art shows, and yoga and fitness classes. “Zoom is filling the void that social distancing has created since the pandemic began,” Rishi Jaluria, software analyst for D.A. Davidson in Portland, Oregon, tells The Edge in an interview.
At its height two weeks ago, the company’s total market capitalisation of US$46 billion was more than the combined market value of the big three US automakers — General Motors, Ford and Fiat Chrysler. Indeed, at one point last month, Wall Street was valuing Zoom at more than all of the listed US airlines, hotels and cruise operators combined.
Mea culpa
Ironically, Zoom’s hyper growth is now threatening to become an albatross around its neck. It is in the eye of the storm as its software has come under intense scrutiny for privacy concerns as well as security issues. Moreover, competitors such as Microsoft and Cisco have dramatically improved their own video software, making their consumer versions free, as well as more secure, in their effort to derail Zoom.
“I really messed up,” founder Eric Yuan said apologetically in a blog post last week. “We recognise that we have fallen short of the community’s — and our own — privacy and security expectations,” he said in his mea culpa. Yet, despite the hammering its stock has taken, as well as the bad publicity, Zoom has emerged as a formidable global player in the productivity software market that even giants like Microsoft and Alphabet’s Google now have to contend with.
The son of mining engineers from China’s Shandong province, Yuan, a software engineer, had long dreamed of working in the Silicon Valley. He tried eight times to get a US visa, but despite being repeatedly denied one, he just kept showing up at the US consulate until he succeeded. Soon after arriving in America in 1997, he landed a job at WebEx, which was developing a video conferencing software. In 2007, networking giant Cisco acquired WebEx, and Yuan ended up heading the engineering team for collaborative software. But WebEx software was buggy and Yuan could not persuade his bosses to give him the resources to overhaul it, so in 2011, he quit and on a wing and a prayer, launched rival Zoom.
Video conferencing is fiercely competitive, with giants like Microsoft, Google and Cisco battling it out for corporate customers. Among Yuan’s early backers were Qualcomm Ventures, the venture capital arm of the semiconductor firm, Yahoo’s founder Jerry Yang and Hong Kong billionaire Li Ka-shing. Zoom’s customers include Walmart, Verizon, Johnson & Johnson, Wells Fargo, the US Department of Homeland Security as well as Japan’s Sony and South Korea’s Samsung Electronics.
Zoom’s revenues are forecast to grow 48% in the current fiscal year ending next January to US$920 million, with paid corporate customers with more than 10 employees growing over 50%. Free cash flow margins are likely to exceed 20%, up from 18% last year. Zoom has conceded that there will be gross margin erosion to pay for some of the recent heady growth. Last year, the company had gross margins of 81.5%. Only two software firms, PagerDuty with 85.2% and Slack Technologies with 84.6%, had better gross margins.
Zoom has been gaining share from legacy video conferencing tools by differentiating itself from competitors like Cisco’s WebEx, Alphabet’s Google Hangouts, LogmeIn’s GoToMeeting, Microsoft’s Teams, and video and teleconferencing equipment maker Polycom, who lack some of the large event, video integration and learning integration that Zoom has. Not only does Zoom have one of the best video conferencing products in the market, its customer care and support are miles ahead of its peers. Yuan has built a customer-centric culture at the firm, focusing on making the most user-friendly software. What differentiates Zoom from rivals is that “it just works”, say users like Jaluria.
Zoombombing
Zoom is popular because it is incredibly easy to use. You do not need to log in, create an account or go through a bunch of steps that other software force you to do. Try installing Microsoft or Adobe software on your computer, as I have in recent days. With Zoom, until last week when it started to tighten up its processes, all you needed to do was to download the software or its app, and you were ready to roll.
Ironically, Zoom’s biggest asset, its ease of use, is also its main flaw. As it has become a mass market product, people are sharing their Zoom yoga classes and weddings on Facebook or Instagram and, if you are a troll, all you need to do is find the link, guess the password, if the user actually has one, and just Zoombomb away.
Much to the world’s chagrin, as we become more reliant on the software, hackers and pranksters are dropping in with graphic porn and Nazi memorabilia to disrupt university classes, company meetings and even journalist interviews on Zoom. Bad actors have been exploiting security vulnerabilities in the software for a while now. Zoom encourages users to try features like a waiting room, a meeting lock as well as a screen sharing limit to avoid such attacks. Last year, Zoom installed a web server inside macOS when users downloaded its software on their computers to allow itself to easily work inside the operating system. It unwittingly created a loophole that allowed any website to open up a video-enabled call on a Mac that has Zoom installed. Unfortunately, even if you uninstalled Zoom, the web server persisted and was able to reinstall it without human intervention. Not surprisingly, Apple’s top brass went ballistic and quickly pushed a software update to remove Zoom’s web server and warned it of consequences if it ever tried to do that again.
There were other issues. Zoom was sharing data with Facebook, which could sell that data to advertisers. Imagine if you were a university student, a doctor’s patient or a member of a corporate board and Facebook was creaming off all your data. Zoom has since fixed that issue and Facebook no longer has access to your data through the software. Then there was the issue of Zoom’s promise that video calls were encrypted end-to-end for all meetings. They were not. “I am deeply sorry” for implying that all calls were encrypted end-to-end for all meetings, Yuan said last week, claiming he is now fixing the problem. New York City schools have banned Zoom and asked students to switch to Microsoft’s Teams. “Zoom needs to do better,” argues Jaluria. “It is basically a business product whose freemium variant caught fire because of coronavirus and as such has had some teething problems,” he says.
Zoom’s problems are unlikely to send all of its customers to Microsoft or Google. It is easy to switch yourself off from Zoom but it is hard to switch on to other products like Teams, WebEx or Google Hangouts. Even after the world returns to some sort of normalcy later this year, Zoom will continue to be a beneficiary as businesses change their attitude towards working from home. Companies are currently investing heavily in software such as Zoom that enables remote work and collaboration while ensuring that the right systems and processes are in place, particularly in areas where compliance is a key component, Jaluria says.
Having captured huge mindshare and with its stock trading at three times its IPO price a year ago, Zoom needs to quickly move to raise lots of cash, which it can then deploy for acquisitions and R&D. In mid-February, just days before the market peaked, Tesla raised US$2 billion (RM8.7 billion) in a secondary offering when its stock was trading at over US$800 a share. Last week, Slack, whose messaging software has a cult-like following and is another beneficiary of the work-from-home trend, raised US$750 million in a convertible debt issue. Analysts say even in this market, Zoom could easily raise up to US$2 billion, possibly more.
Though a transformational merger with collaborative software firms such as Slack, London-listed Atlassian Corp or Adobe are considered a long shot, there are plenty of mid-sized firms that might benefit from embracing Zoom, like work management software maker Asana. If Yuan refuses play predator, he might become prey to the likes of Salesforce.com, which already has a small stake in Zoom, or even Amazon.com. Yuan has said Zoom is not for sale, but having brought the company to global dominance, he is unlikely to let Microsoft or Google trample on him. Yet, Zoom needs to earn back the trust of corporate customers who have been zoombombed. A partnership with a giant, if not an outright sale, that keeps Zoom a dominant player in collaboration software might be his preferred option.
Assif Shameen is a technology writer based in North America
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