Recent Performance and Business Strategy

Zoom became one of the most well-known video-conferencing applications during the COVID-19 lockdowns, and its stock price surged by more than 400% during 2020. The company has practically become synonymous with its function and is for many the company that represents the solution to the needs of working from home. The company was founded in 2011 and launched the first version of its product in 2012. In 2013, around 3 million people participated in a Zoom meeting, whereas in 2014, Zoom had 30 million meeting participants. In 2015, Zoom’s meeting participants grew to 100 million people for the year. In other words, the company has experienced phenomenal user growth since its beginning. However, it was not until COVID-19 broke loose that the company really grew its userbase and revenues accelerated. The already impressive number of 100 million meeting participants in 2015 was by March 2020 transformed to 200 million

89 meeting participants every single day. The formidable growth in users as a consequence of the pandemic is clearly demonstrated in their revenues. Figure 21 shows how Zoom’s revenues increased rapidly in 2020 and is exemplified by a year-over-year growth of 369% from the last quarterly report. Revenue growth of this caliber usually leads to a corresponding increase in operating expenses, and many companies experience cost-related challenges when growing at an unsustainable rate. Interestingly, Zoom has managed to improve both operating income in absolute dollars and the operating profit-margin simultaneously. The operating margin went from 2% in 2019 to 25,3% in 2020 as seen in Figure 22. Interpreting these numbers, one can observe that Zoom has actually achieved improved efficiency in its operations when increasing their userbase and revenue. As discussed previously, the SaaS business model, which Zoom is based on, is very scalable, and more users does not necessarily translate into higher operating costs. Increase in revenues is therefore directly reflected in the bottom line and makes revenue growth a very important value driver, and Zoom’s financials exemplify this very well.

Figure 21: Zoom's Quarterly Revenue

Source: Bjørnson & Hauer (2021) Based on Data from Yahoo Finance

90

Figure 22: Zoom's Annual Operating Income and Profit Margin Source: Bjørnson & Hauer (2021) Based on Data from Yahoo Finance

The recent performance and growth are largely results of the pandemic and market distortions, but it was not given that Zoom could manage the increased demand. The company has prepared for growth since its establishment, and there are especially three key components that helped Zoom to face the growth properly. First, being customer-driven is ingrained in Zoom’s DNA. CEO, Eric Yuan says: “From the moment we founded Zoom, our main focus has been to provide a cloud video communications solution that would make customers happy. That focus has continued to guide all our innovations. The fantastic growth we’re experiencing can be attributed to having satisfied customers that enjoy using our platform.” Secondly, Zoom built a product that can sell itself. When Eric Yuan brought Zoom to the market, he was determined to differentiate the product from the competitors: “The market is extremely crowded, but the potential is huge. If our product is better than any others, we can survive.” Referring to the first component, it is all about being customer driven. The third component is about building their brand. Zoom has focused on getting the brand out in front of as many eyeballs as possible, and they started by targeting one key group:

Early Adopters. “As an emerging vendor, we had to focus on marketing to the curious. This allows us leverage our greatest advantage – user experience – because once an early adopter uses a product they love, they will spread the world.” As the pandemic continues, Zoom is currently expanding their services.

$-4 833 000 $6 176 000 $12 696 000

$669 600 000

-3,19% 1,9 % 2,0 %

25,3 %

-5%

0%

5%

10%

15%

20%

25%

30%

$-10 000 000 $90 000 000 $190 000 000 $290 000 000 $390 000 000 $490 000 000 $590 000 000 $690 000 000

2017 2018 2019 2020

Zoom's Annual Operating Income and Profit Margin

Operating Income %-Operating Profit-margin

91 6.2.2 VRIO

Zoom Video Communications’ Organizational

Key Resources & Capabilities V R I O Competitive Advantage

Product Quality & Ease of Use ✓ ✓ ✓ Temporary

Customer Happiness ✓ ✓ ✓ ✓ Sustained

Freemium Model ✓ ✓ ✓ Temporary

Table 10: VRIO-Table for Zoom Video Communications Source: Bjørnson & Hauer (2021)

6.2.2.1 Product Quality & Ease of Use

Zoom’s success since entering the video communications sector has primarily been driven by user experience (Frampton, 2020). A key, and arguably the most valuable source of customer satisfaction in the industry is the quality of audio and video. Zoom acknowledges this and uses artificial intelligence to constantly make quality improvements through noise reduction and echo cancellation. Whilst high-definition audio and video as a necessity when competing in this industry, Zoom’s high pace of innovation, product enhancement and fairly narrow business focus has led to Zoom staying one step ahead of the competition and subsequent praise from customers for product quality and ease of use. As a result of this, our subjective assessment is that this resource is rare, because of its relative superiority (Gartner, 2021). However, it is subject to imitation, given the high average R&D spending in the industry (Statista, 2021). With its narrow focus on conference room solutions, Zoom is organized in a manner that leverages this resource and maximizes the value captured from high-quality audio and video that is easy to use.

Consequently, we deem this resource to represent a temporary competitive advantage.

6.2.2.2 Customer Satisfaction

Zoom appears to value customer happiness above all else. CEO and founder Eric Yuan stated in the company’s annual report that “We focus across the company on the happiness of customers and building trust with them.” In fact, the document mentions the words “customer” and

“happiness” over 100 times, a clear indication that Zoom themselves view customer experience as their competitive edge and attribute their immense growth to customer satisfaction. Prior to founding Zoom, Mr. Yuan was an employee at WebEx, another developer of videoconferencing

92 applications. Despite commercial success, he claims he never saw a single happy customer while working for the company which inspired him to start the customer-centric cloud video communications solution that is Zoom. Along with positive product reviews, this shows that Zoom’s strong emphasis on customer experience surpasses most of the competition and is therefore deemed to be rare. Next, customer satisfaction is a product of several factors such as the product itself, client care, pricing, etc. Furthermore, it is a result of customer-centric efforts over a prolonged period of time starting at the company’s inception, all aimed at maximizing customer satisfaction and perceived value. Since this is dependent on such a large number of independent variables, we consider Zoom’s superior customer satisfaction to be inimitable, and certainly so in the short term. As indicated previously, the company culture at Zoom revolves around the customer and the firm is organized accordingly and customer satisfaction therefore subjectively regarded as a sustained competitive advantage in accordance with the CEO’s review in the annual report.

6.2.2.3 Freemium Model

Zoom has significantly raised its profile during the COVID-19 pandemic with freemium subscriptions that bridge the gap between consumers and enterprises (Gartner, 2021). They also offer incentives to organizations who sign up to Zoom for the first time which has been a critical success factor in expanding their userbase. This enables Zoom to generate income from the promotion of hardware products, in addition to encouraging paid subscriptions. The long-term effects of the freemium model, particularly given its timing with remote working increasing the industry attractiveness, clearly show that it is valuable, albeit contingent on converting free users into paying customers. The rarity of a freemium pricing strategy is debatable, but among the key players in the video conference industry, Zoom has among the most flexible free packages which allows users to hold meetings of up to 100 participants for 40 minutes. In order to further improve retention, they ran a “no limit” campaign for scheduled meetings (Gartner, 2021). The comprehensive features and capacity included in Zoom’s freemium model are therefore deemed rare. However, this is a feature that can easily be imitated in such an attractive industry with intense competition. It is worth mentioning that a competitor introducing a freemium model is no guarantee for success though, since Zoom already captured a large part of the market using this approach as previously mentioned. By incentivizing permanent, paid subscriptions through as well

93 as securing income from hardware promotions, Zoom is organized in a way that captures value from this resource. All in all, the freemium model represents a temporary competitive advantage for Zoom.