An entrepreneur starts a company, sells it to a big company, sticks around and watches the acquirer dismantle what worked so well.
The entrepreneur gets so frustrated that he leaves to start a new company that will solve all the customer problems that the acquirer has caused -- and strives to win back those customers with a better value proposition.
Can the acquirer learn from its mistakes and get back in the game?
This comes to mind in considering Zoom's efforts to take market share from Cisco Systems in the video conferencing market which is expected to grow at a 14% annual rate to $20 billion by 2024, according to Global Market Insights.
After interviewing people on both sides of this battle, there seems to be room enough for both companies in this market. Yet Zoom strikes me as being more responsive to what customers want than Cisco.
(I have no financial interest in the companies mentioned in this post).
Before getting into this, let's take a look at how Cisco is doing.
In the 1990s I was very impressed by its ability to keep growing at over 40% a year -- abetted by its aggressive strategy of acquiring companies that were attracting budget dollars from its enterprise customers.
Cisco is doing pretty well but its shares still trade at 38% below their March 2000 high of $82. Its revenue growth over the last five years has barely budged -- up at a 0.3% average rate to $49.3 billion in 2018 while its net income has been declining at a 59.4% average rate to nearly $6.4 billion, according to Morningstar.
One of the companies that Cisco acquired was WebEx.
As Zoom CEO Eric Yuan explained in a September 2017 interview, he left Beijing in 1997 to be the founding engineer of WebEx. Cisco Systems bought the video conferencing company in 2007 for $3.2 billion and Yuan stuck around Cisco as a VP in its Collaborative Systems group.
In 2011, Yuan left to start Zoom which was then growing faster than the industry. FORBES reported that Zoom grew 300% in 2016 after raising $100 million in January 2017 at a $1 billion valuation.
Yuan was not happy with the way Cisco was managing WebEx when he left in 2011. As he said, "I was paid very well as a VP at Cisco. But WebEx was my baby. In 2010 and 2011, I did not see happy customers. I was very embarrassed that I spent so much time on the technology. Why are the customers not happy?"
He could not convince Cisco management to fix the problems. As Yuan explained, "Cisco would not change its collaboration strategy. I said I had a different view and left Cisco. 35 to 40 WebEx engineers left with me. Six years later we are doing well with 750,000 customers [up 67% from 450,000 in January 2017]. We are growing thanks to our simplicity, quality, features and price and we have a very high net promoter score of 69."
IDC reported that Cisco was the dominant player with Polycom and Huawei taking second and third place. In the third quarter of 2016, Cisco's revenues grew 6.4% and it controlled 46% of the worldwide video conferencing equipment.
More recently, Gartner placed Cisco and Zoom in the Leader quadrant of the 2018 Meeting Solutions Magic Quadrant. And by October 2018, Zoom had experienced "triple-digit YoY user and revenue growth and 110% growth in employee headcount," according to Digital Transformation.
While Zoom is growing faster, Cisco is not worried. As Aruna Ravichandran, VP of Marketing for Cisco Collaboration, said in a March 7 interview
We do not comment on competitors' case studies. In the meetings business customers switch vendors all the time. Our webex.com online e-commerce business is growing rapidly, and I can share with you that last quarter alone Cisco collaboration took 50,000 seats away from Zoom. This is in large part due to the fact that customers are looking for a complete solution [which includes] world-class endpoints, meetings, team collaboration, contact center solutions and more...Our group within Cisco grew 24% last quarter, and 18% in Q1.
I spoke with a former Cisco customer who switched to Zoom and he revealed what look to me to be Zoom's considerable competitive advantages -- Zoom understands what this customer wants and its technology and customer service satisfy them better than competitors' do. (I elaborate on how to create competitive advantage in Chapter Two of my latest book, Scaling Your Startup)
How so? BAYADA Home Healthcare -- a 28,000 employee, 32,000 client in-home health care service provider switched to Zoom from Cisco and Skype. As BAYADA application manager Dennis Vallone explained in a February 11 interview,
[Cisco and Skype] have been relentlessly trying to win us back since we switched to Zoom five years ago. We use video and collaboration tools for remote physician check-ins. We need high quality, reliable video in all locations -- not just the ones with high bandwidth. Zoom was the only one that could deliver that. Zoom was easier to use, cloud-based, did not require a hardware investment, and its pricing model -- a freemium pricing model when we signed on -- made it convenient to try without an investment. We reconsider our videoconferencing needs every year -- but we stay with Zoom because they listen to what we ask for and unlike the others, they actually provide it. For example, we asked for digital signage and room scheduling and they delivered.
Vallone does not know why it is so difficult for other providers to respond to its needs. As he said, "Sometimes when a company gets too big it becomes too political. It is hard to push change through. Eric Yuan has a culture of really listening to customers and responding."
Zoom does not always add the features that customers want -- but it does listen and execute when it sees a significant market opportunity. As Jim Mercer, Zoom's head of customer success, explained in a February 22 interview,
Before Zoom I spent 16 years at Citrix and I have seen [market share change hands] based on how well customers are treated. Here execution for the customer is our true north. We have a consultative approach to building our service -- working with our customers and our product development teams. We listen and implement features if enough customers request them. We have a customer advisory board for our up-market customers and use AI and automated tools to boost engagement with our product for down-market customers. When it comes to the onboarding process for new customers, some of our competitors merely provide video tutorials and a one page PDF.
Another Zoom customer, Autodesk, started working with Zoom beginning with an April 2017 pilot. According to a March 7 interview with Prakash Kota, CIO, Autodesk, "We enjoy working with Zoom due to high employee adoption and satisfaction rates. [Zoom best met our requirements for] a secure, modern global solution that was platform agnostic, 30 frames per second content share, and the ability for external participants to easily join and collaborate."
Zoom is growing at over 100% a year while Cisco's video conferencing revenues rose 18%. If Cisco can surpass Zoom's competitive advantages, it will be in a better position to sustain its market share lead.
