When Eric Yuan, Zoom’s CEO, decided to go after the video conferencing market in 2011, the market was already flooded with incumbents like Microsoft owned Skype, Google Hangouts & the then market leader Webex, owned by Cisco.
Eric was serving as the VP of Engineering at Webex when he decided to venture out on his own.
So why did he quit Webex & how did Zoom turn into such a big phenomenon?
There’s no denying the fact that the coronavirus propelled Zoom’s growth in a way nobody could have predicted, not even Eric himself, but Zoom was a successful product even before this whole virus thing happened.
Let’s find out the interesting backstory behind what seems like an overnight success & look into Zoom’s business model.
The Zoom Backstory
Convinced that the internet was the next big thing, Eric decided to migrate to the US from China in the mid-’90s.
The first time he applied for the US Visa, he was rejected. The US customs misunderstood Eric to be a part-time contractor because his business card listed him as a consultant.
After that incident, the now-skeptical immigration services rejected his Visa for 7 more times, but Eric did not give in.
“I told myself, okay, great. I’ll do all I can until you tell me that I can never come here anymore. Otherwise, I’m not going to stop.”
He continued reapplying over the course of two years until he was finally accepted on the ninth try.
In 1997, Eric joined Webex as a founding engineer. Operating in the space of real-time collaboration, the company had half a dozen employees at the time.
Webex grew quickly & went public in 2000, riding the exuberance wave of the dot-com bubble. In 2007, Webex was acquired by Cisco for $3.2 billion.
By that time, Eric had climbed the ranks to become VP of Engineering.
Eric continued to work on Webex, which was now a part of Cisco, until 2010, the year in which he found out that most of Webex’s customers were unhappy with the product.
Why were the customers unhappy?
The product was simply not as good as customers expected it to be.
For example, every time users logged into a Webex conference, it took a lot of time to get down to business because the company’s system would first have to identify the version of the product (Android, iPhone, Mac, or PC).
If too many people joined the conference, Webex’s system wouldn’t be able to handle the strain, leading to a decline in the audio and video quality.
And not just that, Webex also lacked modern features like screen sharing for mobile.
Eric tried to convince his bosses to upgrade the product for a year but they wouldn’t budge.
In 2011, Eric finally decided to leave to give a shot at the video-conferencing business, taking his new product in the direction he wanted Webex to follow.
More than 40 engineers followed Eric and left Webex to become a part of his venture.
However, with the market already saturated with products like Skype, Google Hangouts & the then market leader Webex, investors were skeptical of putting money into Eric’s new venture.
Fortunately, former Webex CEO Subrah Iyer believed enough in Eric to give him a seed funding of $3 Million.
Two years later, in 2013, Zoom launched its first iteration, raising a $6 Million Series A round at the same time.
A key difference between Zoom and other existing companies, like Skype, was that Zoom was created with a video-first mentality. The existing players had created audio first and then adjusted to video, which led to an increase in costs.
By May 2013, Zoom’s superior product capabilities helped it reach 1 million participants, connecting more than 400,000 meetings & 3500 businesses.
Zoom managed to get traction because it differentiated itself in many different ways from the existing players.
Zoom video conferences were easy to set up and compatible with all devices, including desktop and mobile via its Android and iOS apps. Zoom was able to handle a data loss of up to 40%, so it worked with a weak internet connection as well. To top it all off, Zoom had a $9.99 per host plan ($14.99 now), which made it cheaper than its competitors.
Zoom kept growing, adding new features along the way. In April 2019, Zoom went public at a share price of $36, valuing the company at $9.2 Billion.
When Zoom went public, it was already operating at a profit, unlike other tech companies like Uber, Lyft & Pinterest which went public at around the same time.
How Does Zoom Makes Money
In simple terms, Zoom operates on what is popularly known as the freemium business model, wherein it provides free limited services to hook users & turns them in paying subscribers in exchange for upgraded services.
To the average Zoom user, it might feel like Zoom is just a video conferencing tool, but Zoom provides more services than just that.
Let’s have a look at them individually before we move on to discussing company financials.
1. Zoom Meetings
Zoom Meetings, the company’s core offering, allows users to connect with each other through audio & video. It also happens to be the most commonly used and popular service provided by Zoom.
Zoom meetings also include Zoom chat, allowing users to share text, image, audio files & content.
The basic plan is free, but it has restrictions like a 40-minute time limit & 100 participants at most for the group meetings.
Zoom offers Pro, Business & Enterprise plans for small teams, small & medium-sized businesses & large enterprises respectively, with features suited as per the size and the needs of the customer.
2. Zoom Rooms & Workspaces
Zoom rooms are basically conference room systems that allow users ( mostly large organizations ) to have Zoom video meetings seamlessly.
Similar to Zoom meetings, Zoom Room plans are available through a subscription, starting at $49/month fee per room.
The more the number of conference rooms the organizations want to connect through Zoom rooms, the more money they have to shell out. For example, to purchase a plan for 10 rooms, organizations would have to shell out $490 per month.
If the customers already have conference rooms setup using Polycom, Cisco, or Lifesize equipment, they can use the Zoom conference room connector to start Zoom Meetings directly from existing conference room systems.
If they do not have existing conference rooms set up, they can purchase hardware from Zoom’s hardware partners which include companies like HP, Lenovo & Logitech to name a few
If needed, Zoom also provides customers with installation support for the conference rooms.
3. Zoom Phone
A cloud-based calling solution available as an add-on to the existing Zoom service, Zoom Phone brings traditional phone capabilities directly into the Zoom application, turning Zoom into a complete collaboration product by providing voice, conferencing, messaging, and video services together.
Starting at $10/month per user, it comes with features like intelligent call routing, auto-attendant & call recording among many more
4. Zoom Video Webinars
With Zoom Video Webinars, users can host online web conferences with up to 10,000 participants.
To make the webinars interactive, Zoom provides features like chat, polling & virtual hand-raising for attendees.
Commonly used use cases for these webinars include town hall meetings, training sessions & marketing presentations.
Zoom Webinar pricing varies depending on the number of attendees and host. The plan pricing starts at $40/month for 100 attendees and 1 host & goes as high as $6490/month for 10000 attendees & 1 host.
In order to make the product experience better, Zoom also supports integrations with apps like Slack, Google Calendar & Trello among many others.
How Much Money Does Zoom Make
In the first quarter of 2020, Zoom reported revenue of $328.2 million, up 169% from the same period a year ago. The number of customers with more than 10 employees also grew to approximately 265,400, up 354% from the same period a year ago.
Eric S. Yuan, Founder and Chief Executive Officer of Zoom attributed the accelerated growth of Zoom to the COVID-19 crisis & rightly so. However, Zoom had been growing steadily even before that.
Here’s a breakdown of how Zoom’s revenue grew from FY18 to FY19 ( Year Ended January 31 )
Is Zoom Profitable?
While Zoom did not make any profit in 2017 and lost money in 2018, the company recorded profits in 2019 & 2020. Please note that the years mentioned in Zoom’s financials below end on January 31st.
As of Jan 2020, Zoom raked in a revenue of $622 million, gross profit of $500 million and net income of 12 million.
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