Roy Lu

Why Slack will out-compete Microsoft and disrupt the enterprise collaboration market. Microsoft already made a choice to focus Teams, its Slack competitor, on its enterprise customers, making itself vulnerable to disruption. Slack is a classic example of Innovator’s Dilemma, starting out as a lightweight team IM tool focused on the niche startup market. The dilemma is that even though incumbents are well-aware of disruptive technologies, they often cannot justify developing for a niche market, thereby giving leeway for niche competitors to grow, mature, and ultimately disrupt.

Consider these two facts from Slack’s perspective:

Slack’s startup clients will grow bigger with more spending power. Give it 5 to 10 years. Slack's capability to serve and sell to enterprise customers will mature over time. Give it 5 to 10 years.

Consider these risks:

Ballooning costs: Not a risk. According to Slack’s 10-K, its R&D and G&A ballooned to $718M from $269M due mostly to one-time stock-based compensations. Overtime Slack should achieve economies of scale as most SaaS companies do. High P/S ratio: Risk. The current P/S is about 20.63; this is frothy in the short-term considering that Slack’s revenue growth has slowed to about 50% yoy. Corona recession: Risk. Investors seem to be confident in Slack’s ability to onboard tremendously more clients due to remote WFH during corona outbreak, but seem to forget that a lot of Slack’s existing paying customers may go out of business.

Furthermore, there are several questions that should be answered to better assess the probability of Slack’s disruption: Will Microsoft develop a light-weight nimble version of Teams? Will Slack’s clients stay on with Slack or switch to Microsoft as they mature? Will there be another entrant adding to the competition? Will Microsoft engage in a price war?

Overall, it does seem like Slack is well poised to be Microsoft’s innovator's dilemma, first serving a niche market and then disrupting the bigger market . However, because the recession will likely hurt Slack’s client base disproportionally, things will get worse for Slack, before it gets better.

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For further reading, I’ve run a thought experiment on Slack vs Teams in the following three areas: user needs, competitive threat, and company.

User Needs - 3 for 3 Slack, 2 for 3 Microsoft It’s obvious that collaborative software tools are replacing traditional emails. Slack delights its users in three major ways:

multi-screen instantaneous access light-weight Multi-screen: consumers now demand access from any device: phone, computer, and tablet. Instantaneous: cloud-access allows users to access chat threads at any time. Light-weight: it’s quick to install, setup and use. Teams does a great job with the first two, multi-screen and instantaneous access but fails the third, light-weight, making it vulnerable to disruption.

Competitive Threat - Microsoft screwed up on Skype. Teams by Microsoft is highly functional. Kudos to Microsoft for making such a smooth, powerful and connected application in a short span of time. There's one key difference: it’s painful to get set up and even more painful to invite new users. No startup in its right mind would choose Teams over Slack. Furthermore, Microsoft has a history of epically failing on Skype, losing the enterprise video-conferencing market to Zoom. This doesn't bode well for Microsoft's likelihood of fixing key product weaknesses in Teams.

Company - Strong leadership. The founder and CEO Butterfield is massively rich from Flickr and Slack’s IPO. Yet he is going to work every day and winning big clients such as Amazon, IBM, and Intuit. When a founder stays on after a company becomes public, the company tends to be more motivated and mission-focused than those run by professional managers. And the fact is Slack has proven it can win over enterprise customers, indicating that Slack will give Microsoft a run for its money.

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Disclaimer: I currently do not own shares of Slack Technologies (ticker: WORK), but plan to do so in the near future.

Roy Lu

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