My bearish stance on Slack and its acquisition by Salesforce

Unlocking Potential is a newsletter by me, Francisco H. de Mello, CEO of Qulture.Rocks

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

Theodore Roosevelt in The Man in the Arena

I have been fascinated by the Slack x Microsoft Team s competitive battle for some time. I felt like I was witnessing one of the great competition stories of the enterprise software market firsthand. This week's acquisition of Slack by Salesforce jerked me back into thinking about it, and I decided to write a follow-up note in part to brag about past predictions and in part to build on them.

My previous take on Slack's prospects as a long-term investment

I'm not sure if you'll remember, but in June 2019, I wrote on this very same blog that I wasn't really bullish on Slack stock as a long-term investment. I'm not one to brag, but I feel that this has been one of my good calls (there are plenty of bad ones I shall not discuss). Back then, I concluded my piece by saying:

"The Microsoft threat is so big that I wouldn't be willing to hold Slack stock on the long run. I wouldn't buy it if I were Warren Buffet anyway."

Looking back, I think my thesis could have been 10x more well developed. Anyway, my reasons for that conclusion were mainly based on the strength of Slack's main competitor: Microsoft and its Teams offering. The supporting arguments were pretty straightforward.

The first was Microsoft's unbeatable partner ecosystem that would help it gain scale at a much faster pace, both in large enterprises as in middle-market enterprises, which were critical segments for Slack's growth. I wrote:

"Selling to the enterprise is a pretty specific muscle, that's hard to train. Microsoft has nailed it by cultivating a direct sales force and a huge channel partner ecosystem that sells and implements their products worldwide. Slack, which until only months ago boasted not having any salespeople, is still a toddler on that front. Slack is still a company hoping to be a long term success with a killer product; Microsoft has already gotten the fact that it is the distribution channel that matters in the end."

The second was that Teams was natively integrated with Microsoft Office, a staple everywhere outside of tech. I wrote:

"The point is: Microsoft and its Teams product is an incredibly strong contender on this fight. It has a huge share of wallet on basically all relevant enterprises globally. So a very relevant question would be how much better is Slack vs. Teams so that a CIO (and this is a CIO type of purchase) will buy in instead of just plugging Teams in its stack? Alas, Teams has much better Office integrations, which are still a huge part of “where work happens” [1] on the enterprise."

Both of these points would be made a bit over a year later by Ben Thompson in his Stratechery article called "The Slack Social Network." I am reasonably proud of that, him being one of the most well-read and well-articulated tech and strategy writers out there, even though I'm not one to brag, as I said.

Ben Thompson called Microsoft's partner ecosystem "a gargantuan moat":

Microsoft’s partner network is a truly gargantuan moat. When it comes to enterprise, it is easy to focus on the biggest companies, where Microsoft will engage directly, and challengers like Slack can build up sales forces to compete. Underneath those companies, though, are tens of thousands of smaller businesses that, even if they have IT directors of their own, rely on outside vendors to build up their technical infrastructure.

And mentioned the Microsoft suite of products and its native integration with Teams as a huge reason for Microsoft's win over Slack (to be very honest, Thompson was basically saying that Teams had already beaten Slack, and not that it was likely to beat Slack.):

This is what Slack — and Silicon Valley, generally — failed to understand about Microsoft’s competitive advantage: the company doesn’t win just because it bundles, or because it has a superior ground game. By virtue of doing everything, even if mediocrely, the company is providing a whole that is greater than the sum of its parts, particularly for the non-tech workers that are in fact most of the market. Slack may have infused its chat client with love, but chatting is a means to an end, and Microsoft often seems like the only enterprise company that understands that.

Having Ben Thompson repeat my arguments a year later already felt good. But Slack's stock price also pointed my way, even though Mr. Market is clearly not a very trustworthy arbiter of truth. After its direct listing, at around $38 bucks, it was trading at $25(ish) a year later (and days before rumors about a Salesforce deal started to emerge).

Curiously, Slack's stock didn't benefit from the tailwinds of COVID-19 and the remote work push we all got. If we compare its performance against Zoom's, we get a really bleak image, or shall I say graph?

My take is that Mr. Market was putting more weight on Microsoft's competitive pressure than on the supposed tailwinds that a more remote world would bring to Slack's back. And I think it was right in doing so. Before the listing, and as I pointed in my earlier article, a lot of Slack's growth had come from enormous enterprises. But lately, as noted by Nathan Baschez, Slack's growth among huge companies (I am guessing (year-on-year (run-rate ARR) growth) from large customers) was falling a lot.

That means Slack was having trouble selling into larger companies, probably because, as I predicted, CIOs preferred the cheaper-for-MSFT-customers, better-integrated Teams (over Slack).

There is one final argument supporting, at least in part, my argument for Teams' success: the sharp growth in its user base, especially relative to Slack's. Check out this chart from Statista:

Twelve million DAUs was the last stat published by Slack before the pandemic. Teams had just released it had already blown past Slack and most recently published an even more whopping number of more than 100m DAUs, whereas Slack remained silent ever since.

Now, I'm totally aware of how bad this argument is in a vacuum. First, because Microsoft gives Teams away for free for a bunch of Office subscribers. Second, because it is rumored to install Teams even though the customer may not have consciously clicked "install," and even worse, it is rumored to be a *very* difficult app to remove from your computer. Third, because Teams has all the voice and video capabilities developed by the MSFT acquisition of Skype, it is just fundamentally hard to compare with Slack's chat proposition.

I'm also aware that even though it looks terrible, Slack's decision not to publish DAUs anymore makes sense. DAUs x DAUs were probably comparing apples to oranges (Slack's engagement was probably much higher), and it was a metric on which Microsoft would look better no matter what. So why pour more fuel on the fire pit?

On the other hand, as flawed as these data are, they do reinforce my main point: Microsoft's distribution can make Slack's life really tough. First, because everybody uses Office, so being natively integrated with that is a plus. Second, Microsoft's huge partner network allows worldwide penetration to the enterprise ex-Fortune 1000 (where a lot of Slack's growth came from, but as we saw most recently started to slow). And I think solid growth on the (global) enterprise market is what would justify Slack's pretty rich valuation at the time of the listing (not to mention a reasonably healthy performance going forward,) and its absence, apparently perceived by Mr. Market, is what hammered its price performance.

Revising my thesis

As I said, I didn't really like my previous piece on Slack's prospects. It could have been 10x better, even though it had some good arguments in it and a conclusion I still kind of believe in. The part that was reasonably well developed was the reason I believed Microsoft Teams would beat Slack. The part that was very poorly developed was at what game such a beating would happen. In other words, what was Slack pursuing, and why that pursuit would be unfruitful because of Teams.

Slack's vision

I'll never know for sure what was Slack's vision for its success, but I'd guess at some point, Stewart, his team, and his investors believed Slack could become something like an enterprise super app. By enterprise super app, I mean a front-end to everything that goes on inside an enterprise, such as business apps (CRM, HR stuff, marketing automation, ERP, et al.).

The reason for my belief is many-fold: whoever is going to become the enterprise super app has to be a high engagement, company-wide app to begin with. And communications, such as email and now chat for a growing number of companies, are probably the most horizontal, highest engagement apps, at least in the western world.

Also, because Slack was showing behavior that pointed in that direction. It was trying to be a hub of integrations, such that Google Apps, Office, even Qulture.Rocks, had widgets that allowed said other apps' workflows and even files to be manipulated and/or consulted from inside Slack.

Enterprise super app being a hugely aggressive ambition, Slack's drive to transform its app into a platform, on top of which developers could build proper apps (and a marketplace that went with it) made sense.

Finally, Slack was expanding a lot away from chat. It built voice messaging. It built Slack calls. I think at some point, it even built video calls, just like the ones we do on Zoom or Google Meets.

The most important point, though, is that to really become the global enterprise super app, Slack had to become the global enterprise communications standard. It couldn't be a niche player. It had to become a $100 billion-plus company. Not a decacorn. A fucking crazy story, like what-the-fuck-is-going-on-here story. And because the company's listing was done at $38 (i.e., that would be my entry point), that's a very probable type of outcome that an investor in Slack for the long run (something I wasn't willing to be) could have been chasing.

Enter Microsoft Teams. Why I think Teams would beat Slack was something I've already elaborated upon. Distribution and Office.

The bullish case: The social network argument

Even though Ben Thomson was bearish on Slack's competition against Teams overall, he was bullish in two aspects. He thought Slack had a chance to win by a) focusing specifically on chat and b) creating a cross-company network of Slack instances (something that Slack had introduced a bit earlier called Slack Connect. With Slack Connect, two companies can essentially create joint channels where people from both companies can talk. Even more, individuals from both companies can DM each other as well. I wasn't very convinced).

Thompson's argument wasn't that Slack could win head-on, but that Slack could win by focusing on chat and pursuing the multi-company angle, while Teams could keep focusing on being "the front-end of all your apps in the cloud." He said:

Slack Connect is about more than chat: not only can you have multiple companies in one channel, you can also manage the flow of data between different organizations; to put it another way, while Microsoft is busy building an operating system in the cloud, Slack has decided to build the enterprise social network.

Stewart Butterfield, CEO of Slack, echoed this strategic angle, in an interview he would later concede to the very same Stratechery. First, he exalted the importance of chat:

There are two things I think that are worth talking about that I’d push back on. One is just the word “chat” because it indicates that this stuff isn’t important. If you’re a manager, executive, leader, more or less, a hundred percent of your job is communication. If you average it out across the entire company, something like 50% of people’s time will go into really basic acts of communication and coordination, so I don’t mean like interesting strategic creative conversations. I mean daily standups and status reports and basically every bit of effort that goes into the creation of a presentation that’s going to be shown at a meeting because the point of the meeting is just to tell everyone the same information so everyone has access to the same information and it’s calibrated. So if that’s what people are spending their time on, it is important. I can’t remember the exact line, but something like, “if your job is to chat all day, then Slack would be a good choice.”

Second, I don't remember where it was, but I remember reading some quote about Stewart downplaying Teams as a competitor. Yes. The guy who took the whole page ad on the New York Times to "welcome" his new frightening competitor started to change the narrative and say Slack was just another thing. It was very focused on chat, whereas Teams was another thing.

I could agree with Thompson that a narrower chat focus could be a good thing for Slack. Qulture.Rocks uses Slack, and I don't see us moving anywhere else. BUT, I don't think our enterprise customers will use Slack for the time being.

Most importantly, I don't think the Slack Connect thing can reverse the trend of losing to Microsoft Teams in the global enterprise arena.

I still think that IF this enterprise super app becomes a network effects play, Microsoft's big distribution advantage (which is its biggest advantage, to begin with) will give it an even greater chance of building said network. A bit after the post, I commented on the Stratechery forum:

IMHO, if Slack succeeds in making the shared channel a thing in the category (which will make Microsoft further copy it with all its horses and men), it will probably (and inadvertently) make its own competitive position even weaker in the future, since as you said Microsoft will just become much bigger (free, the partner network, and so on), and thus a much better “social network.” If there’s one company that can win in a network effects play in the enterprise it’s Microsoft with its Office penetration. WDYT? What am I missing?

I'm not saying Slack Connect isn't an amazing experience. It is. I experienced it firsthand a little while ago when one of the funds that invest in Qulture.Rocks set up a shared channel between themselves, myself, and all other founders of all other portfolio companies. Pretty seamless shit. I can essentially hop in that channel without changing instances. I can even DM somebody that's on that channel as if this person worked at Qulture.Rocks. It's really, really good.

My point is that it doesn't really help Slack become a global standard. It probably generates network effects within specific sectors like the tech + VC intersection, I won't argue. But how much of a return on a $25 billion valuation can you get by being the chat app of choice of the tech + VC ecosystem? Not sure. At gunpoint, I'd bet not much.

Slack and Salesforce

Anyway, this week Salesforce announced it was acquiring Slack for $27 billion (or was it Slack announcing it was being acquired by Salesforce? Anyway...). You might argue that a $27 billion is not too shabby, but let's note that it was clearly not the outcome the company was looking towards as it listed its shares for more than that a year ago. It was clearly trying to become something HUGE (we've already touched on that).

But I guess a year later, Stewart Butterfield was tired.

There are many reasons why he could be tired.

For one, he could have become tired of the fight against Microsoft (not judging - I would probably do the same if it were me) for large enterprise company-wide deals (they talk about the wins but don't really talk about the losses).

He could also have been very discouraged by the stock price gap between Slack and Zoom.

He could have been bearish about how Slack's stock might perform in the short to mid-term and the potential effects of such price action on company morale and customer buying decisions.

The point is, he decided to sell. And to sell for less than what the company was worth when it was listed in the first place. That could mean many things, but being bullish on his company's prospects could not have been one of them.

And, he sold to Salesforce. At that size of a deal, you don't have many potential suitors. He could have sold to Oracle, Google, SAP, Zoom, Amazon, Salesforce, and maybe a handful of other companies. Not Microsoft, because of antitrust concerns. But my main point is that none of these companies is really a dream home for your baby. Benioff attends calls from Hawaii on top of an elliptical (as relayed to me not only by some bulge bracket publication I can't remember but also by an enterprise software CEO with many years at Success Factors.) Oracle would frighten the shit out of any Slack employee - too frat of a culture. SAP kind of the same, but less colorful. Zoom is weird. Amazon is in Seattle. Google is evil (but might have been the best fit - was it frightened by its own antitrust worries?). You get the picture.

I'm not really going to go into the discussion of what were Salesforce's motives were, but I'm trying to reinforce the point that selling Slack to such companies was probably not a dream come true to Stewart. To reinforce the point that his stance for Slack was probably not that bullish. To reinforce the point that I was probably right in the first place, almost a year and a half ago.



Notes and bibliography