Google + Slack
Slack is a technology firm whose main product is a workplace communication tool. This tool is “a single place for messaging, tools and files.” Slack is basically an instant messaging system with lots of add-ins for other workplace tools. The add-ins aren’t necessary to use Slack, though, because the main functionality is all about talking to other people. There are two methods of chat in Slack: channels (group chat), and direct message or DM (person-to-person chat). Slack’s primary customers are enterprises. They sell these customers their product and charge them on a per-user, per-month basis. They have a “freemium” model and offer a free version of their software which has caps on the number of add-ins and messages allowed. They also offer an educational tier of their app for roughly 80% the cost (per-user) of the enterprise version with all of the same functionality.
In order to stay competitive in both the mobile and workplace messaging spaces, Alphabet/Google should acquire Slack. Both Slack and Google are amidst fierce battles against Microsoft in the work productivity space and could utilize the edge that combining forces would give.
Google’s core assets and strengths are particularly around software. They have built hundreds, if not thousands of software applications to help both people and businesses accomplish more. As a part of this, they developed and launched the GSuite. Along with launching Gmail, they created Hangouts. Hangouts was designed to be the integrated message tool for everything within the Google ecosystem. Hangouts was first targeted at enterprise businesses but also was able to be used between individuals on mobile as long as they had Google/Gmail accounts.
Hangouts, however, was not the exact solution that Google needed. With the only functionality being chats (either one-on-one or in a group) and voice calling, a lot of features were missing. A good comparator would be Skype for Business which Microsoft bought in 2011.
Google, since the beginning of both Gmail and Android, has been struggling to create a messaging service/application which complements its current offerings in a way that Apple has iMessage and Microsoft has Skype for Business and now Teams. Hangouts had very low adoption with Gmail users choosing to use other messaging services in order to communicate. Other messaging failures include the likes of Allo (sunsetted March 2019) which had a lifespan of only three years, first launching in 2016.
In 2013, Slack launched to the world and brought a new face to workplace communication with the invention of “channels” used to organize threads of conversations. From the start there was a lot of buzz from within the major players in workplace productivity (GSuite and Microsoft Office). Microsoft even put in a bid to buy Slack in 2016 for $8 billion which Bill Gates shut down in order to focus on Skype for Business and eventually Teams which launched in 2017.
When considering messaging applications, network effects are everything. With low barriers to entry it is typically very difficult have a successful messaging application without a massive user base. Both Slack and Teams enjoy very large user bases with Teams’ daily active users numbering about 13 million and Slack having about 12 million. Teams has a large user base mostly due to free integration with Microsoft’s Office offering which has an incredible market share in enterprise email services. Slack on the other hand is “self-made” from being a stand-alone application. Enterprises which use Slack are a mix between companies which use both Microsoft Office and Google GSuite for their email services. With Teams being offered for free the usage among companies using Office is dwindling fast. On the other hand, Slack is already paired with GSuite quite often due to the general dislike of Hangouts.
Slack has managed to generate “virality” and an extremely loyal following from its user base and is typically brought in from the “bottom” aka end users. Teams, in contrast, is typically brought in from the “top” and is a management decision. This distinction is important because since Slack has such a fierce following from its users, it is incredibly difficult to switch GSuite users over to using Hangouts especially with the free tier of Slack. In the decision whether to build or buy it is very important to consider the users. Obviously Google has the capabilities and talent to build an application that is a Slack clone, however, what you cannot build is the demand for the application from its users. If Google were to create a clone (which it is in Hangouts Chat or Hangouts 2.0) the decision to adopt will come from management similar to Teams as this would be part of the bundle. Instead, by proposing to acquire Slack, Google is able to purchase the demand for an already polished application. This is the key to success within the Google GSuite ecosystem.
An extremely important note about Slack is its openness to its developer community. Slack has over 5000 applications/integrations, including ones that connect it with the GSuite (Drive, Gmail and Calendar). This openness to a developer community aligns well with Google and Android, which is notably open source. By integrating Slack into GSuite, the combined entity is much better positioned to compete with Microsoft. GSuite will inherit a large and loyal user base and Slack will be able to fight the bundle of Office and Teams as Google will offer something similar to its enterprise customers. The switch for current GSuite users will be relatively easy since a lot are already using Slack in their day to day and will benefit by the better integration.
Another benefit for Google is on the mobile front. Google has not been able to create a mobile messaging service anywhere near the likes of iMessage. From firsthand experience this is a major pain point between Android users. Google Messages has made significant strides in the right direction, but it is not quite there. By making Slack Android’s inherent messaging platform, Google is able to bridge the gap between iOS and Android users better than ever before. With the advent of RCS texting supposed to also close the gap, it is years behind in usefulness. Slack communications on mobile can allow for seamless communication no matter which operating system is used.
Lastly, Slack is a prime target for an acquisition. Since its IPO in June, Slack’s stock is down 46%. When it IPO’d, Slack had a valuation of around $23 billion which translates to about $12 billion today and on the downward trend still. Slack’s daily active users was surpassed by Teams shortly after going public with Teams positioned to well outpace in user growth, see figure below:
With Microsoft being a $1 trillion company, Slack is up against a behemoth which it stands little chance against unless it partners with another behemoth in Alphabet/Google which has more than enough resources to put up a fight. With Google also fighting a hard-nosed battle against Microsoft and its Office offerings this teaming up benefits both. Slack’s value is estimated to decline in the coming months as this battle rages on, thus making them an even more attractive target. Google should not wait too long, however, because as Slack’s value goes down other perspective buyers may step in, such as Salesforce.
**Edit on June 5th, 2020
Since this has been written, Amazon and Slack have announced a huge partnership which will bring Slack to each Amazon employee in exchange for Slack using Amazon Chime for their voice and video calling functionality. Although it has not explicitly been stated yet, it can be assumed that Slack will fully move to AWS removing all, if any, dependencies on GCP and Azure. From a cloud competition standpoint this deal makes sense for AWS and Slack, who is in desperate need of landing big fish clients to keep increasing their top line revenue was happy to make the deal. I do not foresee Amazon absorbing Slack through acquisition anytime soon since Amazon has not really competed in the work productivity space, but with this partnership that may change. As much as I would like to see Google acquire Slack, this partnership pretty much takes that completely off the table.
