Interview with Satya Nadella, CEO of Microsoft

In September 12, 2019, Slack launched shared channels to the public. This feature, while simple in concept, gives Slack an important advantage over Teams.

“Shared channels allow customers to securely collaborate with external partners, suppliers and their own customers in channels, while still maintaining their internal controls and compliance policies.” – Slack website 

With the risk of oversimplifying the concept, we can compare it to having one unified email inbox for all your email accounts versus having a separate inbox for each account. The effects are amplified when you take into consideration that chat is higher in frequency and faster in response time. In other words, it greatly benefits collaboration among organizations.

The Teams sales team will show you on paper that Teams can do everything that Slack can do—that they have feature parity. This could be technically true if it weren’t for the shared channels. However, anybody who has used both services will tell you that the user experience is far from equal. Slack was built to delight and sell itself, with the finesse on par to the best consumer products, while Teams was built in response to Slack and with Microsoft’s business customers in mind—and it shows.

The results are obvious in both good and bad ways. Teams integrates with Office 365 like a dream, so if your company’s workflow revolves around Office 365, Teams is a clear winner. However, if you step outside the cozy Microsoft ecosystem, you'll find your experience lacking. Slack has over 1,800 apps, whereas Teams has 220. Even the apps available on both services are not created equal (think the early days of Android and iOS).

In conclusion, Teams has not achieved feature parity with Slack. Slack is more feature-rich, has a stronger ecosystem, and is easier to use. Whether this matters or not for Slack’s success is a separate discussion.

Money-losing enterprises may remind investors of the dotcom bubble in the late 1990s. Back then, companies were losing money; they were valued on “eyeballs” and prioritized growth at all costs. It all ended with a pop—hence the term “dotcom bubble”—so it makes sense for investors to be wary of making the same mistake twice. However, we need to be careful not to blanket all loss making businesses the same, particularly SaaS businesses.

Back in the days before SaaS, software companies like IBM or Oracle sold software as a one-time perpetual license. They later sold upgrades and consultation for future revenue. In this model, customers pay a large one-time license fee up front and maintenance fees in the later years. The large license fees get recognized as revenue immediately, and so do all of the costs associated with the sale, such as engineering, sales, and marketing. In this model, the revenue and the costs closely reflect the true economics of the business.

On the other hand, in a SaaS business, customers sign up to use software on an ongoing basis, which is called a subscription, sometimes with a contract and sometimes without. There are no license fees and no maintenance costs. With a subscription model, companies can recognize revenue only as the service is delivered, generally on a monthly basis. So even if a customer signs up for a 3-year contract and pays up front, revenue is recognized when the service is delivered. However, costs such as engineering, sales, and marketing are all recognized immediately. The traditional accounting methodology mismatches revenue and costs for SaaS businesses and, therefore, does not reflect the true economics of the business.

As long as the lifetime value of a customer (LTV) is greater than the customer acquisition cost (CAC), it theoretically makes sense to continue to acquire more customers. As a result, SaaS companies will grow fast and lose money faster on the accounting books. They do this because for every dollar they spend to acquire a customer, they generate more profits in the long term, as long as LTV is greater than CAC. Once the business matures and growth slows, the delay in revenue recognition will be shorter, and the company will scale. The company will then generate outsized profits on the accounting books.

Something to watch out for as you read more on LTV and CAC is the so-called rule of thumb saying that a LTV-to-CAC ratio greater than threefold represents a healthy SaaS business. We’d like to caution our readers on rules of thumb in general. The LTV and CAC can be calculated in many different ways and, hence, manipulated. The goal is to make sure that the value of a customer is greater than the cost of acquisition. This means truly understanding the customer and the costs. As in any other case, the devil is in the details.

Shared channels are nothing special, and that’s the beauty of it. Through shared channels, Slack users from different organizations can use Slack to collaborate together as easily as they do internally. Shared channels were officially launched on September 16, 2019, and became available for all paid plans.

Before shared channels, collaborators from outside the organization would have to log in to the workspace of each different organization they collaborated with. After shared channels were introduced, all collaborations consolidated into one workspace. This might seem trivial, but it increases productivity, lowers complexity, and is a key differentiator from Microsoft Teams.

The implied benefits of shared channels are their network effect. Besides making it easier for teams from different organizations to collaborate with each other, organizations have started to invite their suppliers, customers, contractors, and others to communicate on Slack instead of via traditional methods like email. If these new users enjoy using Slack, they will invite their own contacts, and so forth.

Microsoft is not sitting idle and will likely introduce similar features soon. However, as of September 2019, Teams has not even launched private channels, a much requested feature Slack introduced in 2015. Regardless, it is unclear whether Slack’s superior product will give it the opening it needs to penetrate the enterprise market where Microsoft is king.