Zoom’s proposed acquisition of Five9, a leading provider of cloud-based contact center services, always seemed like a way for the company to bulldoze its way deeper into the enterprise and show itself to be more than a one-trick video conferencing pony. As I wrote in August, the plan is evidence that Zoom:

sees little point in attacking a fortified hill where Microsoft, Google and Salesforce (Slack) dominate the market for productivity and collaboration services. Instead, Zoom finds more opportunities in vertically expanding into omni-channel customer support for organizations still struggling to serve users and employees in an online-first world.

Five9’s shareholders dashed the strategy when they didn’t approve the merger and the two companies “mutually terminated the merger agreement.” Zoom founder and CEO Eric Yuan says the company remains committed to building on its Zoom Phone system and entering the cloud contact center services market, one where Gartner doesn’t even list it as a niche player. In a blog spinning the deal’s collapse, Yuan now portrays the Five9 deal as opportunistic, but not critical to this strategy (emphasis added):

We have also looked to acquire capabilities through M&A. Five9 was one such opportunity, as it presented an attractive means to bring to our customers an integrated contact center offering. That said, it was in no way foundational to the success of our platform nor was it the only way for us to offer  our customers a compelling contact center solution.

The proximate cause of the deal’s failure was the assessment of Five9’s shareholders that Zoom’s offer was inadequate since it was paying for the company with its own inflated stock. The deal’s fate was sealed when ISS, the influential proxy analysis firm, recommended that Five9 shareholders reject the offer and consider other buyers. As Barrons reported, ISS cautioned that “the deal would expose current Five9 holders to a more volatile stock with a growth outlook that has become less compelling as the world begins to move past the pandemic.” Indeed, the dramatic drop in Zoom’s growth rate after its lockdown-induced spike undoubtedly spooked Five9 stockholders unwilling to hitch their fortunes to a falling star.

An underlying, but more grave factor is concern by the U.S. government and western companies with Zoom’s ties to and reliance on Chinese developers, capital and infrastructure. The deal’s fatal blow came when an August letter by the U.S. The Department of Justice to the FCC requesting a review by an interagency committed known as Team Telecom was made public. The DOJ’s letter states that:

pursuant to Executive Order (“E.O.”) 13913, to determine whether this application poses a risk to the national security or law enforcement interests of the United States. USDOJ believes that such risk may be raised by the foreign participation (including the foreign relationships and ownership) associated with the application, and a review by the Committee is necessary to assess and make an appropriate recommendation as to how the Commission should adjudicate this application.

Cloud communication providers evolving from services to platforms

The Zoom-Five9 proposal illustrated a broader trend in communication services evolving from cloud products (SaaS) to cloud platforms (PaaS). For those not enmeshed in the market dynamics, here’s the evolving product taxonomy:

• UCaaS (unified communications as a service) is the original managed communications product that started with enterprise IP-based telephony and added mobile device support with virtual number forwarding, audio conferencing, text messaging with presence (online activity) detection, IVR (interactive voice response) and call automation and video conferencing. UCaaS can be delivered by the UCaaS software vendor, carrier or MSP. Traditionally, UCaaS providers owned and operated the requisite infrastructure from a few data centers. Like enterprises, UCaaS vendors have adopted cloud infrastructure to improve scalability, reliability, cost efficiency and security. UCaaS vendors have also simplified their pricing models to make them more SaaS-like and like other SaaS vendors, can operate from rented IaaS infrastructure like AWS or, if large enough, from self-managed systems in colocation facilities around the world.
• CCaaS (contact center as a service) provides specialized communications services designed for telemarketing, sales and product support and help desk operations.
• CPaaS (communications platform as a service) build on a CCaaS feature set with APIs, middleware and development tools for creating custom communications software and integrating it with existing enterprise systems and business processes.

The following slide, presented at an 8x8 investor meeting, illustrates the market size of each segment. Major players in the UCaaS market include Cisco, Google, Microsoft, RingCentral and Zoom, while AWS, Five9, Genesys, NICE CXone and Talkdesk are popular CCaaS offerings. 8x8 straddles both markets, something Zoom was hoping to do via the Five9 acquisition. Indeed, a slide in Zoom’s most recent investor presentation shows the contact center market critical to its strategy of almost tripling its TAM by mid-decade.

UCaaS + CPaaS critical to 8x8’s differentiation

Bootstrapping its entry to the contact center market is one element of Zoom’s strategy, but creating a communications platform is the other pillar. While Zoom picks up the pieces and attempts to enter the contact center market via in-house development, its recent Zoomtopia event illustrated the company’s growing developer platform. As Derek du Preez wrote in summarizing the event and Zoom’s product announcements:

What's clear is that Zoom is thinking well beyond its video call roots and is creating a platform that's an effective place for people to get work done. Upcoming integrations with the likes of Google Drive and Dropbox are just part of this.

Indeed, apps and integrations are one of Zoom’s five strategies for growth and product enhancement.

Aside from a market-leading video conferencing service (admittedly, a huge deficiency), 8x8 already has what Zoom is still building: a mature UCaaS, numerous application integrations, maturing contact center features (what Gartner characterizes as a “challenger,” not a “leader”), a development platform and content analytics software. Indeed, the company claims to be the only vendor that combines UC, contact center and a communications development platform as an integrated service, what is calls XCaaS.

CEO Dave Sipes highlighted 8x8’s view on the collision between the UC and CC markets in the company’s Q2 2021 earnings call (emphasis added):

The era of partnering is ending. And while this was fine when there weren't other solutions for customers to be partnered between UC and CC solution. I think customers, they want more. They want more integration. They want more manageability long term with integration frameworks that work well, and they want a single vendor reliability across that. So I do think we're entering the era of the owned and integrated UC and CC product, and that's an area where we continue to be farthest along on an integrated solution in our XCaaS message. 

Hunter Middleton, 8x8’s SVP of Product Management, echoed that sentiment in a recent briefing, saying that the company saw the Zoom-Five9 merger as validation of its strategy and the deal’s failure as an opportunity to differentiate itself from the competition. The company just released 8x8 Frontdesk which blends elements of UC and contact center service for high-volume incoming call handling. The service exploits 8x8’s Microsoft Teams integration which enables presence synchronization and call routing.

Teams integration is becoming more popular with 8x8 customers with about 6 percent (more than 100,000) of 8x8’s 1.8 million customers using the combination. Indeed, an 8x8-commissioned survey found that 80 percent of the organizations using Teams plan to integrate it with a third-party telephony service. They are likely attracted by the ability to download and share 8x8 voice recordings to a Teams discussion and support for 8x8 voice and text messaging within the Teams UI.

My take

Zoom’s strategy of using the technological maturity and market dominance of its video conferencing system to expand into other enterprise markets and insinuate itself deeper into business processes is solid, but was dealt a significant, but not fatal blow by Five9’s shareholders. Indeed, while attempting to differentiate itself from the competition, 8x8 validated Zoom’s strategy and a look at each company’s feature chart shows much overlap. Most significantly, both see the futility of attacking entrenched incumbents Microsoft, Google and Salesforce (Slack) in productivity and collaboration software and instead seek to augment these with communication, contact center and workflow features.