Why is one of the hottest IT startups in 2019 engaged in the production of hardware

The manufacturer of cloud-based video conferencing software Zoom, which successfully launched an IPO in the spring and now costs $ 19 billion, is opening up a new industry for itself — the production of hardware and video call equipment.

Too much involvement in this industry threatens to affect Zoom’s margins.

Zoom CEO Eric Yuan created titanium video conferencing.

With the help of the service, more than five billion minutes of meetings are held monthly, the company’s market capitalization is about $ 19 billion, and its entry into the Nasdaq exchange has become one of the hottest IPOs of the year for IT companies.

Today, Zoom has focused on what it did better than its competitors: it is software. Now Zoom will try its hand in a new field — in the manufacture of equipment.

In mid-October, Zoom announced that it had invested in Neat, a start-up startup from Oslo that launches hardware to complement Zoom’s cloud-based video conferencing software.

The startup has about 50 employees, and it raised a total of $ 20 million. Zoom declined to name the size of its investments, but both companies say that it did not receive a controlling stake.

Neat was created with the participation of a team led by OJ Windge, who previously led the Cisco partner communications department and worked on its WebEx video conferencing platform.

Winge and his longtime business partner, Fredrik Halvorsen, the former CEO of Tandberg, the teleconferencing company, invested in Neat through a financial firm under their management, Ubon Partners. The Neat plan for the near future is to sell your product exclusively to Zoom customers as a turnkey solution for organizing meetings through Zoom in meeting rooms. A tool for working with screens (for example, television) called Neat Bar is now available for pre-order at a price of $ 2500. The price of the second product, Neat Board, which has its own screen, has not yet been determined, and it will be available for pre-order in January 2020.

For Zoom, investing in Neat raises the question of why the company decided to change its long-standing strategy of completely abandoning hardware. Until now, Zoom customers have only contacted third-party suppliers (Dell, Logitech). “Zoom is Switzerland in the world of communications platforms,” says Bernstein analyst Zane Crane. Having invested in Neat and retained the opportunity for Yuan to take a place in the future on the board of directors, Zoom for the first time allocated resources and engineers for direct participation in the production of iron.

 

There are certain risks to this move, analyst Dan Romanoff of Morningstar warns. “Show me a hardware manufacturer whose profitability would be higher than that of a software manufacturer.” You will not find this, ”he says. The level of involvement of Zoom is unknown, but it is definitely less than $ 20 million, since all Neat funding does not exceed this amount. So the volume of investments can be considered insignificant so far. But if the level of involvement in the startup will increase, additional costs will affect the profitability of Zoom. “If Zoom eventually invests $ 250 million, many will have questions for it,” Romanoff says. The point of investing in Neat is to more effectively monetize services for small business customers. Many small companies with small budgets could benefit from the use of relatively inexpensive Neat equipment compared to purchasing equipment from third-party manufacturers.

 

Employees at Five9, a startup-call center in San Ramon, California, are testing the Neat device in one meeting room, which, according to CEO Rowan Trollope, has become the most popular in the office due to the simplicity of Neat’s on-screen controls. The trollop may be biased — he is former Winge’s Cisco colleague and private investor Neat. In terms of importance for the communications market, he compares the combination of Zoom and Neat with the launch of the iPod. “If Apple decided to create a conference system for the whole world, he would have created this,” Trollop said.

 

Yuan compares the potential of Zoom and Neat with another Apple product combining hardware and software, the iPhone, while Zoom and Neat connect with Google, its Android software and how the company works with gadget manufacturers like Samsung.

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