Breakingviews - Slack would be better off as part of a team

The Slack Technologies Inc. logo is seen on a display on the floor of the New York Stock Exchange (NYSE) during the company's IPO in New York, U.S. June 20, 2019. REUTERS/Brendan McDermid

NEW YORK (Reuters Breakingviews) - Slack Technologies is on the wrong end of the network effect. Shares in the work-messaging firm fell about 10% on Tuesday as its chief rival – Microsoft’s Teams – announced it has almost twice as many users, based on latest reported numbers.

Slack has a lot going for it – including rapid growth and loyal users. On average they spend 90 minutes a workday actively using the service, the company says. Yet the shares are now down 45% since it went public in June, giving the company a market capitalization of $11.5 billion by Tuesday’s close. It’s not profitable even at an EBITDA level, nor do analysts expect it to be in the next year, according to Refinitiv.

The rise of Teams makes the prognosis worse. While 70% of Slack’s top 50 customers also use Microsoft Office, the $1.1 trillion software giant can easily tie its own messaging app in with enterprise software for free, undermining Slack’s efforts to turn free customers into paying ones. The division of Microsoft that includes Office made some $16 billion in operating income for the year ending June 30. Slack had an operating loss over the same period. In a war of capital attrition, Slack will definitely lose.

There would, though, be safety in numbers. Slack could be a good candidate for acquisition by other business software makers., the $145 billion cloud computing firm, could be one of them. Chief Executive Marc Benioff has made dozens of acquisitions to soup up the company’s sales software, including Tableau Software and ClickSoftware for a combined $16 billion this year.

Fast-growing companies like Slack are often loath to consider giving up on an independent future. The decade-old company, like many peers, has supervoting shares, a chunk of them held by founder and Chief Executive Stewart Butterfield, that protect it from unwanted advances. But without a good way of turning back the Teams tide, Slack should probably be working on some new connections of its own.


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