Slack Technologies (NYSE:WORK) recently signed a new multiyear enterprise deal with Amazon (NASDAQ:AMZN). Slack will start using Amazon Chime for voice and video calls, and increase its usage of AWS (Amazon Web Services) for additional storage, compute, database, security, machine learning, and analytics tasks.
Amazon will allow all its employees to start using Slack. It's unclear how many of Amazon's 840,000 employees will use Slack right away, but it could replace IBM (NYSE:IBM) -- which rolled out Slack to its 350,000 employees earlier this year -- as Slack's top customer.
Slack and Amazon are teaming up as both companies face tougher competition from Microsoft (NASDAQ:MSFT). Microsoft Teams competes against Slack in the enterprise collaboration market, and Microsoft Azure is the world's second-largest cloud infrastructure provider after AWS. Here's what this deal means for all three companies.
Why Slack needs Amazon
Slack's tools streamline business communications and partially replace traditional channels like emails and phone calls. Slack's revenue rose 57% last year, and climbed another 50% in the first quarter.
Slack expects its revenue to rise 42%-44% annually in the second quarter, and 36%-38% for the full year. Slack remains deeply unprofitable, but it expects its non-GAAP net loss to narrow this year.
Slack's total number of paid customers grew 28% year-over-year to 122,000 in the first quarter. Slack generates most of its revenue from smaller businesses, but 963 of those customers generated over $100,000 in annual recurring revenue -- up 49% from a year ago. It claimed to reach 12.5 million concurrent users in late March.
Slack's growth in paid users and revenue remains impressive, but its limited number of big enterprise customers and competition from Microsoft Teams crimps its ability to raise prices and boost its margins. Therefore, serving Amazon's employees would increase Slack's exposure to the enterprise market, widen its moat against Microsoft, and possibly bolster its margins with economies of scale.
Slack's integration of Amazon Chime, which competes against Microsoft's Skype, Zoom, and Cisco's Webex, will also strengthen its calling and video conferencing capabilities, which have become increasingly important throughout the COVID-19 crisis. In the past, Slack mainly let its third-party partners integrate their own voice and video calls with its platform.
On the AWS front, Slack's tighter integration of AWS Chatbot could improve its chat capabilities, and Amazon AppFlow could streamline data transfers between Slack and AWS. In short, the partnership sounds like a win-win deal for both companies.
What the deal means for Amazon and Microsoft
Amazon Chime controls a tiny sliver of the enterprise collaboration market compared to Microsoft Teams and Skype, which are both bundled with Microsoft's Office 365 services. Chime's video conferencing features are generally more refined than its other collaboration tools, so partnering with Slack should toughen up those soft spots.
Slack's increased usage of AWS' services could also support Amazon's growth against Microsoft's Azure. Amazon's AWS revenue rose 33% annually last quarter, but Microsoft's Azure revenue surged 59%.
Microsoft enjoys two distinct advantages against AWS. First, it can bundle Azure with its market-leading Windows and Office platforms. Second, companies burned by Amazon -- most notably brick-and-mortar retailers -- generally prefer to help Microsoft instead of feeding Amazon's most profitable business.
Amazon's deal with Slack marks a reversal of that strategy. Slack, which claims to have never used Azure's services, prefers to help Amazon instead of Microsoft -- which clearly wants to kill Slack after nearly buying it in 2016.
It matters more to Slack than Microsoft and Amazon
This deal won't meaningfully tilt the balance in the ongoing cloud war between Microsoft and Amazon. However, it's a meaningful victory for Slack, and it indicates that Microsoft won't run the niche underdog off the road anytime soon.