October 11, 2020
Congratulations to the team at Segment for their massive acquisition by Twilio. From being founded in 2012 to getting acquired in 2020 (for billions) is a huge success and a testament to their team’s outstanding execution.
When Segment initially released
analytics.js, it was criticized for being only marginally better than a tag manager but developers on HackerNews loved the idea. Hence, Segment’s success is also a testament to the power of the developer community on HN—hats off to everyone who supported the project, especially in the early days.
Twilio & Segment
Segment recently published a CDP report where they shared some data around top destinations. Interestingly, the SMS & push category was in a distant 11th place, with only 13% of businesses leveraging those types of connections. Even more interesting is that companies like Braze & Customer.IO were listed within the SMS and push category, but not Twilio.
In fact, Twilio was not even a top destination for Segment, which means there is very little overlap between buyers of Segment and Twilio. Or, to put it differently, people who buy Twilio don’t have a significant need for Segment and vice-versa. Twilio didn’t acquire to resell Segment to their existing customer base.
So, Why Twilio?
To a lot of people, Twilio was a surprise acquirer. Many expected Segment to be picked off by one of the usual suspects like Adobe or Salesforce. We believe a few reasons are underpinning this as a true strategic acquisition.
API to Application Stack
Twilio’s Sendgrid acquisition gives us a few hints into what’s happening here. Twilio was built as a platform providing telecom services over an API, and other companies build applications on top of their APIs.
While Twilio has a near-complete monopoly on this API business, it is still a low-margin business where most of the money goes to gateways, providers, etc. Plus, the gateways like bandwidth.com started to compete by getting into the API business themselves.
The result has been aggressive discounting, which makes it hard to compete. So, while Twilio may have the best developer tools, the nature of the core product (low margin telecom) means that customers will naturally price shop as they scale and the offering becomes more commoditized. To move away from the low-margin API business Twilio needs to go higher up the stack and build applications to move away from the low-margin API business.
End-to-End Marketing Cloud
The demand for messaging in marketing automation products has grown significantly and is only growing, so it is natural for Twilio to go after the marketing use case.
They already owned the SMS/push channel, and their Sendgrid acquisition covered the email channel. In full form, though, the marketing use case requires data collection and audience building in addition to messaging.
The Segment acquisition gives Twilio the missing half of the equation and will allow them to build a unified marketing platform. Perhaps most importantly, Twilio has the ability to reinvent significant pieces of the marketing cloud as API-first, which would give them a foot in the door to the market currently owned by Adobe, which has a $250 billion market cap.
This is probably the most interesting impact of the acquisition: instead of sitting towards the end of the stack as an API endpoint, Twilio has bought a seat in the extreme front seat of the stack. Not only will this give them significant insight into what is being used effectively in the market amongst a plethora of tools, but it could potentially enable Twilio to build/buy the important verticals that are considered indispensable but are missing from their stack. This could— and should—make some of the Segment’s partners wary.
This isn’t a new dynamic, as many companies in the ecosystem have already developed a healthy distrust of Segment, and now Twilio, along with their roadmaps and product ambitions. Amplitude and Braze are examples of the many products sitting downstream of Segment that will now feel the increasing pressure of “the sandwich.” As a result, we wouldn’t be surprised if Twilio continues to add more of the “missing middle” components of the marketing stack, most likely through acquisitions.
Jeff is now interested in building a truly iconic business such as Salesforce, and Wall Street has given him the checkbook to do M&A. Twilio’s stock price has rapidly climbed from $100 to $300 in the last 6 months.
We have heard that Segment is at approximately $150M ARR, and given Twilio’s current EV/ARR multiple of approximately 25x, Twilio will add about $3B-5B in market capitalization, making this a solid acquisition in terms of the basic exchange of value.
Moreover, Twilio’s margins in their core business are arguably lower than Segment. We have also observed that Segment is struggling to make the transition to both enterprises as well as build a product beyond the pipe that has meaningful traction. All in all, we believe this is a win for both parties involved. Jeff is well on his way to building a once-in-a-lifetime business.
So once again, congratulations to Segment and everyone involved. We have a huge amount of respect for what their team has accomplished and for such a smart acquisition by Twilio.
Also, not to state the obvious, but if you’re interested in an open-source alternative to Segment, we’d love to talk. 🙂
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