Twilio Buys CDP Segment for $3.2 Billion

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Friday afternoon brought an unconfirmed Forbes report that communications platform Twilio is buying CDP Segment for $3.2 billion. The deal would be Twilio’s third acquisition this year, following much smaller deals in January for telephony platform Teravoz and in July for IoT connector Electric Imp.  It comes two years after Twilio’s $3 billion purchase of email platform SendGrid.

The deal is intriguing from at least three perspectives:

Valuation: the $3.2 billion price is impressive by any standard. Segment’s current revenue isn’t known, but the last apparently-authoritative statement was $96 million in 2017 on about 180 employees.  The company has at least tripled in headcount and clients since then, suggesting that Twilio is paying no more than 10x revenue.  This seems bargain compared with the 20x that Salesforce paid for Mulesoft ($6.5 billion on roughly $300 million), 15x that Adobe paid for Marketo ($4.7 billion on $320 million)  or 14x that Twilio itself paid for SendGrid ($2 billion on $140 million when the deal was announced; the $3 billion price reflects the subsequent rise in Twilio’s stock). Note that these prices are well above the run-of-the-mill SaaS valuations, which are under 10x revenue.

We don’t have public information on pricing of other CDP vendor acquisitions, and in any case Segment is much larger than any other CPD acquired to date.* Still, this single data point suggests that CDP valuations are lower than other martech systems – likely reflecting the intensity of competition, lack of dominant vendors, and fundamentally unglamorous nature of data management software.

Twilio: the SendGrid acquisition marked a major movement of Twilio beyond its base in telephone messaging to support a broader range of channels. If they’re to avoid the fragmentation that has plagued the larger marketing clouds, which also grew by acquisition, they need a CDP to unify their customer data. The big clouds (Oracle, Adobe, Salesforce, Microsoft, SAP) all chose to build their CDPs internally, but Twilio is much smaller and lacks the resources to do the same in a timely fashion. (Even the big clouds struggled, of course). On the other hand, Twilio’s surging stock price makes acquisition much easier. So buying a CDP they can deploy immediately gains them time and a mature product. It also offers entry to 20,000 accounts that might buy other Twilio products, especially given Segment’s position at the heart of their customer data infrastructure.

Of course, if Twilio really wants to compete with the marketing clouds, it will need to support other channels, most notably Web site management and ecommerce. Note that vendors beyond the clouds are pursuing the same strategy, including Acquia (which bought CDP AgilOne), IBM-spinoff Acoustic, MailChimp, and HubSpot. So the strategy isn’t unique, but it may be the only way for companies like Twilio to avoid being marginalized as apps that depend on major platforms controlled by other vendors. By definition, apps are easily replaced and are therefore easily commoditized. That’s a position to escape if you have the resources to expand beyond it.

CDP Industry: Segment is/was the largest independent CDP vendor, although Tealium and Treasure Data are close. Other recent CDP acquisitions were mostly mid-tier vendors (AgilOne, Evergage, QuickPivot, Lattice Engines, SessionM). Of these deals, only AgilOne seemed central to the product strategy of the buyers. Segment’s decision to sell rather than try to grow on its own may signal a recognition that it will be increasingly difficult to survive as a general-purpose independent CDP. We’ve already seen much of the industry shift to more defensible niches, including integrated marketing applications and vertical industry specialization. There’s certainly still a case to be made for an independent CDP as a way to avoid lock-in by broad marketing clouds. But there’s no doubt that the marketing cloud vendors’ own CDPs will grab some chunk of the market, and more will be lost to CDPs embedded in other systems (email, ecommerce, reservations, etc.), offered by service vendors (Mastercard, Vericast, TransUnion, etc.) and home-built on cloud platforms like Amazon Web Services and Google Cloud.

Given these pressures, we’re likely to see additional purchases of CDPs by companies who are trying to build their own complete marketing platforms, including Shopify, MailChimp, HubSpot, and a number of private-equity backed roll-ups. Faced with a daunting competitive situation, many CDP vendors will be interested in selling, even at prices that might not be as high as they once hoped.

Ironically, none of this bodes ill for the fundamental concept of the CDP itself. Companies will still need a central system to assemble and share unified customer profiles. It is indeed the platform on which the other platforms are built. Whether their CDP is stand-alone software or part of a larger solution doesn’t really matter from the user’s perspective: what matters is that clean, consistent, complete customer data is easily available to any system that needs it. Similarly, companies will still need the skills to build and manage CDPs.  Marketing, data, and IT departments will wrestle with customer data long into the future, and the winners will be best positioned to achieve business success. 

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*The closest might be Softbank-owned Arm’s acquisition of Treasure Data in 2018.  Arm paid $600 million for a company with 130 employees at the time. This is a slightly lower ratio than $3.2 billion for 550 employees at Segment, although Segment’s revenue per employee is apparently well above the industry norm of $150,000 to $300,000. If Treasure Data is closer to that norm, then Arm may have paid as much as 20x revenue. As you probably know, Treasure Data has just spun out of Arm to regain its independence, but I haven’t seen any financial details.

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