Twilio acquired Segment. Why? And was it a good idea?

Last Friday, Twilio (TWLO) announced that it had acquired Segment in an all-stock deal worth north of $3.2B. The move has significant ramifications for the entire marketing and data technology ecosystem. Major players like Salesforce (CRM), Adobe (ADBE), and Oracle (ORCL) have the beginnings of a new, developer-focused marketing cloud competitor on their hands. Other martech vendors have new existential questions around the partnership and competitive landscape. Investors want to know if it’s a good deal. And brands still just want to message customers more effectively. Is new-look Twilio the answer? Is it a threat? Is it even a good idea? All of the above?Let’s look at the deal and see what’s going on.

Who is Segment? And how do they fit Twilio’s market thesis?

Founded in 2012, Segment began life as a segmentation tool (hence the name). Quickly, however, it pivoted into a new sort of tag manager that leveraged its late-mover advantage to differentiate based on its orientation to streaming data. Segment has since become the gold standard for web and mobile tracking — as seen by players like MetaRouter and RudderStack — leveraging their code in an open-source capacity. Over the last eight years, it has built an impressive roster of reportedly over 20,000 customers and $150MM+ ARR. Easily the largest non-marketing cloud player in the CDP space, Segment, like many other “CDPs,” has had an uneasy relationship with the category. Last year, it branded itself “Customer Data Infrastructure,” emphasizing its developer-first orientation and seeking to separate from the muddled mass of “CDPs” with varying functionality and maturity — and with very different buyers and end-users. In the press release announcing the acquisition, however, Twilio’s CEO Jeff Lawson embraces the term, writing:

As the leading CDP, Segment enables developers to unify customer data from every customer touchpoint, and empowers marketing, sales, and customer service leaders with the insights they need to design and build relevant, data-driven customer engagement.

The quote provides a good context on both Twilio’s orientation to Segment and to the market at-large. Twilio is a developer-first shop. Their fundamental market hypothesis is that developers will drive innovation in martech and customer communications through access to superior infrastructure. They believe that by owning the “pipes” that drive all customer communications, they at once control the emerging martech ecosystem (who build platforms on their pipes) and emerging brand ecosystems (whose developers build internal tools to send through them). Twilio’s 2018 acquisition of SendGrid affirmed this strategic orientation. Many, if not most, next-gen marketing clouds (e.g., Braze, Iterable) used SendGrid to send email — often exclusively and at tremendous volume. Many, if not most, emerging brands (e.g., Airbnb, Uber) used SendGrid to send both product and marketing emails — often exclusively and at tremendous volume. Twilio’s acquisition meant that developers from both ecosystems could now work with one progressive, high-scale delivery provider. Culturally and structurally, Segment feels almost identical. Segment sells mostly to developers. Segment views itself very similarly to SendGrid. Peter Reinhardt, Segment’s CEO, has spoken publicly about being the data infrastructure for the next generation of marketing tech. Developers at progressive, high-growth brands have used them to manage their data flows, and — in both cases — once deployed, they’re deeply entrenched.

What does the acquisition mean for Twilio?

With the acquisition, Twilio can step past simply being a one-stop-shop for marketing infrastructure. Twilio’s press release conspicuously stresses concepts like “customer experience” and “empowering marketers.” Coupled with a reference to Twilio Flex, this provides important clues into their forthcoming strategic orientation. The full formula for managing customer experience is simple: you need data solutions to help to understand customers; you need orchestration solutions to decide what messages they receive, and you need pipes to send those messages. Until now, Twilio has concerned itself exclusively with pipes while driving itself to a >$45B market cap. Turns out, controlling the pipes is pretty profitable. By acquiring Segment, Twilio is betting that significant additional opportunity lies in controlling the data flowing through those pipes. Snowflake’s IPO, along with the early spike in Twilio’s share price on Monday, certainly confirmed that public markets share this view. But Twilio’s press release doesn’t stop at controlling data and pipes. Specifically, CEO Jeff Lawson gives a telling reference to Twilio Flex, intended to be a developer-first orchestration solution:

Over time, the addition of Segment will allow Twilio to integrate data intelligence into Twilio Flex and every one of our offerings to provide highly personalized customer touchpoints.

The writing is on the wall here: Twilio likely intends to build a developer-first experience cloud. Flex will be their orchestration offering, and they’ll be taking on Adobe, Salesforce, and Oracle through a developer-first product suite that is designed for a more modern organization.

Will Twilio’s strategy be successful?

Twilio has shown a tremendous ability to evolve and change. Their longer-term success ultimately hinges on five important factors:

• Continued Martech Ecosystem Success: As noted above, a major pillar of Twilio’s strategic advantage is the extent to which marketing technology providers (e.g., Braze, Iterable, Attentive) use them as pipes for their own solutions. Segment’s partnerships with similar entities have provided important tailwinds to all involved. With a Flex + Segment-powered experience cloud, Twilio now faces Google Pixel-like competitive dynamics with their own customer base. Skillful navigation of this dynamic will be critical.
• Continued Strong M&A Performance: Twilio’s acquisition of SendGrid was smart and timely; the acquisition has been relatively smooth, owing largely to the cultural and product similarities, along with a relatively low tech-integration burden. The Segment acquisition can be a similar boon, but execution will be critical. Moving forward, the M&A teams at Twilio will need to close gaps in other areas. Will Flex actually be sufficient, or will an orchestration-focused acquisition be necessary? How will Twilio address other channels, e.g., web?
• Supportive Product Development: With heavy bets seemingly placed on Flex, the product and engineering teams at Twilio have their work cut out for them. Flex is far away from being anything approaching a sufficient orchestration solution today. Orchestration is a complex space with a long tail of features that are necessary for competitive enterprise parity with incumbents like Salesforce, Oracle, and Adobe. While Twilio’s developer focus can stave off some of this pressure in the short term, parity will eventually be required, and they may be years away.

Beyond simple orchestration, as David Raab at the CDP Institute notes, absent a meaningful customer acquisition story, Twilio will have to address additional channels and other critical functionality like reporting and content. The enterprise wants to integrate CX across product, marketing, and engineering — a far cry from Flex’s footprint today or anywhere in the near future. Additionally, integrating Segment brings its own challenges for enterprise companies which can be traced to its tag manager roots; ongoing product development to drive differentiation and integration enablement will be critical.

• Brand + Ecosystem Development: Twilio has a very different brand profile than Salesforce or Adobe, two companies with tremendous name recognition among enterprise marketers and technologists. Dreamforce is essentially a gigantic martech networking festival; Salesforce Trailblazers and MVPs provide critical mechanisms for celebrating marketing and technology specialists. Adobe has similar constructs with its Summit and other programs. Both have huge service and support networks surrounding their product suites. No one gets fired for buying these providers, and there are significant career upsides for investment in these ecosystems. To compete, Twilio will need to find ways to cultivate deeper relationships with non-technical buyers, which remains largely uncharted territory for them.
• Enterprise Sales Development: Neither Twilio nor Segment have meaningful enterprise sales pedigrees, particularly when it comes to targeting marketers. It is easy to underestimate the power that folks like Salesforce and Adobe wield via their massive sales engines. Twilio will need to develop real competencies around better penetrating enterprise accounts, building consensus, and driving decisions and upsells where they already have a presence.

The final point here is particularly nontrivial. Selling and implementing solutions like Segment in the enterprise is incredibly challenging, and may have had something to do with their desire for a deal. Twilio doesn’t have deep experience, and the headwinds are going to be significant. A CTO of a publicly-traded company shared this thought with me over the weekend along those lines,

“So many of today’s digital enterprise platforms have legacy systems and/or technical debt that makes deployment of systems like Segment incredibly difficult. The migrations and upgrades I led at [Company] made these sorts of deployments easier, but it was a long road that many shops won’t want to go down.“Beyond simply the technology challenges, accounting for measurement anomalies is a huge burden in the enterprise. Traffic numbers will change following installation, and we had to deal with their auditors to account for the differences. When we first launched, traffic was off by 0.5M per month and we did an insane dive to figure out all the differences and account for it. We required a disclosure when releasing their EOQ numbers, which was exquisitely painful.”

Why did Segment sell rather than IPO?

Twilio’s strategic trajectory and long-term ambitions are only one side of the story. Segment chose to do this deal and to do it against the backdrop of Snowflake’s valuation more than doubling following a last-minute repricing and significant private market valuation increases in the period leading up to IPO. Why? Public markets want data infrastructure companies. Data is the future. Outside looking in, doesn’t Segment stack up well against these criteria? Ostensibly yes. But now their strong alignment is Twilio’s to benefit. Why did they do the deal? Three theories:

• The Deal Was Just That Good: This is presumably what Segment would want you to believe, but was it? We aren’t privy to the full mechanics of the deal, but from the outside, it looks like a valuation around 20x. At $3.2B, that’s just over double Segment’s last private market valuation. In a vacuum, that’s an excellent deal for all investors and shareholders. For comparison, though, businesses like Twilio are trading north of 25x — and Segment is still relatively early. Maybe Segment’s revenue has been overreported, and we’re looking at closer to a 25x multiple. Maybe there are other factors at play.
• Segment Struggled To Expand Outside Of Their Initial Market: Obviously, Segment’s growth has been tremendous, but were they hitting their own projections? Were they set up to scale at a pace that would be consistent with the expectations of public markets? It’s possible that their developer-focused, mid-market/SMB TAM was getting too saturated to sustain growth rates, and new products weren’t delivering sufficient incrementality. There have been consistent rumblings that their Personas product was underperforming relative to internal expectations, and they’ve switched sales leadership repeatedly in an effort to unlock an effective sales motion to marketing and enterprise teams. It’s entirely possible that, despite good growth, the board and leadership team felt it was time to cash out and not risk future down rounds, particularly given the murky macroeconomic waters ahead.
• They’re True Believers: It’s reportedly an all-stock deal, which is somewhat unusual. Yet given the initial spike in Twilio’s share price, it’s perhaps a savvy move. It’s entirely possible that the Segment board looked at the sum of both companies and thought the upside was significant enough to offset the opportunity cost of not IPOing. Time will tell if this is the case, regardless of the cause. But, as noted above, there’s some strong synergy here if both companies execute well.

Ultimately, it may well be a combination of the above causes. The truth of the matter tends to leak out after the dust settles on deals like these.

Final Thoughts

At the end of the day, the success of this acquisition will be dictated almost entirely by two factors: Twilio’s share price and Segment’s ability to catalyze their long-term strategy. Jeff Lawson has strong ambition (and a matching checkbook) to take on large marketing cloud incumbents. Their developer-led, land-and-expand framework pairs perfectly with their current product ecosystem and Segment fits well into this landscape. If Twilio can develop a more powerful marketer-led enterprise GTM motion/brand, continue to make and integrate smart acquisitions, and navigate delicate ecosystem dynamics, they should be set up well. For the rest of the marketing technology landscape, there is both incremental uncertainty and opportunity. A CDP, your preferred definition notwithstanding, has been acquired for multiple billions. There will almost certainly be a scarcity-driven increase in CDP acquisition by relevant folks. From the perspective of other marketing tech providers, Twilio and Segment no longer seem like innocuous supporting pipes, but are now a daunting entity with a potentially nefarious agenda. The partnership landscape will undoubtedly shift. Some, like Sparkpost, will benefit, while others (e.g., pick your Twilio-powered ESP) may find it difficult to adjust. Brands, for their part, continue to struggle. Customer experience expectations are more intense than ever. Channels continue to proliferate. Data-privacy policy is evolving in near real time. The underlying challenges of true experience management remain daunting and expensive problems for almost every company. Expensive problems tend to command expensive solutions, so the budget will be allocated. But who will get it? Time will tell.