To Mr. Matthew Prince, and Directors of Cloudflare,
My name is Ming Wong, and I am the CEO of Zetalon Ltd., a company that has been a committed investor and free user of Cloudflare’s services. I am penning this open letter to express my concerns and provide suggestions that, I believe, could contribute to the financial performance and longevity of Cloudflare.
Despite the company’s remarkable growth in customer base and service offerings since its initial public offering in 2019, the financial reports from 2019 to the present indicate a continuous operation at a loss, with a reported loss of $190.1M in 2022. This persistent inability to turn a profit raises serious concerns about the company’s long-term sustainability and its value creation for shareholders.
I understand that Cloudflare’s strategy has been to build customer loyalty and support small websites to grow into large, paid websites. This is a commendable approach, and it has indeed resulted in a significant increase in Cloudflare’s customer base. However, it is also clear that this strategy has not been successful in turning the company’s impressive growth into profitability.
Cloudflare’s growth and market presence are indeed impressive. The company boasts over 4 million customers, including 17% of Fortune 500 companies. It generated $431.06 million in revenue in 2020, a 5.08x increase since 2016. There are 7.59 million active websites using Cloudflare, and the company has 119,206 paying customers. These paying customers produced 88.84% of the revenue, indicating a significant reliance on a relatively small portion of the user base.
Despite this impressive market share, Cloudflare has fewer high-traffic websites compared to competitors like Akamai, Amazon CloudFront, and Fastly. This is a clear indication that the company’s current strategy is not fully capitalizing on its potential.
Importantly, Cloudflare provides its services at a more affordable rate than many of its competitors, including BelugaCDN, Amazon Web Services, Stack Path, Microsoft Azure, and Google. This competitive pricing gives Cloudflare an edge in attracting customers, particularly small and medium enterprises looking for cost-effective solutions. While this strategy contributes to Cloudflare’s expansive customer base, it further underlines the necessity of increasing revenue streams beyond just customer subscriptions.
However, the current financial performance poses potential risks to the shareholders. Continuous operation at a loss can diminish shareholder value over time, which could eventually lead to shareholder dissatisfaction and the potential for capital flight. Shareholder value should not be an afterthought; rather, it is a primary goal that aligns with the company’s growth and success.
To address this and enhance profitability, I propose a strategic shift in Cloudflare’s approach to its free services. Here are the specific changes I propose:
- Limit Free Plan Features: Disallow features like Async JavaScript Loading with Rocket Loader and Multi-User Administrative Access and Read-only User Access in the free plan. Also, limit the number of free custom hostnames from 100 to 50. These changes will encourage multi-employee companies to upgrade to a paid plan.
- Introduce Ads on the “Checking your browser before accessing” Page: By forcing this page to be shown on all free websites, it can serve as an effective platform for displaying ads, providing an additional revenue stream. This change could also serve as a stepping stone for Cloudflare to develop its own ad network, further diversifying its revenue streams.
- Introduce a $20 per Year Plan: Replace the current free plan with a $20 per year plan. This nominal fee is affordable for most users and can generate significant revenue given Cloudflare’s large user base.
Although these changes may entail risks such as potential customer dissatisfaction and a possible initial decrease in the user base, it is important to emphasize the long-term benefits. Implementing these changes could not only result in increased revenue but also lead to a diversified business model less reliant on customer subscriptions alone. This diversification could reduce risk in the long term and lead to a more robust, resilient business. Moreover, the profitability from these strategic shifts could significantly increase shareholder value over time, securing the company’s longevity and growth prospects.
Here are some rough estimates:
If 25% of the 7.48 million free websites move to the $20 per year plan, that’s 1.87 million websites. At $20 per website per year, the potential revenue increase would be $37.4 million per year.
Assuming 25% of websites stop using Cloudflare, the remaining free plan users would be 3.24 million websites. Assuming the average daily traffic of the websites is 100, that’s 324 million page views per day. Over a year, that’s approximately 118.26 billion page views. With a $3 CPM, the average CPM of Google Display Network ads, the potential ad revenue would be approximately $354.780 million per year.
So, the total potential revenue increase from both the $20 per year plan and the ads would be approximately $392.18 million per year. This revenue increase not only covers the $193.4 million loss reported in 2022 but also potentially results in a significant profit.
I understand and appreciate the reasoning behind Cloudflare’s commitment to a free service, and I am cognizant of the factors that make it such an invaluable asset. I’d like to address each of these points:
- Data: Cloudflare’s ability to gather a wide array of data from its free service users, thereby enhancing protection for paid users, is indeed commendable. My proposition for limiting features on the free plan and the introduction of a $20 per year plan should not compromise this ability. A lower-tiered paid plan may even encourage more users to sign up, potentially offering a larger data set.
- Customer Referrals: I recognize that customer referrals, particularly from satisfied users of the free service, play a pivotal role in attracting larger customers. I believe that a $20 per year plan would continue to offer tremendous value, maintaining a high level of customer satisfaction and continuing to drive referrals.
- Employee Referrals: I acknowledge the importance of the free plan in attracting potential employees. I propose that, with careful communication and strategic rollout, the changes will be accepted and will continue to attract top talent to Cloudflare.
- QA: Offering new features to free customers for testing is indeed a unique and valuable approach. The changes I propose should not interfere with this. On the contrary, a more diverse range of customers due to a $20 plan may provide even more varied feedback and testing.
- Bandwidth Chicken & Egg: I understand the role of free customers in achieving the scale necessary for competitive pricing and regional peering. By introducing a reasonably priced $20 per year plan, I believe that we can maintain, if not increase, the diversity and scale of our customer base.
Looking ahead, I believe that Cloudflare holds substantial growth opportunities, which, if tapped into strategically, could enhance long-term benefits for both the company and its shareholders. Specifically, I would like to highlight three potential areas of expansion:
- Ad Networks: By introducing ads on the “Checking your browser before accessing” page, Cloudflare could diversify its revenue streams and lay the foundation for establishing its own ad network. Ad networks have been profitable ventures for many tech companies, and with Cloudflare’s broad user base, there is significant potential for high returns.
- Web Hosting Services: Cloudflare’s existing infrastructure and network capacity make it an ideal candidate to offer web hosting services. This could attract a new customer segment that’s looking for a one-stop-shop for their website needs, generating additional revenue while enhancing the company’s value proposition.
- Virtual Private Servers (VPS): The growing trend towards remote work and online businesses increases the demand for reliable and affordable VPS. By offering VPS services, Cloudflare could capitalize on this trend and further strengthen its market position.
By expanding into these areas, Cloudflare would not only diversify its offerings but also create synergies with its existing services. For instance, customers using Cloudflare’s web hosting or VPS services could be more likely to use other Cloudflare services, creating a more integrated and stickier customer base.
Moreover, these new revenue streams could greatly enhance the long-term financial performance of the company. While the initial investment might be substantial, the potential for increased and diversified revenue could outweigh the costs in the long term, driving profitability, and thereby enhancing shareholder value.
While I believe that the changes, I propose carry significant potential for profit and growth, I am aware that they also present certain risks. Therefore, I find it essential to acknowledge and consider these risks in your decision-making process.
- Customer Backlash: Changes to the free plan could lead to a backlash from current free users. However, it’s important to note that even with these changes, Cloudflare’s services are still very competitively priced. Therefore, despite changes to the free plan, Cloudflare will continue to provide excellent value for its users. Nevertheless, careful communication about these changes and potentially introducing transitional measures could help manage this risk effectively.
- Competitive Dynamics: A change in Cloudflare’s pricing structure could potentially alter competitive dynamics in the market, possibly inciting competitive responses from other CDN and cloud service providers.
- Ad Network Viability: While the potential revenue from ads is significant, building an ad network also involves challenges. Besides the technical challenges, it may also take time to attract advertisers and achieve profitable scale.
- Diversification Risks: While diversifying into web hosting services and VPS may seem attractive, it’s important to consider that Cloudflare would be competing in a new market with its own competitive dynamics and established players. Moreover, the investment required to establish a presence in these markets could be substantial.
As with any strategic decisions, it’s crucial to balance the potential rewards with the inherent risks. While the strategies I propose carry risks, I believe that with careful planning and execution, these risks can be effectively managed. Moreover, the potential long-term benefits in terms of revenue growth, profitability, and shareholder value are significant.
I am confident in Cloudflare’s potential for growth and profitability. However, it is crucial that the management team takes decisive action to address the current profitability issues. The proposed strategies are not just about improving the financial performance of the company, but also about fulfilling the company’s responsibilities to its shareholders.
Thank you for taking the time to consider my concerns and proposals. I firmly believe that these strategic shifts would significantly enhance Cloudflare’s profitability and shareholder value. I urge the board to conduct a thorough review of the proposed strategies and consider implementing them for the long-term success of the company.
I look forward to your response and to seeing Cloudflare seize these growth opportunities, ensuring a prosperous future for all stakeholders.
Best regards,
Ming Wong
CEO, Zetalon Ltd.
Sources:
CDN Pricing 2021 | Top 5 CDN Providers Price Comparison Chart n.d., BelugaCDN, viewed 20 July 2023, <https://www.belugacdn.com/cdn-pricing/>.
Cloudflare, Inc. (NET) Income Statement – Yahoo Finance n.d., finance.yahoo.com, viewed 17 July 2023, <https://finance.yahoo.com/quote/NET/financials/>.
Cloudflare Stats for 2023: How Many Websites Use Cloudflare? 2023, Backlinko, viewed 17 July 2023, <https://backlinko.com/cloudflare-users>.
How can CloudFlare offer a free CDN with unlimited bandwidth? n.d., Webmasters Stack Exchange, viewed 23 July 2023, <https://webmasters.stackexchange.com/questions/88659/how-can-cloudflare-offer-a-free-cdn-with-unlimited-bandwidth>.
Is Online Advertising Expensive? 2021, Top Draw Inc., viewed 18 July 2023, <https://www.topdraw.com/insights/is-online-advertising-expensive/>.
Monthly Website Visitors | KPIs For Business Owners (2022) n.d., www.landmarklabs.co, viewed 17 July 2023, <https://www.landmarklabs.co/kpis/monthly-website-visitors>.
Which Companies Turned A Profit the Quickest – And Which Have Yet To? n.d., viewed 20 July 2023, <https://www.digitalinformationworld.com/2019/11/how-long-did-it-take-the-world-s-biggest-brands-to-turn-a-profit.html>.