You partially answered your own question with the last sentence. Because of the way the network is architected and because Cloudflare owns the infrastructure and can manage the traffic it is done at very low (essentially 0) cost to them. You ask why other SaaS companies don’t do this? They don’t own their own infrastructure, they rent it from the hyperscalers. It would be a lot more expensive for them to provide something like this. This is a major advantage Cloudflare has over other SaaS businesses.
Why does Cloudflare give these products away for free besides being almost no cost for them? Prince explained that it has contributed to building trust and goodwill in the federal space and is turning into more and more business and generating significant revenue for them.
Outside of the federal space the free tier of their products allow for rapid product development in that they can release new products and use the free base as testing/QA on them. It also make it very hard for competitors to compete with. There is a very strong moat around the business and this is part of the reason the valuation always has been so high despite slightly more tepid growth than other similar hypergrowth Co’s.
This is an answer directly from the CFO at the Morgan Stanley Tech conference in March this year when asked about why they have a competitive advantage in SASE vs. others, but it also explains why this can be done at almost no cost to them. It is pretty clear to me that the benefits of this “free” software outweigh the costs.
And every product we have and every service we offer runs on every server and every location and that means that the complete surface of the network capacity wise and infrastructure-wise, becomes our decrease of freedom, how we manage traffic, how we manage cost. And this the key reason why our margin structure is so superior and why you have such an elasticity in our business model.
So for example, when – during COVID when most of our revenue is subscription review, it’s also quasi fixed, there’s very little component of variable. When during COVID, we all started to work from home, traffic spiked on our network literally within a couple of weeks by 60%. Folks expected our margins to tank, they didn’t flinch, they actually improved. And this speaks volumes about the efficiency of the architecture but also the elasticity we have to absorb gigantic moves in data.
Now this network is built on the traffic we deliver or handle with our first wave of products. So it’s a CDN network, but not a lot of CDN revenue, it’s the firewalls, the DDoS mitigation, the routing, the load balancing that happens. In this business model, you pay not – or we don’t pay for the amount of data we move, we literally pay for the size of the pipes we have installed, right? And the first wave of product is literally traffic moving out to the eyeballs.
So when we now design a slate in the portfolio of Zero Trust products, they are literally moving traffic in the reverse direction. It’s all about moving traffic back. So all that traffic that we collect literally comes for free. So our Zero Trust products are margin-wise far of 90% there. Matthew, I think, on the last earnings call [indiscernible] he said we could consolidate all the Zero Trust providers out there, put all that network on our – all the traffic on our network and not need to invest one additional dollar of CapEx. So it gives you really a good idea of that – the capacity of the network.