Instant Messaging – The realm of conjecture

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Valuations in this segment are reaching nose bleed territory.

  • Just four months ago Snapchat closed a series B round of $60m with a valuation of $860m (post money).
  • Institutional Venture Partners and its co-investors will be smiling this morning as talks are being held with regard to selling a much larger stake to a strategic industry investor probably from Asia.
  • The valuation being discussed could be as high as $3.6bn which I suspect is being partly driven by Pinterest’s recent raising of $225m at a valuation of $3.8bn.
  • Snapchat is not even close to being the largest player in this field as I estimate its 250m users put it in 3rd or 4th place globally.
  • WeChat currently leads the field with 460m users then WhatsApp at around 400m. Third and fourth is shared between LINE and Snapchat at around 250m each.
  • Then comes Samsung ChatOn, Google Talk and KakaoTalk at around 100m each.
  • Finally there is BlackBerry BBM which has not grown for a year and is languishing at 75m although the usage of the service is very high.
  • A $4bn price tag for a company that has virtually no revenues is a sky high valuation and both Pinterest and Snapchat are guilty of having this problem.
  • This feels an awful like the gold rush of 1999 and 2000 and I do not want to be around when he enthusiasm runs out.
  • To give Snapchat credit, I believe that it is fully aware of this issue and I see it moving very quickly to monetise as well as expand its service into adjacent areas.
  • However, until it can generate some meaningful and growing revenues, the real value of the company is going to remain in the realm of conjecture.
  • There are many instant messaging services, (albeit each being slightly different), that I suspect that there will be a race to the bottom.
  • This means that the realistic price that one can charge for this service will end up being zero meaning that revenue will have to be made by monetising the traffic through advertising.
  • Of all of these services, the one that looks the most robust is LINE which already has a growing revenue stream and has managed to convince users to pay up for its cutsie cartoon stickers.
  • There is certainly a strategic value to be had from owning an instant messaging service but one needs to work out how to earn a decent return on investment before jumping in.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.

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