Viber / Rakuten – History lesson

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  • This deal looks eerily similar to Ebay’s unsuccessful purchase of Skype in 2005.
  • Rakuten, The Japanese B2C and B2B2C e-commerce platform has announced that it will buy Viber for $900m.
  • Viber is very similar to Skype except that it was developed for mobile first meaning that it has been designed with mobile in mind.
  • Skype is primarily a fixed line platform and the performance of its clients on mobile devices is average at best.
  • That being said it is far more established than Viber which has 300m users and no revenues to speak of.
  • Running Viber through a valuation exercise and comparing it to the likes of SnapChat, LINE, Kakao Talk and WhatsApp gives a valuation of around $1 per user with no monetisation.
  • LINE and Kakao Talk have much higher valuations per subscriber because they are able to generate significant revenues from their user base.
  • This gives me a fair value of Viber of around $300m.
  • This means that the other $600m is for “strategic value” to Rakuten.
  • This is all well and good but we have seen an ecommerce platform try this before.
  • eBay purchased Skye in 2005 in order to allow buyers and sellers communicate with the click of a button and this is exactly the reason that Rakuten has given for making this acquisition.
  • Two years later eBay wrote down Skype by 35% (or $900m) as there appeared to be very little value added to the users and no one was using it.
  • In 2009, it sold 70% of Skype to investors including Silver Lake who turned it around and sold the business to Microsoft for $8.5bn.
  • All ended well for eBay but the original reason for buying Skype turned out to be a very bad idea.
  • This is why I think that the real reason for buying Viber has to be a competing offering to LINE and Kakao talk which have done a superb job of moentisation their home markets of Japan and South Korea.
  • Viber has already launched stickers and I can see Rakuten pushing the platform into games and other such media that have proved very popular and very profitable in Japan and South Korea.
  • If Rakuten can monetise the Viber platform to the same degree that LINE and Kakao Talk, then this is a good acquisition.
  • However there are two main problems:
    • First. LINE and Kakao Talk’s monetisation outside of their home markets is a tiny fraction of what they get at home and it is outside of Asia where Rakuten will be mostly looking to monetise Viber’s users.
    • Hence, the outlook of squeezing more than a few cents per user per month from users is very bleak indeed.
    • Second. This is no longer virgin territory. LINE and Kakao Talk have already grabbed the market and Rakuten will have to entice these users away.
    • This is a much more difficult, expensive and risky proposition.
  • If Rakuten can make this work, then I can see a good return on this acquisition as I would value it at around $2.3bn if Viber were to see the same kind of success as LINE.
  • However, this is going to be very difficult to achieve and Viber will have to much better and much more innovative to make it work.
  • History has shown that there is no value for an e-commerce platform from this type of acquisition and realising a decent return for Rakuten investors is a very difficult proposition.
  • Japanese companies have a habit of overpaying for assets at the peak of their value, and in all likelihood this will be no different.

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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