Not a unicorn.

Photographer: Chris Goodney/Bloomberg

Line: An IPO Worth Its $8.6 Billion

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Line, the Japan-based instant messaging company that went public on Thursday with a big jump in its share price that put its value at about $8.6 billion, may be the only of its peers that makes sense as a stand-alone company with a ticker symbol and a market cap. Even though mobile messaging is a huge phenomenon, most of the money is still being made by mobile operators that offer outdated text messages. Line has tried every possible gimmick, and though it's unprofitable, it has solid revenue.

The instant-messaging industry started as a "build it, and they will come" engineering lark. The top 10 messaging apps have a combined 4.5 billion active users (some are shared). Yet it's safe to say that not a single one is a moneymaker. Many are part of big corporations (Facebook owns WhatsApp and Facebook Messenger, Tencent owns QQ and WeChat, Microsoft owns Skype, the Japanese mobile commerce group Rakuten owns Viber), and the parent companies don't break out their financial results, which is usually a sign that there's not much to brag about. The stand-alone companies, such as SnapChat, don't release financials, either. One of the leaders, Telegram, with about 100 million monthly users, is a nonprofit.

Last year, Juniper Research predicted that the size of the mobile-messaging market would decline to $112.9 billion in 2019 from $113.5 billion in 2014 -- and that almost all the money would be made by telecom operators:

Juniper Research

This prediction covers all the revenue of internet messengers (IM on the chart) -- advertising revenue, income from the sale of stickers (the emoji-like pictures or animations that users can send) and whatever else. It may not come true. Facebook's founder, Mark Zuckerberg, for example, promised in 2014 to wait until its messenger services reach 1 billion users before trying to monetize them (WhatsApp did so this year, Facebook messenger is still short of the target). Now, it's selling the messaging platforms to businesses as tools for communicating with clients, and that may create a sizable revenue stream because having chat bots answer common questions could help businesses lower costs. Facebook has successfully monetized its basic offering, and it may figure out how to make corporate activity on the messengers more "organic" -- the term company executives use to mean "natural" and "unobtrusive for ordinary users." No one can predict how lucrative that will turn out to be, however.

Facebook can afford such gambles. SnapChat, which rejected Facebook's advances, took until last year to make a first, tiny revenue, even as it burned through cash. This year, it projects $300 million in revenue from various forms of advertising -- a big number but still a tiny share of mobile operators' SMS revenue, given the billions of messages its users send.

Line and its Asian rivals haven't wasted any time trying to monetize. Mary Meeker, an analyst at Kleiner Perkins Caufield & Byers, provided this introduction timeline in her 2016 report:

KPCB

Line has something U.S.-based messengers don't: 8.4 million people a month who pay for stickers and 1.6 million paying players of Line-branded games that are only available to the owners of Line accounts. It has also experimented with taxi services, mobile commerce, payments and grocery deliveries. Although these services make up a small share of its revenue -- about 6 percent, according to the initial public offering prospectus, games, stickers and advertising bring in the rest -- the share has grown from 1.7 percent in 2013. Line, however, hasn't done much to allow companies to use it to work with customers, the way Facebook does, but because its Chinese and Korean competitors are already in that territory, Line is likely to follow soon.

Sure, Line is losing money, but it has a solid revenue stream: almost $1.1 billion last year. U.S.-based services are nowhere close to such numbers, though they started out around the same time and their technology is no more advanced than Line's.

Analysts and investors may worry about Line's sluggish user base growth and the limited appeal of paid stickers beyond a few Asian markets -- but at least this company has made the effort to build a business, not just a useful service. It has had the courage to experiment and sometimes fail, and it has increased revenue by a factor of 19 since 2012. That's why it can proudly go public, and that's why it's trading significantly higher than the offering price.

If you're going to build a free service to replace a paid one, as the messengers' creators have done, it's useful to try to work out a replacement business model. The tech revolution has disrupted a number of industries in this way -- from media to money transfers -- but it has mostly failed to create working monetization models. The few that work well are mostly advertising-based, and that's a shaky foundation, as print media have discovered in the last 15 years. Line deserves to be a public company with a real market cap, rather than a "unicorn" with an inflated one based on a few investors' highly publicized bets, because it has been built as a business and has taken care to build up a number of revenue streams. That's a more remarkable achievement than huge user growth based on technology that doesn't differ much across the industry.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net