Chat startup Discord Inc. has gained massive popularity with skyrocketing revenue and high valuation despite lacking the one thing found on the most successful social media platforms: advertising. Your CEO says don’t expect that to change.
Discord nearly tripled its revenue last year solely by selling subscription access to exclusive user benefits. By contrast, companies behind other free online hangouts, including Facebook Inc.,
and Snap Inc.
—Mainly selling targeted advertisements created around the exchange of users’ personal information.
In an interview, Discord co-founder and CEO Jason Citron, 36, said the company has refused the advertising model preferred by its peers because the ads would be too intrusive. People use Discord for real-time conversations, he said, rather than passively reading, making or commenting on posts. He also said that he believes that consumers in general do not like ads and do not want their data shared with brands.
“We really believe that we can create products that make Discord more fun and that people will pay for them. It keeps our incentives aligned, ”he said.
For a startup like Discord, trying to monetize through ads would be difficult, said AB Bernstein analyst Mark Shmulik. “So you are competing with the big incumbents on Google, Facebook and other social platforms for ad dollars and that’s not an easy task,” he said. “It’s heavy work.”
San Francisco-based Discord started in 2015 as a platform that made it easy for video game enthusiasts to chat while playing together online. Citron, an avid gamer and game developer, called its technology a more robust alternative to existing options at the time. Since then, Discord’s appeal has expanded to include groups of high school students doing homework together, friends watching a movie on a shared screen, and individual investors from Reddit Inc.’s WallStreetBets community, which gained notoriety earlier in the year. this year due to its role in the GameStop trade. frenzy.
Discord said it has doubled its monthly user base to about 140 million as daily life moved online in the coronavirus pandemic. Last year, the company generated $ 130 million in revenue, up from nearly $ 45 million in 2019, according to a person familiar with the company’s finances.
Still, Discord said it’s not profitable. Most of its growth has been by word of mouth, although in recent months the company said it has invested in promoting itself to college students.
Discord users form groups called servers that consist of friends or communities dedicated to topics like houseplants or cryptocurrencies. They can chat via text, audio, or video, and most Discord servers are guest-only. Users can choose to pay $ 9.99 per month or $ 99.99 per year for Nitro, a subscription that offers benefits like special emojis and improved video resolution.
Citron said Discord plans to continue to lean on its large devoted user base to help it become profitable as vaccines are rolled out and virus restrictions are lifted. Users will often purchase Nitro subscriptions for the servers they belong to as a way of showing support, he said, adding: “It’s almost like giving your friends a group hug or inviting them to lunch.”
Subscription-based business models are attractive to technology investors, analysts say, because they can provide consistent and therefore predictable income. But the strategy depends on users liking a platform enough to commit to recurring payments for services or products.
“You are confident of getting more revenue from a small subset of passionate customers willing to pay for the product than you could get by showing ads to the entire customer base,” said Doug Clinton, managing partner at investment and research firm Loup Ventures. . “It’s risky to trust consumers to keep paying for long periods of time, but it’s beautiful if it works.”
Other communication platforms, such as Signal Messenger LLC and Facebook’s WhatsApp, also do not monetize through ads. Signal is a non-profit organization that relies on donations. Facebook planned to introduce ads on WhatsApp last year, but changed course.
Discord doubled its valuation in December to $ 7 billion after raising $ 100 million in a funding round led by venture capital firm Greenoaks Capital, which was already an investor in the company. Overall, Discord has raised roughly $ 480 million, according to Crunchbase data. Citron said it is not planning to go public at this time.
Most of Discord’s servers are private, while other social platforms feature mostly public dialogs. Although Discord is primarily for consumers, some companies have set up servers to share news and provide customer support, as well as for their employees to communicate with each other.
“There is no comparable product that looks and feels the same as Discord,” said Neil Mehta, partner at Greenoaks Capital.
College junior Heather Navarro said she belongs on a Discord private server with about three dozen friends and a handful of public community servers, such as one for singles and one dedicated to Richmond, Virginia, where she lives. Sometimes you log into a server where students of all ages provide homework help.
Ms. Navarro, 20, joined Discord a few years ago as a way to chat with friends while playing video games. He recently bought a monthly subscription to Nitro because “I’ve been using it a lot more lately,” he said. “My friends and I use it to chat about our lives. We talk every day “.
Discord is testing more paid features, including original multiplayer games and digital stickers.
Like other social platforms, the challenges of moderation loom, and the company has at times struggled to control bad actors as it does not monitor user conversations. “Privacy is built into our product from scratch,” Citron said.
Discord uses a combination of machine learning, employees, and volunteer moderators to eliminate behaviors that violate its rules of conduct. A trust and safety team of approximately 45 employees, or 15% of Discord’s total workforce, proactively seeks out people’s efforts to train unwelcome servers on their platform. “We have zero tolerance for hate and extremism online,” Citron said.
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