The Telegram app is booming, but needs advertisers – and soon to be USD 700 million – update
By Sam Schechner
Telegram is very popular, adding tens of millions of users this year. Now comes the bill.
The messaging service and social media platform owe creditors around $ 700 million by the end of April, according to people briefed on the company’s plans and Wall Street Journal loan documents. At the same time, due to its rapid growth, Telegram Group Inc. has to meet its increasing spending on equipment and bandwidth even though it has not tried to generate revenue for years.
Telegram is one of the few major social media challengers to Facebook Inc., reaching 1 billion active users each month through the end of 2022, up from around 550 million today.
But first, Pavel Durov, the Russian émigré from Dubai who owns Telegram, has to figure out how to transform the dynamics of his app into a self-sustaining business.
“A project our size needs at least a few hundred million dollars a year to move on,” wrote Durov on his public channel on Telegram late last year. “In doing so, we remain independent and remain true to our values and redefine how a technology company should function.”
To pay the bills, Mr. Durov is issuing corporate bonds to investors in the range of $ 1 billion to $ 1.5 billion, with the promise of discounted equity if the company eventually goes public, said people on the plans were informed. He has also announced that he will start selling ads on Telegram public channels later this year and offering other premium services for businesses and users.
A Telegram spokesman declined to comment on the bond issue or the amount of the company’s debt. The spokesman said Telegram’s device and bandwidth costs are increasing because the number of users has steadily increased more than 40% year over year.
Telegram offers publicly available channels that are something like a mix of Twitter feeds and chat rooms, as well as encrypted communications that are private.
Messaging apps are becoming increasingly popular, but their business models remain uncertain. Facebook’s WhatsApp is still not delivering any significant revenue to the social media company and recently announced a push for companies to use the app for customer service. Signal is owned by a non-profit foundation and is largely dependent on donations. Chat startup Discord Inc. had $ 130 million in revenue from selling premium subscriptions to users last year, but it’s still not profitable.
Telegram has to convince advertisers that its audience is broad, which could pose a challenge after reports of far-right groups and white racists poured into the app after being banned from other platforms. Mr. Durov must also convince Apple Inc. and Google of Alphabet Inc. – whose app stores control most of Telegram’s distribution – that the app can curb threats of violence and the coordination of illegal activities such as arms and drug sales.
The Telegram spokesman said the company’s advertising strategy will likely focus on Asia, Eastern Europe and the Middle East initially. He added that Telegram has a working relationship with Apple and Google for content moderation.
Mr Durov started Telegram with his brother Nikolai in late 2013, just months before he was ousted from VK, the Russian social media platform he founded. Mr Durov showcased his new app – funded with UK sales proceeds – less as a business than as a way for people to message while avoiding government surveillance and censorship.
Mr. Durov and a few dozen employees had no permanent headquarters for a while, but traveled around the world and settled in one city after another, he told the Journal in 2016. However, the company is based in Dubai. it says it doesn’t keep any servers there.
Mr. Durov has had a longstanding friendship with actor and tech investor Jared Leto since he was in the UK, with whom he shares an ascetic lifestyle that avoids meat and alcohol.
Mr. Leto described that Mr. Durov has “the X-factor that is so rare in founders” with “a bit of a secret in it for a good measure”. When asked whether he had invested in Telegram’s bond offering or would invest in an eventual IPO, Leto replied, “What is the Fight Club’s first rule?”
Mr. Durov is proud of the use of the app by dissidents in Iran, Russia and elsewhere, writing that “Telegram never gave in to pressure from officials who wanted us to carry out political censorship.”
These principles were tested after the Islamic State terrorist attacks in Europe in 2015 and 2016, in which militants used telegram as a propaganda tool to recruit and communicate with potential attackers. Mr Durov initially responded by defending the use of encryption to protect private chats in his service.
The company also began removing terrorist propaganda from public channels when it was reported. The Telegram spokesman said the company is now deploying “a robust moderation system” for public channels, including automated content monitoring systems and manual review.
At the end of 2017, Telegram began investing in a new cryptocurrency. The company eventually sold early access to the currency units – known as grams – to about 200 investors in two rounds, grossing $ 1.7 billion. Some investors said they bought in because it was the next best thing after equity that Mr. Durov didn’t want to sell.
The U.S. Securities and Exchange Commission sued Telegram in late 2018 before it could issue the currency, arguing that the company was illegally selling securities, which Telegram denied. During the lawsuit, the SEC said Telegram used investor money to fund more than 90% of its operating costs.
Telegram eventually settled the case and agreed to pay a fine of $ 18.5 million in June 2020. Telegram reimbursed investors for any remaining funds, which at the time made up 72% of the total, the spokesman said.
Some of those who invested said they felt burned. But Mr. Durov offered non-U.S. Investors the option to convert their refunds into one-year loans, which according to a copy of a loan agreement viewed on 30 by the magazine. Those loans are now valued at around $ 700 million, according to the people briefed on Telegram’s plans.
The Telegram spokesman said the losses of some investors were unfortunate, but added that investors were warned of regulatory risks. To repay its creditors, Telegram is selling five-year bonds that pay about 7% or 8% a year, said people briefed on the company’s plans. Discount on the list price if Telegram goes public.
Some details of the fundraising plans were previously reported by The Information.
It remains to be seen whether Mr. Durov will list his company on the stock exchange. Several investors said they doubt the founder wants to give up any control. In a Telegram message, Mr Durov told the Journal that he preferred an IPO to venture capital firm funding. “Going public is an open and democratic method of raising capital that is more in line with our values,” he said.
Rather than selling ads on its own, Telegram said it will likely initially use an agency model of doing business with outside companies in different regions for commission sales.
Large, brand-sensitive companies could be wary of appearing on a platform that prides itself on refusing to collaborate with governments and where it’s easy to find hate speech and conspiracy theories, said Brian Wieser, Head of Business Intelligence at Media- Buying conglomerate GroupM.
Even marketers aiming to drive clicks and sales – rather than building reputations – could struggle with Telegram’s refusal to collect and share data about its users because performance marketing requires in-depth analysis, Wieser said.
“It’s not enough to know that you can get a billion impressions in a month,” he said. “You must have a process that can be carried out against these impressions.”
Mr Durov said last month that he found it immoral to use user data for targeted advertising. The Telegram spokesman said that advertisers will instead be able to target ads by selecting topics or even a specific channel in which to display ads.
“Telegram wants to show that precise, contextual advertising is not only an ethical alternative to targeted advertising, but can also be efficient,” said the spokesman.
–Jeff Horwitz contributed to this article.
Write to Sam Schechner at [email protected]
(END) Dow Jones Newswires
Mar 15, 2021 7:19 AM ET (11:19 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.