Chat startup Discord Inc. has ridden a surge in popularity to soaring revenue and a lofty valuation despite lacking the one thing found on most successful social-networking platforms: advertising. Its chief executive says don’t expect that to change.
Discord nearly tripled its revenue last year solely by selling subscription access to exclusive perks for users. By contrast, the companies behind other free online hangouts—including Facebook Inc., Twitter Inc. and Snap Inc. —primarily sell targeted ads built around sharing users’ personal information.
In an interview, Discord co-founder and CEO Jason Citron, 36 years old, said the company has balked at the advertising model favored by its peers because ads would be too intrusive. People use Discord to hold conversations in real time, he said, as opposed to passively reading, making or commenting on posts. He also said he thinks that consumers in general dislike ads and don’t want their data shared with brands.
“We really believe we can build 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, analyst Mark Shmulik with AB Bernstein said. “You’re then competing with the big incumbents in Google, Facebook and the other social platforms for ad dollars and that’s no easy task,” he said. “It is a heavy lift.”
San Francisco-based Discord got its start in 2015 as a platform that made it easy for videogame enthusiasts to chat while playing online games together. Mr. Citron, an avid gamer and game developer, billed its technology as a more robust alternative to existing options at the time. Discord’s appeal has since expanded to include groups of high-schoolers doing homework together, friends watching a movie over a shared screen and individual investors from Reddit Inc.’s WallStreetBets community, which gained notoriety earlier this year due to its role in the GameStop trading 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 isn’t profitable. The majority of its growth has been through word-of-mouth, though 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 such as house plants or cryptocurrency. They can chat by text, audio or video, and most of Discord’s servers are invite-only. Users can opt to pay $9.99 monthly or $99.99 annually for Nitro, a subscription that provides perks such as special emojis and enhanced video resolution.
Mr. Citron said Discord plans to continue to lean on its large base of devoted users to help it become profitable as vaccines roll out and virus restrictions lift. Users will often buy Nitro subscriptions for the servers they belong to as a way to show support, he said, adding: “It’s almost like giving your friends a group hug or taking them out to lunch.”
Subscription-based business models are attractive to tech investors, analysts say, because they can provide consistent, and thus predictable, revenue. But the strategy is dependent on users liking a platform enough to commit to recurring payments for services or products.
“You’re banking on making more revenue from a small subset of passionate customers willing to pay for the product than you could from showing ads to the whole customer base,” said Doug Clinton, managing partner at investment and research firm Loup Ventures. “It’s risky to rely on keeping consumers paying over long periods of time, but beautiful if it works.”
Other communication platforms, such as Signal Messenger LLC and Facebook’s WhatsApp, also don’t monetize through ads. Signal is a nonprofit that relies on donations. Facebook planned to introduce ads to WhatsApp last year but reversed 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 already was an investor in the company. Overall, Discord has raised roughly $480 million, according to Crunchbase data. Mr. Citron said he isn’t thinking about taking the company public right now.
Most Discord servers are private, whereas other social platforms feature mainly public dialogue. Though Discord is primarily for consumers, some businesses have set up servers to share news and provide customer support, as well as for their employees to communicate with each other.
“There’s not a comparable product that looks and feels the same as Discord,” said Neil Mehta, a partner at Greenoaks Capital.
College junior Heather Navarro said she belongs to a private Discord server with about three dozen friends and a handful of public community servers, such as one for singles and another dedicated to Richmond, Va., where she lives. Sometimes she will hop into a server where students of all ages provide help with school assignments.
Ms. Navarro, 20, joined Discord a few years ago as a way to chat with friends while playing videogames. Recently she purchased a monthly Nitro subscription because “I’ve been using it a lot more lately,” she said. “My friends and I use it to chat about our lives. We talk every single day.”
Discord is testing more paid features, including original multiplayer games and digital stickers.
Like other social platforms, moderation challenges loom, and the company has struggled at times to rein in bad actors, as it doesn’t monitor users’ conversations. “Privacy is built into our product from the ground up,” Mr. Citron said.
Discord uses a combination of machine learning, employees and volunteer moderators to weed out behaviors that violate its rules of conduct. A trust and safety team of about 45 staffers, or 15% of Discord’s total workforce, proactively seeks out efforts by people to form servers that wouldn’t be welcome on its platform. “We have zero tolerance for hate and online extremism,” Mr. Citron said.
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