The title of this piece may confuse you. Just what is a digital sticker? How could such a seemingly inane concept be worth $10 billion? These are confusing times, for sure. But to be successful in investing in technology these days, you have to understand the answers to these questions. Because, despite how worthless you may think they are, digital stickers rake in big money. And as we settle into this new millennium, more companies will employ the digital sticker business model.
What's a digital sticker?
When using messaging applications, users can add emoticons to communicate things that text might not be able to. Beyond the typical smiley faces, some applications offer much more detailed pictures to send -- these are sometimes called stickers, and can be pictures of popular cartoon characters that are sold for around $2 per set. That's right, users find such value in sending certain character stickers they pay to do so.
Why's it worth $10 billion?
Now, this practice has yet to catch on in the U.S. It mainly occurs in Asia, where one of the biggest messenger services, LINE, dominates. LINE grew extremely popular in Japan, where it has a 40 million users, but now has a combined global user base of over 300 million. Spun-off last year from its South Korean parent corporation, Naver, The Wall Street Journal reported that LINE could go public this summer at a valuation around $10 billion, very similar to Twitter's (NYSE:TWTR) IPO.
LINE brought in $157 million in revenue in its third quarter last year, $31.5 million of which was just from stickers according to Business Insider. LINE's other revenue sources include games and advertising. While the majority of revenue doesn't come from stickers, its likely that the application wouldn't have caught on if it had not offered such a feature and such characters as a hook.
Lessons from a digital sticker economy
What can we learn about a company that has ridden digital stickers to create a company valued at $10 billion? A few things:
- What you value isn't the same as what someone else values. It may be that you may never feel the need to pay $2 for digital stickers, no matter what emotion you'd like to express over a text message. And in a stock market that is reaching new highs and that many are calling overvalued, you might have to look beyond your own interests and discover other opportunities beyond your normal grasp. Because it's likely that things will just get stranger from here; for example, take Bitcoin.
- Despite globalization, localization and curating preferences to populations is still a winning strategy. Scale can help a company's cost structure, and help beat rivals on price. But cost structures only matter if a company is actually selling something a population desires. For whatever reason, digital stickers are extremely popular with LINE's users, while the U.S. seems not to buy into that trend. Global rivals like Facebook (NASDAQ:FB) and Twitter can attempt to compete with scale, but homegrown networks like LINE don't have to cater to such diffuse cultures.
And the most important takeaway:
- Digital companies that diversify away from advertising revenue could have the advantage. Companies can obviously be hugely successful if advertising is all they sell. And the advertising model has been the most common way to monetize a service. But ad revenue is extremely dependent on the economy, and when Internet companies stop reaping the gains from being a growing place for ad spending, growth will need to come from other areas.
Outside of advertising, Twitter has a side business, data licenses, that made up a little more than 10% of revenues through the first nine months of 2013. Through these data licenses, Twitter sells access to search and analyze every single tweet, new and old, to study trends and sentiment.
Facebook's share of revenue not tied to advertising has fallen from 14% to 11% as of its latest quarter. This revenue is mainly from payments associated with games. While that may not look like a great statistic, its because ad revenue growth is outpacing its other revenue. Both ad revenue and payments grew significantly over the same year-ago quarter, 66% and 24% respectively.
Digital Brooklyn Bridges
Buying something like a digital sticker may not seem like the greatest investment to you, but there are probably hundreds of other similar industries that you may need to explore in order to find other investments. While Peter Lynch argues to invest in what you know, in low-growth times, it may be that you have to actively expand what you know in order to find reasonable returns. And as the online ad market becomes saturated, companies will need to find other drivers of growth.