Taking BlackBerry's Stickers Seriously

Jun.13.14 | About: BlackBerry Ltd. (BBRY)

Summary

Selling stickers and sponsored content has an enormous revenue potential for instant messaging apps.

Comparing BlackBerry Messenger to Line, the former could generate between $146 million and $219 million a year just by selling stickers and sponsored content.

If BBM can accelerate and sustain its growth, it should provide a significant tailwind for the stock in the coming quarters.

BlackBerry (NASDAQ:BBRY) announced last year its intention to launch BlackBerry Messenger (BBM) for Android and iOS software. With this move, it saw its registered user base grow by 20 million in its first week. Although a sustainable growth in Monthly Active Users (MAU) to interesting levels has yet to be seen, this move probably saved BBM from irrelevancy.

Given the company's urgent need to return to profitability, it set forward a monetization plan for BBM (along with other initiatives in different business segments), basically offering what competing apps already have (perhaps with the sole exception of enhanced encryption messages which could be appealing for enterprises). Even though it is late to the party, BlackBerry can grow an interesting revenue base by nurturing its MAU and leveraging on its brand in its remaining strongholds.

On February 2014, BlackBerry launched stickers for BBM. Some investors could be tempted to mock the prospects of selling cartoons as a business model for a messaging app (I was tempted too at first). However, in this article I shed light on its rationale for unfamiliar investors and attempt to provide estimates of BlackBerry's top line from this interesting source of revenue.

For this purpose, I take advantage of Line Messenger's recent history and its disclosure regarding its various sources of revenue.

Line: A Roadmap to Success

Line is Japan's largest social network. Anchored in a messaging app, it has seen explosive growth since inception. It launched on June 2011, and merely nineteen months later, it reached the 100 million users mark. By its two year anniversary it had over 200 million users. The latest estimate stands at over 450 million. Line offers text messages, graphics, video and audio media, VoIP calls and conferences. Japan represents only 12% of its user base as of June 2014, although it is still its largest hub.

Source: Naver Corporation, June 2014 IR Presentation

Perhaps more impressive is its revenue growth, which has increased from USD$4 million to USD$214 million between 2Q12 to 1Q14. Line has three major sources of revenue: free video games with in-game purchases, stickers and sponsored content for businesses that pay a fee to reach a broader audience.

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Source: Naver Corporation, 2Q12 through 1Q14 earnings release, available here. Figures are in million USD

Games are offered through an affiliate app called Line Game. Since its games have to be downloaded from Google Play or other third party app stores, it pays a fee worth 30% of its revenue. This particular business segment should be more difficult to replicate and hence is less obvious a guideline for BlackBerry Messenger. I will concentrate on the two additional business segments: stickers and sponsored content.

Stickers: A Serious Business

Selling pictures of cartoon characters through messaging apps probably sounds lame for many investors unfamiliar with its global revenue trend. But for the right demographics, it's a fun and effective way to communicate which enhances user experience with the app.

From a business standpoint, an app could generate revenue by selling third party stickers or by selling ads through sponsored stickers that could go viral.

For Line, the sticker business has been a lucrative one. For 2Q13, the company announced that it was making over USD$10 million a month selling stickers, and this number probably continued to rise along with its additional users.

Unfortunately, Line's disclosure leaves much to be desired. The company has only disclosed so far its revenue breakdown for 1Q13 to 3Q13. With this limited information at hand, I will offer an estimate of BlackBerry Messenger's potential in this particular segment.

Although BlackBerry came late to the sticker party, announcing its launch on February 2014, it seems to have gotten off to a hot start, according to Forbes. However, no one has given an indication so far of exactly how much current and potential future revenue can be expected from selling stickers. I will try to close that gap using Line's numbers.

Line sold USD$32 million worth of stickers in 3Q13. It probably had 215 million users during the period, taking the average of its announced figures for the quarter (available only for July and August), which means it sold USD$0.15 per registered user. Line doesn't disclose its MAU, but has indicated in the past that the number should be around 80% of its user base. I take 70% as a more reasonable number, in line with BBM's registered user to MAU ratio, which means that it probably generates around USD$0.21 per MAU. Taking this ratio as given, the estimated sticker revenue of Line for the period between 4Q13 and 2Q14 is shown below (I do the same to estimate Games and Sponsored Content revenue).

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Source: Business Insider, Naver Corporation

Line's sticker business comes mainly from selling third party content. However, on April 2014 it announced an interesting addition: letting users make and sell their own sticker sets, charging a fee equal to half its revenue. This initiative has the potential to add flexibility and to localize its content, which makes perfect sense for an app aiming to go global.

BlackBerry announced on March 2013 that it had 85 million MAU, a 23% growth from one year earlier. Assuming that BBM has a similar user engagement as Line and considering different scenarios of growth, BlackBerry could generate anywhere from USD$72 to USD$128 million a year from selling third party stickers.

MAU (million) 85 100 120 150
Implied Sticker Revenue (million) 72 85 102 128
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Sponsored Content

This segment depends on the number and marketing budget of companies using official accounts and distributing sponsored stickers. This source of revenue generated USD$23 million during the 3Q13 or USD$0.15 per MAU for Line.

BlackBerry's parallel is BBM Channels, which allows a brand to distribute sponsored content. There are three ways that sponsored content is promoted through BBM:

1. Featured Placements: Brands pay for space on the Featured Channels tab to promote their channels.

2. Sponsored Invites: Channel owners can invite targeted BBM users by filtering through demographic characteristics.

3. Sponsored Posts: Channel owners are able to place sponsored posts alongside updates from BBM Contacts.

Taking Line's revenue per MAU for sponsored content, BlackBerry should generate between USD$61 million and USD$92 million. This is again assuming that user engagement is comparable between the two apps.

MAU (million) 85 100 120 150
Implied Sponsored Content Revenue (million) 52 61 73 92
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Other Sources of Revenue

Selling stickers and sponsored content are just two of several prospects to monetize BBM. Other sources of revenue include mobile payments and BlackBerry Messenger for enterprises.

BlackBerry should even explore gaming as an additional offering for BBM, given the enormous success for competitors such as Line. I leave for other articles to provide estimates of BBM's revenue potential from these other sources.

Valuation

As of June 12th 2014, Naver Corporation -owner of Line- has a market cap of approximately USD$24 billion. Line's revenue is by far the fastest growing business segment of the company. Nevertheless, to provide for a floor of Line's valuation, one could simply take into account that its revenue represented around 20% for its parent company's top line. This simplistic proxy of value would mean that Line is worth at least USD$4.8 billion or USD$16.5 per MAU. Even if BBM is valued at half of this number per MAU, given its lackluster growth compared to Line, it still would be worth around USD$700 million, or approximately 17% of BlackBerry's market cap (assuming $4 billion). If BBM can accelerate its growth in the coming quarters, it could provide a compelling tailwind for the stock.

Limitations

First and most importantly, before BlackBerry can count on a reliable source of income in BBM, it has to gain further momentum. Compiling MAU and registered users from various sources as of 1Q13, BBM lags its major competitors by a significant margin.

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Source: Statista, Business Insider, Tech in Asia

Second, given the lack of information, it is not possible to segment BBM's user base by region to compare it to Line. It is likely that a Japanese user has very different consuming patterns than an Indonesian, for example. If this is the case, given that BBM's user base should be concentrated in strongholds such as Indonesia and South Africa, its revenue per MAU should be below that of Line given the latter's concentration in the Japanese market. Additionally, it's yet unclear how stickers are doing in western markets, where BBM has additional users.

Conclusion

Unfortunately for BlackBerry's users and investors, the company hasn't exactly been a source of innovation in the consumer market lately (ignoring for the moment QNX's potential applications on the IoT industry). However, even if it's late to the party in segments such as BBM, it can leverage its brand in its strongholds and follow competitors' proven strategies for the time being.

Disclosure: The author is long BBRY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.