Discord in talks to sell to Microsoft for over $10B | E1190

Top Insights

Discord and Slack have had strangely similar journeys

There is a correlation between gaming-focused founders and making great messaging products

  • Rahul Vohra (Runescape > Superhuman), Stewart Butterfield (Glitch > Slack), Jason Citron (OpenFeint > Discord)

Microsoft is paying a premium (likely over 75x price to sales), but Discord fits perfectly into their “Netflix for gaming” ambitions

$10B isn’t too steep considering their market cap is approaching $2T

Background on Discord

Recent history:

Discord is a voice and text-based messaging app that is largely used by gamers for in-game communication, and it was founded by Jason Citron in 2012

A “server” on Discord is the equivalent of a “workspace” on Slack: a dedicated space for people to communicate about a specific topic

In June 2020 after COVID hit, Discord capitalized on the stay-at-home orders and changed their tagline to “Your place to talk.” – targeting fan communities of books, music, art, tv shows, and more to expand beyond just gamers

In January of 2021, Discord ran into some controversy when they briefly banned the r/wallstreetbets server which now has around 600,000 members

  • Wall Street Bets is an infamous subreddit that set off the GameStop fiasco in January – and they use Discord to communicate in real-time via voice chat
  • WSB’s server was banned for one day, and after being reinstated, Discord offered to help WSB moderators due to the amount and intensity of their users
  • We covered the WSB/Robinhood fiasco on an emergency pod back in January

Discord user metrics:

Discord has 140M+ MAUs as of December 2020

  • Other MAU stats: (as of Feb. 2021 via Statista)
  • WhatsApp – 2B
  • FB messenger – 1.3B
  • We Chat – 1.2B
  • QQ – 617M
  • Telegram – 500M
  • Snap – 498M

How they make money:

  • Discord makes money by selling a $100/year premium subscription called Nitro and also by taking fees from games sold on its servers
  • Benefits of Nitro: larger file uploads, HD video screen share, extra server support, personal profiles on servers
  • The core app remains free, so users only pay when trying to access premium features
  • Discord was rumored to be up for sale in 2018 – but did not proceed with buyers due to CEO Jason Citron allegedly opposing an ad-based model proposed by the would-be buyers

Discord generated $130m in revenue in 2020 and has raised $480M since inception

History of Discord and how it’s different but similar to Slack

Discord and Jason Citron had a very similar founding story to Slack and Stewart Butterfield’s

  1. 2002: Launches an MMO (Massively multiplayer online game) called “Game Neverending” which eventually shuts down due to inability to fundraise
  2. Stewart then creates Flickr from the well-received photo-sharing features of “Game Neverending”
  3. 2005: Stewart sells Flicker to Yahoo and starts working there running Flickr
  4. 2008: Stewart leaves and starts a new game called “Glitch”
  5. Glitch eventually fails, so Stewart focuses on the internal chat app they built, which eventually becomes Slack
  1. 2011: Jason Citron sells his social gaming startup OpenFeint to GREE for $100M
  2. While working on his next gaming project, Citron noticed how awful the current voice messaging software was, making it hard to strategize with teammates while playing online
  3. 2012: When his next project showed signs of failing, Citron pivoted to create Discord to meet the needs of its users

Interesting trend: Talented video game designers making amazing messaging products, for example:

  • Rahul Vohra worked on Runescape before Superhuman
  • Stewart Butterfield worked on Glitch before Slack
  • Jason Citron was a successful gaming entrepreneur before Discord
  • Theory: if you can make a game that engages users, you can make a product that engages customers

Deal breakdown: Discord at $10B compared to Slack at $27.7B?

  • Slack 2021: ~$900M in revenue (43% YoY growth), sold for $27.7B (~30x revenue)
  • Slack is geared towards enterprise customers, startups and SMBs
  • Discord 2021: ~$130M in revenue, in talks to sell for over $10B (~75x+ revenue)
  • Discord is geared towards communities, social and gaming

Microsoft is willing to pay a premium for Discord based on its revenue footprint… so what is their thesis?

Microsoft’s major consumer play

Every other FAANG company has a massive, industry-leading consumer business:

  • Facebook – social
  • Apple – hardware/app store
  • Amazon – marketplace
  • Netflix – streaming
  • Google – search

Microsoft’s big consumer bet appears to be in gaming (they own Xbox, Minecraft, and 30+ game studios)

  • With a ~$1.9T market cap, they have the capital to take big swings in M&A

Timeline for Microsoft’s recent gaming acquisition spree:

  • January 2019 – Microsoft CEO Satya Nadella explained his vision for their Xbox subscription:

“We describe it as, ‘Netflix for games'” – Satya Nadella

  • December 2020 – The latest Xbox console release helped Microsoft surpass $5B in gaming revenue during their most recent December quarter (Q2 2021 on their fiscal calendar), up 51% year-over-year (via GeekWire)
  • Xbox content and services revenue increased to $3.5B due to Xbox Game Pass subscriptions
  • Game Pass hit 18 million subscribers in Jan. 2021
  • Game Pass costs $10/month for standard and $15/month for the ultimate package (Ultimate includes XCloud, allowing gamers to play cross-platform)

In summary

Microsoft (~1.9T market cap) sees every other big tech company with a major consumer business and understands that gaming is the clearest path to building its own

$10B for Discord is a fair price to pay if Microsoft integrates Discord into their cloud-gaming subscription products ($10B is well under 0.05% of Microsoft’s market cap)

Microsoft is building a quasi vertical monopoly in gaming – they now own:

  • the hardware (Xbox, Surface, PCs)
  • the software (Bethesda, Minecraft, Xbox Game Studios, dozens of original titles exclusive to Xbox)
  • the communication platform (Discord)

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