Online Dating 101:
I have always been fascinated by online dating as a business model. I’m interested in the dynamics of these thriving online dating applications/sites because they are at the intersection of a number of phenomena. For instance, certain characteristics of a successful online dating property resemble an online marketplace. Instead of trying to balance the supply and demand dynamics of buyers and sellers, you are trying to manage two sides of a potential relationship. The initial challenge is the same - without sellers there won’t be any buyers, and in this purely heterosexual example, without any women there won’t be any men and vice versa. In this context it also resembles a nightclub; albeit one that can let everybody in.
A successful online dating property is inevitably a social network. It is, however, the kind of social network that matches people privately, and almost always operates to connect two people who have not met before. This is the very reason why the likes of Facebook have been unable to break into this vertical, despite having made a concerted effort to do so. The version of yourself you present to a potential partner is different than the version of yourself that you present to existing friends and family. People also want to choose. The idea of an algorithm suggesting partners from a group of existing contacts seems dystopian. The model which has worked to achieve the goal of a typical user - namely to find a (singular) partner - is a one to one channel, where both parties have selected the other. There have been experiments with connecting multiple users at once before, which has largely resulted in disaster.
The advantage of operating a scaled online dating property is that the opportunities for monetisation are almost limitless. Unlike most social media, which is primarily monetised via advertising generally, and by subscription revenues in the case of a LinkedIn, the likes of Tinder and Bumble can monetise by a mixture of advertising and tiered subscription services. On one hand, engagement on these applications is naturally high. Perusing and interacting with attractive potential mates is a fun thing to do for all genders. On the other hand, drip feeding free users and then offering them the promise of features that increase the number of their matches, or even offer instant new matches, is a powerful value proposition.
The longevity of these properties seems remarkable. Every generation of computing seems to have its own family of properties that seem to capture a large market share and then persist for some time. This was certainly observable in the pre-mobile internet era, but it has become even more pronounced now. A new user must simply go to an application where other people also go, i.e. the network effect. The new generation of dating applications have also been led by female entrepreneurs, and there has consequently been a sea-change in the acceptability of meeting someone over the internet. With that background in mind…
The Update:
Match Group Inc. forecast growth through the end of the year that missed analysts’ estimates, citing lingering Covid effects in Asia, particularly in its second-biggest market of Japan.
The Dallas-based company said it expects fourth-quarter revenue of $810 million to $820 million. That compares with the average analyst forecast of $838 million, according to data compiled by Bloomberg. Adjusted earnings before interest, taxes, depreciation and amortization will be $285 million to $290 million, according to a statement Tuesday. Analysts had projected $285.5 million.
Match said it expects to see improvement “as mobility restrictions lift, vaccine levels continue to rise, and case counts fall.” The shares tumbled 5.4% in extended trading.
The dating-app giant, which owns brands including Tinder, OkCupid and Hinge, was forced to pivot during the pandemic as lockdowns early in the Covid-19 outbreak all but eliminated in-person socializing. That led Match to enhance its digital experience and simulate offline encounters with features like video and audio.
The core promise of the Match Group brands is that by using their services you will meet a potential partner in real life. In this vein, the demand for its services increase where a person might find themselves in a new city, perhaps for a short amount of time. In part, they are a travel company. In essence, while the pandemic has forced a lot of life online, connecting with a potentially romantic partner is something that has to be done in real life. Notably Match has continued to grow at a neck-break pace throughout the last several years proving itself to enjoy many of the benefits of a winner-take-most-market.
While the revenue and the EBITDA growth has been impressive, the most important thing from the Q3 earnings call was the speculation concerning the direction of Apple and Google’s control over their respective app stores. To cut to the jist of the issue at hand - both Google and Apple have taken a 30% cut of all revenue generated through in-app purchases and subscriptions. Gary Swidler, CFO and COO, provided extensive colour on the implications that this could have on Match’s business:
The biggest swing factor in our 2022 EBITDA outlook is what happens with App Store fees, which are an increasingly large percent of our revenue, up from 17% in 2020 to an estimated 19% in 2021, totaling over $550 million. There are numerous actions across the globe scrutinizing Apple and Google's requirement that we use their payment system and pay a 30% fee. A reduction in these fees would have numerous positive consequences, including enabling us to pass along benefits to consumers. Google has agreed to reduce fees for subscriptions, though not a la carte, and from 30% to 15% starting January 1, 2022. But they also still have a policy change to require use of their billing system scheduled to go into effect at the end of March 2022.
There are many unknowns regarding Apple's plans for IAP, including weather and how they intend to comply with the law banning mandatory IAP in South Korea and the injunction in the Epic decision, which requires them to eliminate the anti-steering provision by December 9, 2021. We're going to watch these developments around the App Stores for at least another few months before we provide our EBITDA outlook for next year. We're optimistic more changes in the ecosystem are likely.
The consequences for the bottom line are extremely significant. I would be hesitant about taking Swidler seriously on his comments about passing these savings onto users. Subscription fees have generally been going up, and people have been willing to pay. Anyway that you want to cut these developments up, this is a seriously positive catalyst that will play out over the next twelve months. There are few businesses which are such a pure play on revenue directly generated via the app store, and the EBITDA margin Match could achieve could be nothing short of incredible.
Of course, the battle over app store fees stretches back years when Match originally decided to join Epic in challenging Apple and Google’s policy’s in 2019. The two developments mentioned above are significant. Firstly, South Korea passed a bill in August that banned Apple from requiring developers to use the app store in-app purchase system (IAP). Epic originally challenged Apple on this by offering customers the option to pay directly via credit card within their application, in contravention of Apple’s policies. This would have allowed Epic to take payments directly, and thus skirting the 30% tax they would have had to pay Apple by utilising their payment gateway. In the case of Alphabet, and the Play Store, their fees are being reduced across the board. I’m going to go out on a limb and say that the fees generally are going to have downward pressure, especially as payment options are opened to competition.
Secondly, the Epic v. Apple decision referenced above relates to a ruling that Apple can no longer prohibit developers from pointing users outside of the Apple ecosystem with native apps. The removal of these anti-steering provisions should be implemented by December 9th, but the ruling is currently being challenged by Apple. The general direction of these decisions is extremely important to the future of computing platforms, and the policy formulations that are being formalised now could have important implications for the aspirations of those vying for dominance in the next digital arenas.