Telegram’s route to profitability looks dubious

Financially insecure. Pavel Durov has some taxing problems. For one thing, the founder of messaging app Telegram is now unable to leave France after domestic prosecutors charged him with allowing his platform to be used for money laundering and child sexual abuse material. In comparison the question of how his enterprise can make money might seem trifling, but it’s arguably just as tricky.

Prior to his legal predicament, Durov’s main challenge was to ready the company he wholly owns for an initial public offering or a sale to Big Tech. Telegram in 2023 generated revenue of $342 million, according to the Financial Times. Divided by an estimate of 850 million monthly active users for the same period, that amounts to revenue per user of 40 cents. Yet Durov also said earlier this year that his average costs per user were less than 70 cents – implying for each Telegram customer he’s currently losing 30 cents.

The easiest fix would be to pivot Telegram to a more Facebook-like business model. The social network owned by Meta Platforms derives most of its revenue from advertising. Like Facebook’s Groups, Telegram’s user-created public channels can host unlimited numbers. In theory, Durov could charge advertisers to display their ads to a targeted group of Telegram users.

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But this would be expensive. Global governments are pressuring Telegram’s social media rivals such as Elon Musk’s X to moderate content. That’s costly: Meta hired 40,000 staff and has spent $20 billion since 2016 to look after platform safety and security, Meta’s spokesperson told Breakingviews. That $2.5 billion annual expense equates to $0.83 per monthly active user, according to Breakingviews calculations that assume nearly 3 billion Facebook customers. The extra moderation cost would triple Telegram’s losses per user to $1.13, or $1 billion overall.

Facebook imitation is tricky in any case: advertisers are hardly likely to flock to a platform featuring illicit content. Hence an alternative is to market Telegram as more akin to Meta’s WhatsApp messaging service. Telegram differs from WhatsApp because it currently does not automatically enable end-to-end encryption that ensures messages are only read by the sender and the receiver. But switching to a purely messaging service and limiting the number of users in its channels might allow Durov to dodge Facebook-style content moderation costs.

Unfortunately, this sort of business model is notoriously hard to monetise. Despite owning it for a decade, and generating billions of revenue via Facebook and Instagram adverts that click through to WhatsApp, Meta has found it harder to generate revenues from messaging – it only recently achieved $1 billion via this avenue. With over $2 billion of bonds that have an expiry date of 2026, Telegram needs to do something. It’s just not totally clear what.

Context News

A French judge put Telegram boss Pavel Durov under formal investigation on Aug. 28 for suspected complicity in running an online platform that allows illicit transactions, child sex abuse images, drug trafficking and fraud. The 39-year-old entrepreneur, who has French and UAE citizenships, is also suspected of enabling money laundering and providing encrypted messaging to criminals. Paris prosecutor Laure Beccuau said in a statement the judge found there were grounds to formally investigate Durov on all the charges for which he was initially arrested on Aug. 24. Lawyer David-Olivier Kaminski, who is representing Durov in France, said on Aug. 29 it was “absurd to say that a platform or its boss are responsible for any abuse” carried out on the platform, and that Telegram was abiding by European laws. Telegram has raised about $2.4 billion in debt financing set to mature in 2026. Telegram’s bonds were trading at around 87 cents on the dollar, yielding over 16%, as of Sept. 2. They were trading at over 96 cents on Aug. 23, the day before Durov’s arrest in Paris.