Telegram's premium service faces tough odds but still worth trying

While free messaging apps are famously hard to monetize, Telegram Messenger LLP is looking to its newly launched premium service to generate enough revenues to sustain its business model.

The company recently announced it will introduce a premium service for $4.99 per month aimed at businesses and power users, with a host of benefits, including the ability to send large files of up to 4 GB, faster downloads and exclusive stickers.

Telegram CEO and founder Pavel Durov said the company's costs could be covered if at least 2.5% of its user base adopted premium, meaning it is aiming for annual revenues of around $1.1 billion from the initiative. Telegram currently sells sponsored ads in chat groups of more than 1,000 people, but it is unclear how much income this generates. Telegram did not reply to a request for more details.

"It's difficult to assess how much of an impact [the introduction of the premium tier] may have, and whether it will help cover costs or become a source of revenue. It seems, however, like a viable option for the company to achieve either or both of these goals," said Raul Castanon, a senior analyst at 451 Research.

Apps like Telegram and Signal Messenger LLC are becoming more popular with customers, partly due to higher perceived privacy than Meta Platforms Inc.'s WhatsApp Inc. and Messenger services. While WhatsApp encrypts messages and the app cannot see them, it can share user details with Instagram and Facebook for targeted advertising.

"Privacy is becoming a bigger and bigger issue for Facebook and peers, and hard to see how it becomes any less of a focus," said Craig Huber, an analyst at media research firm Huber Research Partners.

WhatsApp remains the most downloaded messaging app in the world, but Telegram is closing in. In 2019, WhatsApp was downloaded around 772 million times, more than 6x as frequently as Telegram, according to data from Apptopia. Year-to-date as of June 17, that lead declined to just 1.3x. In 2021, Telegram surpassed Meta's Messenger by number of downloads.

In addition to privacy, users are flocking to Telegram because it offers many features like group chats and broadcasting capabilities.

"Telegram and Signal are next-generation platforms for users that are worried about privacy, especially since people are not knowing what Meta is doing with their data," said Seth Shafer, a senior analyst at Kagan, a media research group within S&P Global Market Intelligence.

While Telegram has been successful at attracting new users, making money might be more difficult given the space's struggle to generate revenues. "I think this is a gamble, consumers don't want to pay for messaging," said Nick Lane, a principal analyst at Mobilesquared, a research firm providing advice on business messaging.

Meta paid $19 billion to acquire WhatsApp in 2014 and has had trouble turning it into a viable business, even though the number of monthly active users has jumped to more than 2 billion.

Over the years, WhatsApp has tried options like charging all users a $1 annual subscription fee, and it considered ads, but these initiatives were shelved. Meta has taken a different tack with the 2018 launch of WhatsApp for Business, which allows business owners to communicate with their clients more easily for a small fee via an application programming interface. Rakuten Viber, another popular messaging app, has adopted a similar monetization approach along with ads and subscriptions to make phone calls.

Targeting businesses is a monetization opportunity that has room to grow. According to a survey by 451 Research in 2021, messaging apps were among the least popular customer communications tools for businesses, which still prefer email, text messages and voice messaging.

The market of business communications via texts is still in its incipiency. According to Mobilesquared, application-to-person SMS is used by around 15 million businesses, representing just 5% of total registered businesses globally. A growing number of businesses are adopting services like WhatsApp for their customer communications, but the transition is slow, according to Lane.

"WhatsApp's attraction for businesses is the scale, but the challenge is integration," Lane said, noting that it is much easier for businesses to integrate SMS communications than messaging apps.

If Telegram's premium service fails to catch on with customers, it can always turn its focus to business messaging, Lane said.

451 Research is part of S&P Global Market Intelligence.