Tech Newsround – Google & Klarna

Google Play: The slippery slope.

• Google has announced a countersuit against Match Group as the concessions that it originally made clearly do not go far enough, underlining just what a slippery slope the app store business model is on.
• The suit is in response to a lawsuit from Match Group claiming that it is now Google’s “hostage” and that the concession that Google made to cut its fee in half for some apps does not go far enough.
• This is a classic example of when an industry norm has no fundamental basis but has simply been a fact of life for years, there is no bottom to where pricing can go.
• Another one is patent licensing which is why one often sees patent licensors go to great lengths to ensure that the price they have historically charged does not erode.
• The problem now according to Google is that Match Group wants to use Google Play for free which I consider to be completely unreasonable.
• Match makes money by being present on the Google and Apple ecosystems and, as such, it should make a contribution to the cost of being there.
• I already see the revenue share paid by app developers coming under intense pressure and so when the dust finally settles, I suspect that the industry standard will be well below 30%.
• I think that the best scenario for all concerned is one where the platform owner makes a very healthy profit from the ecosystem that it has created and where the app store is run at break-even.
• This would ensure that developers maximise their profitability and at the same time make a contribution to the cost of running the platform from which they are benefiting.
• The platform owner benefits greatly from having the developers present as it is a core part of creating the engagement which it can then monetise through any of the traditional methods.
• However, until we reach that point, we are going to continue to see tit-for-tat warfare, spurious and frivolous lawsuits and great copy for the media and bloggers.

Klarna: The reality gap.

• Klarna has closed its much-discussed fundraising at a pre-money valuation of $5.9bn even lower than my fundamental valuation of $7bn (see here) meaning that the new investors Mubadala and the Canada Pension Plan Investment Board got a pretty good deal in my opinion.
• Existing shareholder Sequoia hilariously commented that the valuation shift was “entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years.”
• The reality is that this raising has to be done because Klarna burns so much money (despite its $1.4bn in revenues in 2021) that without it, it was going to go bankrupt.
• This enabled new investors to take advantage of the sudden withdrawal of liquidity from the market and rising interest rates to exact a much higher price for their dollars than before.
• It is also a reflection of a return to rationality after a classic and stratospheric, Softbank-pumped valuation turned out to be little more than hot air.
• Now that the liquidity event has occurred the existing shareholders who would have been very happy to mark up Klarna in their books last July to $46bn will now have to write it down by 85%.
• This has no cash implications for these investors, but it will damage sentiment towards their funds as well as their reputation as shrewd investors.
• Klarna will now be able to continue to grow but the imperative will now be to get to cash flow break-even as quickly as possible as another round like this will dilute the existing investors even further.
• Klarna is lucky to have been able to find investors and others that need to raise money in the next 12 months may not be so lucky as the great reckoning spreads.