The rejection of Microsoft’s $12 billion takeover offer for gaming chat platform Discord was a “case of epic hubris. Discord’s rejection of Microsoft’s $12 billion offer in early 2021 may have been one of the biggest business mistakes of the epidemic, but so far Discord’s business is still performing better than other Internet companies that ate the epidemic’s dividends.
While Discord welcomed a large number of new users during the epidemic, it was still a jaw-dropping deal for a nine-year-old social communications startup. Discord was also in talks with a number of other companies, including Twitter, but no deal was struck, sources close to the situation said.
Still, for Discord CEO Jason Citron, turning down Microsoft might not have been a foolish move. According to a Discord employee, Discord’s average monthly active users increased from 151 million to 183 million in the first quarter of this year, up 21 percent year-over-year, though still below the 68 percent increase in the first quarter of last year.
Meanwhile, Discord’s business remains strong. In the first quarter of this year, Discord reported revenue of more than $100 million, up 61 percent from $62 million in the same period last year. By comparison, video conferencing provider Zoom’s first-quarter revenue was up just 12 percent. discord employees also said the company’s full-year revenue goal is to reach $525 million, up nearly 70 percent from last year’s $309 million.
Discord’s success during the outbreak doesn’t look like a fluke, according to Brandon Ross, media and technology analyst at investment bank LightShed Partners. It has become a communications platform that is indispensable to every gaming enthusiast.
Of course, Discord’s decision to reject Microsoft’s continued independence could ultimately prove arrogant if Discord’s growth slows in the future, or if market conditions remain unfavorable for the tech industry. Last September, Discord received a $15 billion valuation from investors in a $500 million funding round. But like many other startups, Discord could be valued at less than its current valuation if it seeks funding again.
Finding new revenue streams
Today, it’s imperative for 37-year-old CEO Citron to find new sources of growth for Discord, which is a hybrid of Slack, Reddit and Zoom that allows users to communicate in groups via text, audio and video. Citron said in an interview that he rejected the idea of generating revenue through advertising because it would be a distraction for users.
Instead, he favors a subscription service called “Nitro. Currently, the service charges users $4.99 or $9.99 a month for higher-quality videos, larger file uploads and other perks.
One option to attract more subscribers is to create a cheaper version of Nitro for as little as $3 a month, according to three Discord employees. In addition, Discord is testing features that would allow users to charge for access to the content they create.
Whether these will be enough to justify the rejection of Microsoft’s acquisition is still an open question. Citron’s decision to reject Microsoft is also not an isolated case. Facebook (Meta), for example, had rejected a $15 billion offer from Microsoft. After rejecting Microsoft, Citron told employees that Discord did not need a parent company (such as Microsoft) to succeed, sources said.
Microsoft really has a checkered history when it comes to acquisitions. In 2020, Microsoft shut down Mixer, a live gaming platform it had acquired four years earlier, after failing to keep up with Twitch. according to Joost van Dreunen, an adjunct assistant professor at NYU’s Stern School of Business, “Microsoft’s record of acquiring these ‘infrastructure-type’ gaming companies with a track record of not being very successful.”
A spokeswoman for Discord said the company did receive multiple offers, but ultimately decided to remain independent. The spokesperson also said Discord is confident in the strength of its business and its growth prospects.
The companies did not comment on Twitter’s and Microsoft’s bids to acquire Discord.
Focused on revenue growth
Citron’s commitment to keeping the company independent may reflect his past experience as an entrepreneur. In 2011, Citron sold his previous startup, OpenFeint, to Japanese gaming company Gree for $104 million, but his new employer soon drove Citron out of the company due to disagreements over OpenFeint’s future.
I remember sitting in the car and crying. Because I thought that maybe there would be no more opportunities to create something important.”
In 2012, Citron and Stanislav Vishnevskiy, Discord’s current chief technology officer (CTO), founded Discord, then known as Phoenix Guild. Citron’s original vision was a company that would develop and publish games, and create communication tools for gamers. However, the first two ideas (development and distribution) failed to gain traction and were abandoned.
After launching in 2015, Discord quickly gained attention and spread widely on social media Reddit. By the end of 2017, Discord had 14 million daily active users. While Discord’s basic functionality was not unique, PC gamers found other voice apps like Skype awkward to use while gaming, while Discord users did not need to call their friends individually and simply set up virtual rooms that participants could come and go as they pleased.
Discord got even faster during the epidemic. At the time, people flocked to online entertainment such as games as they were forced to stay at home. Some reports say the number of Discord users doubled year-over-year to about 140 million in March 2021, while revenue nearly tripled to $130 million.
Three former Discord employees said Discord began to focus more on revenue growth after rejecting Microsoft’s acquisition offer, which was key to Discord’s plans to move forward with an IPO. Two former employees said Discord reassigned some engineers working in other areas to revenue-related projects, added more features to Nitro (such as stickers for use in chat) and tested new revenue streams. Currently, the majority of Discord’s revenue comes from Nitro.
So far, Discord’s efforts to expand its revenue streams beyond Nitro have remained lackluster. in 2018, Discord launched a game store, but it was shut down after only three months. The reason was that Citron realized that Discord wasn’t good enough to compete with bigger companies’ app stores. Last summer, Discord also tried to generate revenue by selling tickets to gaming events, but the results were so bad that it eventually abandoned the effort, three people familiar with the matter said.
But Citron didn’t give up trying. Last year, Discord began testing a new feature that would allow owners of servers, to charge for access to their servers. These servers are used to run forums where users can talk to friends or strangers with common interests.
One of the core aspects of Citron’s growth strategy is to expand Discord’s appeal beyond its core gamers. The effort began in 2020 when Discord launched a new tagline: “your place to talk.” Discord said at the time that it was ready to move away from its gaming focus and would strive to become an everyday communication tool.
In addition, people familiar with the matter said that Discord 2021 bought ads on Spotify, Vice and Imgur, targeting young people interested in music and emojis (memes). Private groups have also been introduced for some college students.
Investor enthusiasm for Discord stock on the secondary market has waned this year, although many other technology companies have done the same as inflation and interest rates have risen. Discord stock traded as high as $726 in February this year, but fell to $441 earlier this week, some data show.
Discord had hoped to go public by the fourth quarter of this year in the middle of last year, people familiar with the matter said. In March, it was reported that the company was in discussions with banks about going public and planned to enter the public market with a “direct listing” rather than a traditional IPO. Three current Discord employees say Discord executives haven’t made any company-wide announcements about the timing of the IPO in recent months.
Growing Pains
As Citron tried to build Discord into a bigger company, he also took steps to prevent disruptions to the company’s culture.
About three years ago, Citron was having lunch with a senior manager who asked Citron why he was having sleepless nights. Citron replied that his main concern was how the company would change as it grew. He was particularly concerned about his ability to successfully communicate with an increasing number of employees and to create the infrastructure to train employees to be effective managers.
Citron has said that while working at his early company, OpenFeint, he learned to pay more attention to relationships. At one point, a friend (an OpenFeint employee) told Citron that working for the company “kind of sucked. Citron later said he didn’t want to make the same mistake with Discord.
As Discord gained momentum, Citron began to seek out a mentor, a person familiar with the situation said. The mentor taught him management skills, such as managing people with more experience than he had. At the time, Citron was in his early 30s. Those who interacted with Citron at Discord said he was smart, humble and sometimes outspoken, and a Discord spokeswoman confirmed that Citron did have such a mentor.
When interviewing potential employees, Citron pays particular attention to how interviewees treat others. When taking a candidate out to lunch, Citron observes how he treats the restaurant’s wait staff. Before Discord hired its 100th employee, Citron also launched a “manager training program,” in which senior leaders shared experiences on how to better connect with employees and other management skills. Before the epidemic, Citron held weekly videogame nights to encourage employees to connect.
But as the company grew larger, Discord began to move away from this tradition of close ties. At the beginning of this year, Discord had about 650 employees. Four people familiar with the matter said it is on track to reach 1,000 to 1,200 by the end of December, although many tech companies have slowed hiring. A Discord spokesman would not comment on that, but said it is hiring for all departments.
As the number of employees grows, in some cases Citron has begun to show signs of impatience with employees. At an all-employee online meeting in December 2021, employees asked a number of questions, including whether Discord was ending the floating holiday policy introduced during the outbreak and whether a four-day work week would be introduced, multiple people familiar with the matter said.
Those questions drew a backlash from Citron, who replied that people who didn’t like working at Discord could go find their next job. Citron then abruptly walked out of the meeting, sources close to the situation said. The next day, he sent a message to employees apologizing for his response.
That said, Discord has shown a moderate side. It has recently taken some steps to retain employees, including offering some benefits. Employees who join before April will get a 7 percent raise this summer; employees will be allowed to work completely remotely; and a policy to pay for medical travel up to $5,000 was introduced after the Supreme Court overturned Roe v. Wade, people familiar with the case said.
A spokeswoman for Discord confirmed the medical reimbursement policy but did not comment on the 7 percent raise or the decision to allow employees to telecommute.
