Is MXit worth the money?

[By Alistair Fairweather]

Alan Knott-Craig Jr is looking for attention. He wants so much of it, in fact, that he’s just bought the attention of 40m people in 120 countries. Yes, I’m talking about the MXit acquisition.

Last week, in a completely unexpected move, Knott-Craig swooped in and bought Africa’s biggest social networking platform. The widely quoted but totally unsubstantiated price was R500m.

That might seem a lot, but compared to current Silicon Valley valuations it’s dirt cheap. Twitter, with its 100m users, is valued at about US$8bn, or R640/user at current exchange rates. Facebook, with its $80bn valuation and 750m users, is even pricier at R850/user. So at R12,50/user for MXit even if Knott-Craig paid 10 times the speculated amount it still looks cheap by those standards.

But MXit has drawbacks that trouble neither Twitter nor Facebook. The most obvious is the age and affluence of its users. Predominantly young and African, these users simply don’t have the spending power of the millions of upper-income hipsters that have taken to a platform like Twitter.

A second caveat is the rapidly changing local bandwidth market. MXit has thrived in large part because it replaces costly SMSes with cheap Internet-based messages. Even when mobile bandwidth was pricey, the simplicity of MXit’s format kept the cost per message low.

Now bandwidth is rapidly falling in price, that simplicity starts to look like a drawback rather than an advantage. Kids increasingly expect the richer features and graphical capabilities of a platform such as Facebook on their phones.

The third and most serious drawback is the oncoming wave of fierce competition from international players. MXit has always excelled at reaching consumers on low- to mid-range handsets — the kinds of phones that parents are willing to buy for their children.

But smartphones are quickly becoming ubiquitous, even in Africa. Huawei, a Chinese mobile telecommunications giant, has captured half of Kenya’s smartphone market in a matter of months. MXit hasn’t yet made the jump to smartphones, and when it does it will face stiff competition from the likes of BlackBerry Messenger (BBM) and WhatsApp, which do essentially the same thing as MXit.

Knott-Craig is no fool. He is well aware of these dangers, and talks about having a “a window of opportunity” — presumably to successfully migrate to smartphones. He’s also under no illusions about what sort of business he has bought. Asked to describe MXit, he calls it a service for users that are “looking for a cheap way to send SMSes”.

While he is still cagey about discussing MXit’s revenues, admitting only that “MXit SA makes money”, Knott-Craig is quite open about his intentions for the platform. His current business, the rather grandly named World of Avatar, specialises in mobile applications, mostly aimed at the kinds of mid- and low-range phones owned by, you guessed it, MXit users.

And so, rather than revenues or assets, Knott-Craig is buying something much more precious in the new global economy — attention. Businesses like Google and Facebook have shown just how lucrative that attention can be. Even if MXit only commands that magnitude of attention for another four or five years, it would still be worth many times the speculated price.

So, was this a good deal? Naspers, which owns 30% of the platform, has never sold anything in its history without extracting a fair price. You don’t get to be the R145-billion gorilla in the African media market by giving away value. And, while Alan Knott-Craig Jr may be a self-made millionaire, he isn’t known for overpaying.

But the real clincher is the fact that Herman Heunis, the founder of MXit, was willing to sell. Having poured a decade of his life into the company that he started from scratch in 2001, Heunis is not the kind of man to sell out to a corporate raider.

I have an inkling that both Heunis and Naspers realise that MXit’s growth, both in value and in influence, has already peaked. I suspect Knott-Craig is also well aware of this. The real question is whether that peak will be followed by a long plateau of value (like Microsoft) or a sharp plunge (like Yahoo). Knott-Craig is clearly betting on the former.

Though we may never learn the selling price for Africa’s largest social network, we can be sure that everyone involved feels they are getting a good deal. Naspers and Heunis are cashing in their hard won value, and Knott-Craig is buying possibilities.

Asked about whether his fellow investors in the deal “understand this market well” Knott-Craig sums it up: “Well I’m not sure I understand this market well, so I would say it’s people that are excited by this market and interested in this market and want to be exposed to this type of asset.”

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  • Vincent Mabuza

    “Well I’m not sure I understand this market well, so I would say it’s people that are excited by this market and interested in this market and want to be exposed to this type of asset.”
     Dear  Alan Knott-Craig Jr building and maintaining a
    social platform is the toughest online business you will ever engage yourself
    in (Ask Google) This is like the restaurants of onliness businesses and by not having people “who know the market” you have
    just thrown a pile of cash into the toilet. You should have kept Heunis and agreed on an Earn -Out because that guy has vision and knows the market.

    P.SI could save Mxit for you free of charge but i got bigger plans. This is my last comment on this deal.Bye

  • http://www.qedsolutions.co.za Dirk de Vos

    You can be sure that Heunis and Naspers priced in a long plateau of value rather than a sharp fall-off so AK-C (jnr) will only see a return if he does something to monetise the user base or so more than keep it steady state.  Naspers, who tried to sell their ISP business, has stated their desire to move out of pipes/OS’s and focus on content or apps. We know that Naspers already has a huge stake in the “MXit generation” with their media titles and other content offerings – it just probably their view that MXit, the platform, does not help them to get closer or more of them.  The move to other platforms through smart phones (or smarter phones) will see quite high churn rates but even those who move off MXit, will need to keep their accounts to keep in contact with the laggards (sort of similar to Microsoft XP?).  They will need to head off an image problem quite soon though – namely the perception that you only use MXit because you are too poor/too uncool to have a proper phone. 

    The key will probably be to introduce new WoA apps (using say JME focusing on local services) either that the user base can take with them as they migrate onto other platforms or, less likely, to try to keep them within the MXit platform for longer. Then,  use the existing base for more online advertising or start to generate more revenues as a gatekeeper (for product click-throughs). I would expect a working virtual wallet soon. With luck, the other social media platforms will focus on improving their services based on an assumption of more and more cheap ubiquitous broadband on offer, leaving more space for a specialist apps developer for in low broadband data environments.

    AK-C (jnr) is certainly making a noise, even dispensing ra-ra advice on entrepreneurship – it may be self serving but he has our attention and he had better use it.  

  • Anonymous

    “MXit hasn’t yet made the jump to smartphones…”

    Alistair please explain what you mean. As far as i know, mxit has versions for all major smartphone OS. The latest android build is impressive.

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