The 1M1M Deal Radar 2010: Paltalk ,Los Angeles

Paltalk provides software and technology for real-time, rich media, interactive social networking. The Paltalk platform powers the largest collection of video-based communities on the Internet and has more than 4 million active members, with nearly 100,000 people at any one time chatting in rooms on a variety of topics, talking with friends, instant messaging, or conducting meetings.

The New York City-based company was founded in 1998 by Jason Katz, who became interested in personal computers and the Internet in the early 1990s and was not satisfied with simple text messaging via IM. He was instant messaging with a friend when his two-year-son jumped onto his lap so that he was not able to type. This gave him the idea to add voice and video to instant messaging, a combination that did not exist at the time.

Paltalk was founded on the premise that if instant messaging was combined with video conferencing in a simple-to-use package, many users would take advantage of the service. At the time, the only instant messaging services were AIM and ICQ. There was no existing pervasive PC-to-PC audio calling software, although Microsoft’s NetMeeting, a VoIP and videoconferencing client, did exist. By combining instant messaging with video conferencing, Paltalk became the first company to tap a niche that later saw entries by Skype and IChat.

The company operates on a freemium model, and most of its revenue comes through subscriptions. Products include PaltalkScene, which can be downloaded free, although only by PC users, and offers video chat rooms and voice chat (free video chat for up to 10 people with SuperIM); PaltalkExpress, which offers free chat rooms, IM, and video chat from the browser with no downloading required and is thus also available to Mac and Linux users; online meeting package Hear Me, which includes video, audio, Web conferencing, and desktop and application sharing tools; and a widget that allows people to add video chat to their own site, blog, or forum. Hear Me works on a flat monthly fee for unlimited use. As for the premium PaltalkScene products, subscribers pay $14.95 a month or $60 a year for no pop-ups, unlimited, expandable video windows, and live streaming video. Premium chat rooms are priced higher and include different color indicators to indicate that the room is a premium room, the ability to personalize and lock rooms, Web access to the rooms, and audio webcast capability, among other features.

The ability to generate subscription revenue in a business where all other competitors, including AIM, MSN, Yahoo!, and Skype, offer competing products free, differentiates Paltalk from these products. Skype has greatly expanded its subscription service for calling landlines and mobiles and in May launched free video conferencing for PC users that it says it will eventually charge for. Katz says that the decision to combine instant messaging with video conferencing before other competitors and and to not expose individual webcam feeds in chat rooms unless the member paid a subscription fee enabled Paltalk to remain profitable through the Internet downturns of 2002 and 2009. In 2009, Wired editor Chris Anderson called freemium the “first business model of the 21st century” and argued that churn rates were lower among those who were converted to pay for services than among those who were forced to pay up front, and that converters tended to be less price sensitive. Freemium conversion rates tend to be 2%–4% on average. Paltalk’s rates vary by country but range from 2%–12%.

Paltalk has been cash flow positive since 2001 and profitable for the past six years. The company sold 20% of its equity to Softbank Capital Partners for $6 million in 2004 and bought back its shares in 2009. The company did not disclose the buyback price, but Peter Kafka on All Things Digital said that Softbank was reported to have gotten back its capital plus a return. Paltalk’s annual revenue is currently in the range of $15 million–$25 million. The company would consider a large equity investment to facilitate more rapid growth. Growth has been largely organic, but in 2001 Paltalk purchased the assets of the early chat community Firetalk.

Paltalk is a global community with one-third of its users from North America, one-third from Western Europe, and one-third from the rest of the world. Every day, the software is downloaded over 25,000 times and registers over 15,000 new users. Entertainers and musicians have also used Paltalk to host live interactive shows; radio shock jocks Opie & Anthony have one such popular show.

The main growth strategy is to continue to integrate Paltalk into social networks and to power video chat for other Internet sites lacking this functionality. There are no plans for an exit – the company wants to continue to operate profitably and to distribute its earnings to its shareholders. Of course, this model will not work if they take private equity investment.

Recommended Reading
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Video Conferencing Consolidation in Full Swing

This segment is a part in the series : The 1M1M Deal Radar 2010