TREND WATCH: What’s Happening? The maturation of the Internet and mobile IT has paved the way for online dating, which over the past twenty years has transformed from niche to mainstream. More people are finding love online than ever before, drawn to the endless options and ease of use. Yet investors may be wary of an industry in which the vast majority of the profits are generated by only a select few services.
Our Take: We remain bullish. Even after years of rampant growth, the total addressable market for online dating firms (read: all single U.S. adults) remains largely untapped. What’s more, online dating meshes well with current social and generational trends--especially the rise of young-adult Millennials, who want to find their perfect algorithmic match. In the end, people will pay almost anything to find love. That translates into pricing power, a powerful upsell angle, and great revenue growth potential.
It’s a new year. Time to lose weight, get in shape, and… sign up for an online dating service. According to various dating websites and apps, the busiest day of the year for online dating is the first Sunday in January, when average traffic spikes as much as 75%. It’s so popular that the day is now known as “Dating Sunday”: a testament to how much online dating has become part of mainstream culture.
So popular, indeed, that it has lifted the online dating industry to new heights. Match Group, the industry’s single-largest player, soared 11% in after-hours trading Wednesday following the release of a better-than-expected Q4 2018 earnings report. To close out the year, Match Group beat its earnings and revenue estimates.
The industry is changing rapidly. As more people have embraced looking for love virtually, online dating services have begun shifting from promises of endless variety to promises of fewer, better matches with the help of Big Data—a trend that the biggest name in user data, Facebook, hopes to capitalize on as it dives into the dating business. But Facebook’s entry into online dating isn’t a threat to other services so much as it’s likely to be a boon to the whole industry, one that will entice even more singles into finding romance (with their next hookup, fling, or future spouse) and secures this sector as a strong long-term bet for investors.
MORE THAN EVER, THE INTERNET IS PLAYING CUPID
Online dating has come a long way since the first major dating site, Match.com, launched in 1995. Once viewed as a refuge for the desperate, online dating has shed much of its stigma and become a fixture of single life among people of all ages and backgrounds. (See: “A Total E-Click of the Heart.”) Over the next 15 years, Match was followed by high-profile sites like Jdate, eHarmony, and OkCupid—and with the rise of smartphones, dating and hookup apps like Skout and Grindr.
In 2012, the industry entered a new era with the debut of Tinder, which quickly became the most popular dating app and cemented “the swipe” as the symbol for digital-era romance—so much so that several years later, it’s the center of an ongoing trademark lawsuit between Tinder and rival app Bumble. The number of dating sites and apps is now in the thousands, with every year bringing a new service with a different “hook,” from Bumble (women message first) to The League (for young professionals) to Hinge (Tinder, but for serious relationships).
According to a 2016 study from the Pew Research Center, 15% of American adults have used online dating sites or mobile apps, up from 11% in early 2013. This growth has been especially pronounced among two groups: young adults ages 18 to 24 (among whom usage surged from 10% to 27%), and those in their late 50s and early 60s (from 6% to 12%). These figures have almost certainly continued growing. As early as 2010, dating sites and apps had overtaken churches, classrooms, and the workplace as the setting where couples meet their partners. Among same-sex couples, it’s the number one source by far. Overall, online dating now accounts for nearly a fifth of the first meetings that lead to marriage.
Online dating’s reach stretches far beyond North America. It’s gained traction in pretty much every country with Internet access at comparable rates: 12.4% of South Koreans, for example, have dated online. In the Netherlands, it’s 12.5%. Though some of the services popular in America have also found success overseas, the top services in other countries are often homegrown and tailored to their country’s dating culture. In China, for example, the leading online dating service is Momo, a social-networking giant that recently acquired its Tinder-like competitor, Tantan.
With technology growing ever-more central to our lives, it was perhaps inevitable that we would start shopping for love online the same way we do clothes and furniture. But plenty of other trends have also contributed to online dating’s popularity. Longer work hours means less time to search for a partner. Growing concerns about impropriety in the #MeToo era have many men worried about crossing boundaries in a casual real-life encounter. And with more Millennials delaying marriage and more Boomers getting divorced, there are far more single people in age brackets that used to be more heavily partnered.
THE GOOD NEWS: THE POSSIBILITIES ARE ENDLESS
The appeal of online dating is obvious. It allows users, particularly those who find it difficult to meet new people, to choose from a bottomless pool of romantic prospects—while simultaneously narrowing the search according to specific preferences. There seems to be a dating service for every ethnicity, religion, relationship type, and interest imaginable, including Star Trek lovers (Trek Passions), Trump supporters (Righter), the rich and famous (Raya), aspiring sugar babies (Seeking Arrangement), the “aesthetically average” (The Ugly Bug Ball), and even those attracted to convicts (Meet an Inmate).
It also alleviates the pressure of the initial approach. On a dating site or app, users can presume that everyone they see is single and looking. Potential partners usually send a message and exchange texts before ever meeting up, making it easier to put out feelers without requiring the commitment of a date.
THE BAD NEWS: MORE CHOICES, MORE PROBLEMS
But the abundance of choice, combined with the lower stakes, has created its own set of problems. A good chunk of the terms used to describe the pitfalls of modern dating reflect not-so-honest daters entertaining many options: catfishing, ghosting, orbiting, benching, stashing, breadcrumbing. Women frequently report receiving inappropriate photos and explicit comments from harassers. And some customers find that it’s much harder to subscribe than unsubscribe: Last year, eHarmony, Jdate, and Christian Mingle all agreed to settle lawsuits accusing them of deceptive automatic-billing practices.
Above all, the issue that comes up over and over again—among both women and men—is fatigue. After enough dates, people tend to burn out. Couples therapist Matt Lundquist told The Atlantic that a decade ago, the complaint he heard most often was, “Boy, I just don’t meet any interesting people.” Now, he says, “It’s more like, ‘Oh, God, I meet all these not-interesting people.’” The never-ending variety also lends itself to decision paralysis. Many users find it overwhelming to sort through their options and are reluctant to choose when a better (read: hotter, smarter, richer, funnier) match could be just another swipe away. (See: “When Less is More.”)
Online dating companies are responding by taking an increasingly paternalistic approach to their users. More are cutting through the clutter by delivering pre-vetted matches, whether in the form of “one match at a time” services like Coffee Meets Bagel and Once or features like Tinder’s Top Picks and Hinge’s Most Compatible. This approach hearkens back to the early days of online dating, when older-skewing services required compatibility surveys and paragraphs of personal information before showing users prospective matches. The newer apps rely on algorithms instead of user-submitted surveys, but they result in the same outcome that Millennials and Homelanders are yearning for: fewer choices. (See: “Did You Know? Slow Dating Makes a Comeback.”)
How these algorithms work isn’t clear. Tinder’s Top Picks is based on profile information such as career and hobbies. Hinge’s Most Compatible uses machine learning to determine users’ preferences based on who they like and reject. It’s not known which characteristics are weighed, or how. But users don’t seem to mind; they’ve made these features an important selling point. In early tests of Hinge’s Most Compatible, users were eight times more likely to go on a date with those matches than with other choices.
DATING COMPANIES ARE HOT, BUT ONLY A HANDFUL TURN A PROFIT
As online daters’ preferences have shifted, so too have the key players in the industry itself. The dating industry is large, fragmented, and growing fast, with multimillion-dollar companies competing for business alongside individual matchmakers and dating coaches. Most online dating companies operate according to a “freemium” model and make money from users paying for memberships or extra features, with a smaller share of revenue coming from advertising. Industry revenues run about $2.9 billion in the United States and $4 billion globally, and these revenues are up 140% since 2009. Dating apps represent the fastest-growing segment and now account for 31% of total U.S. revenue.
Most of that money, however, goes to only a handful of companies. The majority of online dating companies are tiny. The single biggest moneymaker is Tinder, which has 4.1 million paid subscribers and whose revenues were expected to top $800 million in 2018—more than double the amount the year before. Tinder’s parent company is Match Group, which also owns 44 other dating brands, among them Match, OkCupid, and PlentyOfFish. Tinder’s biggest competitor is the app Badoo, which has hundreds of millions of registered users overseas, but is privately held and doesn’t report revenue numbers. Most of Tinder’s competitors keep their revenue under wraps, but it appears that other popular, privately held services like Bumble and eHarmony bring in anywhere from $100 million to $250 million annually.
Prospective equity investors in this industry (excluding specialized services for national markets like China) have two public options. The first is Match Group, which in 2017 reported $1.3 billion in revenue and $361 million in profit. It has a $12.2 billion market cap. Since going public in 2015, Match Group has largely met or exceeded growth expectations thanks to the success of Tinder. The other is Spark Networks SE, which is based in Germany and owns 10 niche brands, including Jdate, Christian Mingle, and EliteSingles. In 2017, it reported €85.6 million in annual revenue, but a net loss of €5.6 million. It has a market cap of $116 million. The company went public in 2006 and struggled for years, only seeing a big boost when it merged with Berlin-based dating company Affinitas GmbH in late 2017.
Given that Spark Networks isn’t profitable, it’s useful to look at the P/S ratio of these two companies. Spark Networks’s P/S ratio is 1.23, much smaller than Match Group’s 9.03. At this point, Match is highly valued and investors need to pay a premium for it. Spark Networks, which is still establishing itself post-merger, could prove to be a dark horse as it focuses on growing its brands SilverSingles and EliteSingles.
WHAT ABOUT FACEBOOK?
Last May, when Facebook announced plans to launch its own online dating service, shares of Match plunged 22%. The service, which isn’t available yet to Americans but is now being beta-tested in three countries, is focusing on long-term relationships and suggests potential dates to users based on common interests and mutual friends.
With Facebook’s deep pockets, enormous userbase, and giant trove of user data, it’s easy to see why the news spooked investors away from Match. But this reaction wasn’t warranted. While Facebook is competing directly with Match in one specific market (online daters looking for algorithm-approved serious relationships), there’s plenty of room for both, since online daters tend to use multiple services at a time. If anything, Facebook faces unique hurdles because people may be wary about its ability to keep their dating activities private. But at a basic level, the endorsement of one of the world’s biggest companies will reduce the barrier to entry for online dating. This is a particularly good opportunity in countries overseas where Facebook is widely popular but online dating isn’t.
Facebook’s move into online dating is both part of the company’s overall pivot toward generating revenue and an attempt to rehabilitate its image as a faceless tech behemoth. Facebook wants to return to its roots as a place where users make personal connections. (See: “Google-Facebook: It's Not Over.”) But the reality is that the company is rich enough to buy itself into any market it chooses. Remember that in 2014, Facebook purchased WhatsApp for $19 billion. If it really wants to make a play for the dating business, it could acquire Match Group and overnight become the global gorilla in this industry.
FOR ONLINE DATING SERVICES, THE FUTURE IS BRIGHT
No matter who ends up on top in the online dating world, investors have a long list of reasons to be bullish about the industry as a whole. It’s buoyed by tailwinds on multiple fronts that will keep it a good bet in the years to come.
One: Addressable Market Is Still Mostly Untapped. Even as online dating services have flourished, most single people still don’t use them. In Q3 2018, Tinder reported having 4.1 million subscribers, approximately 2.2 million of whom are in North America. A little over half of this group, or 1.1 million people, are adults under 30. The number of adults under 30 in the United States alone who are neither married nor living with a partner is 38.5 million. Thus, even though Tinder has seen strong subscriber growth among the young, its portion of the so-called TAM remains miniscule—less than 3%. Put alternatively, in static terms, Tinder could achieve an 8x expansion of its subscription revenue from this demo by signing up just one in every four single Americans under age 30.
Looking at all the U.S. age brackets, similar growth potential is out there for any online dating service firm. Across all of its services, for example, Match Group has an estimated 4.3 million subscribers in North America. The number of American adults it could potentially reach is 96.6 million. Again, that’s less than 5% of TAM. And abroad, the percentages are even lower.
Two: Addressable Market Is Growing Faster than Population. Not only is the TAM largely untapped, but the TAM itself is also growing faster than population. With the average age of marriage creeping up among young adults and the divorce rate rising sharply in midlife, a growing share of the population is single or unmarried at both ends of the age spectrum.
If America ever returned to the world of 1967, when 83% of 25- to 34-year-olds were married, that would be bad news indeed for the online dating industry. (Today’s percentage is 40%.) But there is no sign we are going back there. For the foreseeable future, we will continue to move in the other direction.
Three: Generational Trends Are Favoring Dating Service Adoption. The age at which people first start dating online is getting younger. Ten or fifteen years ago, online dating was most popular among those in their late 20s and 30s. These were mostly working people who were looking for partners but—as they moved beyond college and away from their childhood communities—had fewer opportunities to meet them. Recently, younger age groups have become more comfortable dating online as well. Last year, Tinder introduced a college-only version of its service, Tinder U, which ensures that users will go through school, graduate, and enter the workplace already accustomed to online dating. Whatever technological or social barriers existed that made online dating seem awkward or unnatural among young Gen Xers are slowly fading.
In part, this reflects shifting generational attitudes. Millennial youth are habituated to sites and mobile apps that enable them to initiate social interactions with less effort (no leaving home), less risk (no dark nightclubs), and greater menu-driven optimization (like Carfax, you get to prioritize all your options in a flash). Most Millennials are not especially impressed by the “method,” if there ever was one, by which their own moms and dads met each other. Indeed, many of these Boomer and Xer moms and dads are now single—and have demonstrated to their kids that these online services are safe and effective. Result? Millennials are more likely to try them even while they have access to plenty of in-person socializing.
Both the creation of Facebook Dating and Match’s acquisition of a majority stake in Hinge indicate that the industry will be focusing on serious relationships for young people in 2019. This direction, along with the industry-wide push to curate matches, is a great fit with Millennials, not only because it fills an underserved market but also because it reduces the effort and risk involved in online dating overall. Millennials are getting married later, but they’re as interested in it as ever before—and when they’re ready, they’re willing to spend more to do it right. This generation is also gaining spending power, making both paying for dating services and the frequently expensive process of dating itself more feasible.
Four: Social Trends Are Favoring Dating Service Adoption. A growing share of adults across North America, Europe, and Asia—especially high-achieving young adults—are moving to big cities. What do we know, historically, about urban lifestyles? They uproot people from the family, religious, and community institutions that legitimize family life and introduce youth to each other. Also, and perhaps for this reason, urbanization is strongly correlated with later marriage age, fewer children, and a higher divorce rate.
Rapidly changing social mores are also helping to boost the appeal of online dating. In the #MeToo era, heterosexual men are growing more cautious about approaching women in real life. Men report being hesitant to make the first move and are increasingly likely to consider venues like the workplace off-limits for romance. With online dating, the boundaries are clearer: Users can assume that everyone they see is single and open to meeting someone. Millennials especially appreciate the lack of ambiguity.
Today, moreover, it isn’t just those looking for romance who are interested in companionship. Recent press has called attention to the growing shares of people, particularly young adults, who report feeling lonely (see: “All the Lonely People”). While online dating services are still focused on helping users find a partner, they’re realizing that they can also fulfill the need for other kinds of connections and relationships, which could help sustain their business even after everyone has been paired off. As such, they’ve begun marketing themselves as sociability platforms—stand-ins, in other words, for your local bar, networking event, or Meetup group. Tinder and OkCupid’s latest ad campaigns don’t focus on finding love or partnership, but on the joys of meeting new people. Similarly, Bumble is rebranding itself as a networking tool that can help users meet their soulmate and their next business partner.
Five: Unlimited Perceived Value Creates Impressive Pricing Power and Upselling Potential. Online dating isn’t a commodity. It’s a service that attracts loyal followers, because the potential value of finding a lifelong partner is inestimable. Ask someone what’s the most they would pay, say, for the best cable service. Then ask them what’s the most they would pay for the best matchmaking service—which could, potentially, mean the difference between a future of personal fulfillment and love-filled companionship versus bitter disappointment following a financially ruinous divorce. You are likely to get a different answer.
That’s a quality that’s hard to find in other products. The industry has proven to be relatively recession-resistant: Match and its competitors saw higher-than-expected growth during the global financial crisis. More importantly, it means that trusted services effectively charge users however much they can afford to pay. This is already evidenced by the pricing structures of the top online dating services. In general, older-skewing services charge more: Match and eHarmony subscriptions, for example, range from $21 to $60 a month. Younger-skewing apps like Tinder and Bumble charge less, or $10 to $25 a month. Part of what’s made Tinder so profitable is the fact that it has differentiated pricing, both by location and age. Tinder Plus costs more for U.S. users than those in developing countries, and twice as much for users over 30 ($19.99 vs. $9.99).
Most services have only begun to exploit this upsell potential. A partial exception is Tinder, which is starting to add new revenue streams at a rapid clip. Tinder offers not only monthly subscriptions, but also upgrades to existing subscriptions and one-off purchases. And customers are shelling out for them. While traditional gender expectations still play a role in the world of online dating, they may not have as much of an impact as one might think. According to one 2016 study, men are 16% more likely than women to spend money on dating apps. So while there is a difference, both men and women have shown a willingness to pay.
The proliferation of targeted services also means that dating services can choose to cater to affluent groups. The recent popularity of “elite” apps like The League and Luxy, along with Spark Networks’s merger with the company behind EliteSingles, testifies to the growing interest on the upmarket end. Sites like OurTime and SilverSingles, meanwhile, are capitalizing on the growing dating market for Boomers. There is a huge opportunity in both of these areas, because even though online dating services already exist for these markets, none of them have taken off or become synonymous with the group in the same way that Tinder did with young adults or Grindr did with gay men.
Six: There Are No Direct Competitors—and Multiple Use Is Common. Unlike many other things you can get online, digital dating doesn’t have any direct competitors. It’s fundamentally different from an industry like music streaming, where the players are fighting to be the favorite out of many possible ways people can listen to music (e.g., listening to the radio, purchasing digital or physical media, firing up YouTube, downloading songs from blogs or friends). While there is an existing industry for real-life matchmakers and dating coaches, it’s not comparable. Those typically cater to high-end clients who can afford to pay thousands of dollars a year to find love. Online dating companies are democratizing this service and making it accessible to anyone with an Internet connection or a smartphone. But they aren’t fighting to steal each other’s customers because this isn’t a winner-take-all market: On average, people use three dating services at a time, since each one offers a different interface, and more importantly, different potential dates.
Ultimately, online dating is a big business whose audience will never run dry. A huge customer base, high perceived value, and multiple revenue streams is a powerful combination. Overall, according to Evercore ISI, industry revenue is expected to grow 25% through 2020. Any way you slice it, this industry is a win-win. A successful service with a reputation for finding quality matches will have daters flocking to use it. And a less successful one doesn’t have to worry either, because if those matches don’t work out, they’re going to split up, dust off their profiles, and start swiping all over again.
