• MeetMe now primarily earns take-rate revenues when its users “tip” live cam performers on its platform – the company is therefore highly dependent on Apple/Google (together processing ~75% of revenue)
  • The company continues to be plagued by a sex offender problem – major recent busts involved MeetMe encounters, and PBS Frontline recently profiled MeetMe in a Child Sex Trafficking Story
  • MEET is finally attracting mainstream media attention – the New York Times mentioned three apps in a recent story about an underage sex sting, two of which were MEET owned
  • Our review of MeetMe Live found numerous public-access streams in which users tipped performers for overt sexual acts and/or drug use, both potential violations of the Apple/Google Store TOS
  • Fundamentally uninvestible: live cam business is non-recurring and now too big to be ignored – slew of bad PR and Tumblr case study creates high risk that app stores drop MEET

Introduction

We first wrote about MEET in August 2016, stating our belief that the company’s ad business (at the time 90%+ of revenues) was likely to implode due to company’s highly suspect content. Our forecast appears to have played out. While it is hard to pinpoint the extent of the decline in MEET advertising revenues since our story due to the company’s aggressive M&A binge, we note that in 3Q17 (one year after our story), MEET disclosed that mobile CPMs at MeetMe and Skout were down more than 40% year over year in a conference call. The stock remains ~40% below levels prior to our first story and advertising revenues continue to rapidly decline – 1Q19 advertising revenue was down almost 40% y/y.

Source: NJ.gov – boxed apps are owned / controlled by MEET

Despite this, MEET has continued to see strong top-line growth. How have overall revenues at MEET continued to climb despite the advertising business falling off a cliff over the past few years (see below)?

Source: Our analysis of public filings

Simple…since our first report, MEET materially restructured its business model and entered the “live stream” business, which, for the unacquainted, involves MEET monetizing user purchases of virtual currencies that are used to “tip” MEET performers who provide live video shows. Essentially, MEET operates and monetizes a marketplace for live cam streams. Today MEET generates ~75% of total company revenues from the user pay segment, through growth largely driven by “virtual gifts associated with MEET’s live video product” (p7).

Here is a quick primer on the “live video” business. MeetMe users can opt in to live stream themselves over a webcam (henceforth “Cam Person”). The Cam Person just needs to download the MeetMe app and hit the live stream button which immediately broadcasts a “selfie” live video feed that is available to all MeetMe users via virtual chat rooms. Any user can join the virtual chat room and watch the live feed. The stream viewers can then buy virtual currency in-app (i.e. diamonds) that they can transmit digitally as “tips” to the Cam Person. The same economic arrangement is available for private (1×1) interactions. Viewers can make requests of the Cam Person via the public chat feature. If the Cam Person is putting on a show that the viewer enjoys, the viewer is free to send tips (i.e. various digital emojis) to the Cam Person.

The Cam Person is able to cash out virtual currencies as real money. MeetMe in turn clips a share of the viewer spend on virtual currency. MeetMe encourages viewers to tip performers, and the Cam Person is obviously monetarily incented to put on a show that generates tips. These virtual currency transactions are processed through Apple and Google app stores.

Source: Twitter

There is nothing illegal or improper about this form of tipping per se. However, given MEET’s extremely questionable history (see more below), our review of public postings relating to MeetMe, and our own experience on the app, we think that the app is inevitably inviting problematic conduct in exchange for tips. We view this as a form of “broken windows theory”, a sociological theory that states visible signs of civil disorder create an environment that encourages further civil disorder. In the case of MeetMe, we think the company’s long history of problematic users makes it next to impossible for the company to shake off the bad actor users. In fact, we think the company’s reputation actually encourages bad actors users to come to MeetMe. We aren’t just speculating on this point – a quick trip to the app will quickly demonstrate to readers that problematic conduct in exchange for tips is in fact regularly occurring. With the live video product, we view MEET as a powder keg. We think bad actors users are attracted to the platform, and have now been given the ability to offer payment to live cam performers via the platform.

Notably, because Apple/Google are processing the virtual currency transactions, they are effectively middlemen in this ecosystem – they are processing transactions that may very well be supporting lewd, vulgar, or illegal activities on camera.

Some readers may point out that adult entertainment clubs (i.e. RICK) are also in the business of effectively monetizing tips. We agree – but adult entertainment clubs do not largely derive their revenues from The Apple App Store. Our issue is not with live cam tipping itself – our issue is that MeetMe, based on our experience, is very clearly frequently monetizing live cam tipping designed to arouse sexual feelings or tied to illegal activities (i.e. drug use) – which, as we outline below, appears to be in direct violation of Apple TOS.

We also point out that MEET bulls will likely compare MEET to Chinese-based MOMO. The Chinese regulatory environment is very different than the US environment, because the policing of apps in China is largely done by the government itself – and even in China these types of apps have been under heavy scrutiny. The Chinese government has been engaged in a war to “clean up the internet”. MOMO was forced to implement a “one-month ban on users posting social updates after they were ordered by authorities to clean up “illegal content”. In fact, the previous hyperlink article talks about the Chinese government’s role in censoring live cam videos through delays and other efforts. We can assure readers that censors did not stop the over sexual content or drug use that we saw during our visits to MeetMe Live.

Broken Windows: MeetMe Has History of Sexual Predator Problems

First, a primer for those unfamiliar with MEET. In 2014, the San Francisco DA called it a “den for sexual predators”. We decided to revisit MEET after a slew of recent negative headlines that appear to have been missed by the market.

In April 2019 MEET was one of the main encounter sources in a pedophile bust in New Jersey in which 16 men were indicted for trying to lure children for sex (we note that at least 7 of those 16 men were using Meet Group apps). We point this out right at the top of the story to illustrate that despite MeetMe/Skout representing only a fraction of the market share of dating, their names are often disproportionately featured in stories involving child sex predators. Second, just last month, MEET was featured in a child sex trafficking documentary produced by PBS Frontline.

In our view, it is obvious that MeetMe continues to have a sexual predator problem. In addition to those two links, conduct a simple Google Search for MeetMe and you will find recent results such as this, and this, and this, and this, and these two that were back to back stings.

Readers who have followed MeetMe long enough will also recall that the company acquired the highly controversial Lovoo around one year after its offices were raided by German authorities:

Source: Google

Despite being plagued with a long history of sexual predator problems, MEET decided to expand into a “live cam” business segment that as one can imagine is rife with significant risk given that users can effectively pay other users to perform on camera.

While some users will clearly point out that pornography and prostitution may occasionally appear on mainstream social media platforms, we note that other mainstream U.S. based social networks (e.g. Twitter) do not facilitate the process of “tipping” people for cam performances. Additionally, some mainstream social media platforms make it very easy for users to opt out of seeing adult content (e.g. Twitter).

This aspect of “tipping” for cam performances is a distinct feature to MEET, which, when viewed in context of MEET’s long history of sexual predators problems, should concern any reasonable investor. In our view, this is likely to cause continued regulatory scrutiny of MEET’s business practices.

Source: See hyperlinks above

After several weeks of research we believe that the company’s explosive growth in its new live stream vertical (i.e. live cam performers) places the company at significant risk of being pulled off the Apple App Store in the near-term. We think the problem is especially acute because of the significant uptick in major news stories (i.e. that we identified above) that highlight MEET and its sexual predator problems. The issue of child sex predators is also very much in the news after the June 11, 2019 announcement of Operation Broken Heart.

It is also clear that MEET is attracting mainstream media attention as a result of these busts. In addition to the aforementioned Frontline story, in April 2019, the New York Times specifically identified three apps involved in pedophile busts – two of which are MEET properties:

Source: NYT

We therefore think the market is missing the significant reputational and regulatory risk surrounding MEET after a) the shut-down of Backpage, and b) MEET’s recent inclusion in a child sex trafficking documentary produced by PBS Frontline.

On the topic of Backpage, we note that in the FY18 10-K, MEET added the following language:

We could also be subject to claims or investigations under new or evolving policies or legislation, such as the recently enacted Stop Enabling Sex Traffickers Act and Allow States and Victims to Fight Online Sex Trafficking Act. Therefore, we may be subject to investigations or subsequent penalties if content on our Live platforms or otherwise on one of our apps is deemed to be illegal or inappropriate under relevant laws and regulations. As a result, our business may suffer and our reputation, user base, revenues and profitability may be materially and adversely affected.

We are also not merely speculating that there is real Apple risk at MEET. We reviewed both the MTCH 10-K risk factors as well as the MEET 10-K risk factors. We note that while both MTCH (owner of Tinder) and MEET flag the Apple App Store as a general risk factor, only MEET includes this ominous language relating to its history with Apple:

Apple has a policy of reviewing apps prior to making them available in the App Store. In the past, Apple has rejected submissions of specific builds of our apps, and we have had to modify those submissions in order to gain acceptance. On more than one occasion, for example, Apple has rejected our apps because of user generated content and other concerns.

Source: FY18 10-K

While we have provided some public access screen shots of the MeetMe Live “experience” in this report, we will not force readers to review everything we saw – nor do we think the objectionable content we found would pass the editorial overview of Seeking Alpha. Needless to say, in our view MEET is even more deplorable than when we first reported on this company. After just a few hours of researching the MeetMe Live product, we witnessed: numerous instances of explicit nudity, users partaking in drug use on video, and user comments that were creepy, hostile, extremely sexually aggressive, and often focused on the age of the live cam streamer.

We also witnessed live stream participants offer payments to women in exchange for sexually suggestive / explicit conduct and/or drug use. Readers who seek verification of these claims should conduct a Google search for the terms “MeetMe and Pornography” which will direct them to a plethora of links to video grabs from the MeetMe app that have been posted on well-known pornography websites. Is this really the type of activity that Apple wants to associate its brand with? Keep in mind that only months ago, Apple removed Tumblr because of pornography concerns.

Reports suggest there are 2.2 million apps on the Apple App Store. Apple has to review thousands of apps and we are sure content frequently slips through the cracks. We also note that Apple has already found issues with MEET based on MEET’s own disclosures. We suspect that because MEET was historically very small in terms of its live video offering, it did not really catch the attention of Apple. Today that business is approaching $82M of run-rate revenues. The larger the business becomes, the harder it is to police. We think the company’s video business has now grown to be “large enough” that is impossible for it to avoid scrutiny. Mainstream media attention on MEET is also likely to put the company’s video business in the public spotlight.

In short, we view MEET shares as uninvestible. After the advertising business started to languish, management upped the ante and pivoted into facilitating “virtual currency” payments for live video performances, which in our view is an even more morally questionable business line than just placing ads on a suspect dating website. To our knowledge, this makes MEET the only publicly traded company focused on the US market that facilitates payments for video performances. Apple is now a significant source of revenues for the company because virtual currency transactions that are used to facilitate payments for live cam shows are processed through either the Apple App Store or the Android store (with the split of revenues largely reflective of the broader market share split between these two form factors). While MEET is cheap on a headline basis at ~10x trailing EBITDA, we believe that the right comparable here is a mobile game with a finite shelf life – i.e. the ZNGA and KING of the world – that historically have traded for single digit trailing multiples. In the case of MEET, we believe that the stock should trade at even steeper discount due to the nature of the content.

We Think MeetMe Live Is At Serious Risk of Violating Apple App Store TOS

From MEET’s own disclosures, we know that Apple has clearly had issues with MEET over the course of time, and specifically with the user generated content section of the app. MEET shareholders should rapidly acquaint themselves with Section 1.14 of the App Store Review Guidelines which lay out rules regarding sexual content:

Notably, Apple makes it clear that apps on its app store cannot offer “overtly sexual material” that is intended to stimulate “erotic rather than aesthetic or emotional feelings”.

We point readers to this publicly sourced video of a woman in a tank top who, in our view, is engaged in highly sexually suggestive behavior and communication in exchange for virtual currency gifts. We suggest readers actually watch and listen to the video to get a full sense for the exact content of what appears to be a MeetMe session that involved the exchange of significant virtual currency gifts. Patrons of the cam session are showering the woman in the video with virtual currency gifts as she engages in extremely sexually suggestive behavior.

In fact, we found it highly notable that one of the virtual currencies available on MeetMe – that we confirmed is still available – are “stacks of cash”. The video in its entirety appears to resemble a form of a virtual “strip club experience”, which in our view points to a setting that was explicitly designed to “stimulate erotic feelings”.

If MEET was truly designed for plain vanilla friendly and flirty interactions, we see no reason that “stacks of cash” should have been included in the design build as a form of virtual currency.

We also had an easy time finding numerous instances of drug use – very obviously and prominently displayed.

According to Apple TOS Section 1.4.3:

One thing we readily observed in our time on the MeetMe app and in our review of public posts regarding MeetMe is that many users received virtual currency rewards when they partook in drug use.

Yes, we understand that MeetMe cannot necessarily control its user behavior. But we hardly find it surprising that the company’s user pay business is subject to the risk that users will “pay” other users or “encourage” other users to engage in questionable behavior – whether it be sexual in nature or relating to drug use.

It would be one thing if MEET was offering a general live streaming service in which no monetary value was exchanging hands. But when money is involved, it is hard for us to believe that performers cannot be induced into doing things that push the envelope – the envelope beyond what would be acceptable in the Apple store. Now that the business is approaching $82M of run-rate revenue, will it continue to fly off the radar for Apple?

We note that Apple is extremely sensitive about its brand imaging – it removed Tumblr from its store last year for a period of time until Tumblr ultimately agreed to ban all adult content from its website.

Removing all instances of drugs and nudity from MeetMe is far harder than policing static Tumblr content. In the case of Tumblr, it is a blogging website in which content is static – i.e. easy to review. In the case of MeetMe live, the company would have to actively screen every single cam interaction to ensure it is not in violation of Apple TOS. As the company grows, we have a hard time believing they will be able to effectively police their content barring massive investment which would tank margins. For example, MOMO has implemented a 10-15 second delay in all live-streaming content to ensure that all content can be flagged and reviewed prior to posting to its users.

Keep in mind that Apple processes as much as 30% of MEET revenues today (it was 21% in 2018 p13 but the cam business is growing much faster than the rest of the company). Combined, Google and Apple process around 75% of the company’s revenues. If Apple removed MEET, we assume that Google will likely follow suit. We provide a potential “lost EBITDA” to MEET should this draconian outcome play out:

Source: Our analysis

Conclusion

MeetMe has a long history of problems with sexual predators on the platform. The SF DA has called it a den for sexual predators, stories pop up extremely frequently about the company’s problems with sexual predators, and even the mainstream media (Frontline / NYT) is now writing about MeetMe’s problems. We think there is significant headline risk at MEET. We think the stock is simply uninvestible due to its live cam business which we think could very easily run afoul of Apple TOS especially as it gets bigger. If MEET were to be pulled off Apple, it would have dire consequences for the company’s P&L. Even though the stock is fairly cheap on a TTM headline basis (10x EBITDA), the reality is there is no recurring aspect to MeetMe’s revenues and at any time Apple could pull the plug on the business which could likely cause the stock to fall more than 50%. We think the live cam business has gotten far too large for MeetMe to effectively police it, and we think that the company’s continued problems with child sex trafficking and assault headlines place the company at grave risk of getting kicked from Apple and/or potential regulatory investigations akin to Backpage (per the company’s own disclosures). Up to $55M of the company’s EBITDA is at risk.

Plus, does institutional capital really want to be associated with investing in this type of company when the revenues are not even recurring or sticky at all and could be eliminated with the stroke of Apple/Google’s pen?