Having built their businesses on the PC, the internet majors are now looking to position themselves to deliver online commerce in a word increasingly dominated by mobile. As, in the words of Benedict Evans, “Mobile eats the World” , none of the majors who have grown up on the PC can afford to sit on the sidelines as the mobile retailing experiment that is chat plays out. That experiment is discussed in detail below.
Facebook and Ratuken have fired the starting gun on chat app M&A. Who will follow them, and how those services evolve will be a major industry theme for 2014.
2013, a year of dramatic chat app growth
Chat apps have had a pretty spectacular twelve months, rivalling Candy Crush (King) and Clash of the Clans (SuperCell) as the online theme of 2013.
In December 2012, Chat rose to the surface of general consciousness when Informa and the UK’s Financial Times announced that chat traffic had for the first time exceeded SMS. At the time, the leading market players had around 150m users each with perhaps an aggregate 1 billion downloads in total across the segment. Today, the four leading players alone - Whatsapp, LINE, WeChat and Viber - have amassed collectively over 1.4 billion users. A raft of other significant players including Facebook Messenger (now presumably to be wrapped into Whatsapp), Skype, and Snapchat take that figure well over 2bn downloads (Note that on average chat users use three apps each). San Francisco online researchers, Flurry Analytics, reported that, at 203% year on year in 2013, messaging usage was the fastest growing of any mobile app category.
However, as any internet entrepreneur and their backers will testify, growth in user numbers is a necessary but insufficient condition for success. What is also needed is user stickiness and (ultimately) a good monetisation strategy.
Signs of stickiness
What peaked the interest of Facebook and Ratuken is the level of engagement users have with their messaging apps.
It is clear from a number of sources that good messaging apps are very heavily used:
- Whatsapp tell us that 70% of their users use their app every day.
- A recent survey of over 3000 users in 5 countries by OnDevice (appropriately entitled “How Facebook lost its lead”) suggests that 86% of users use their app at least once a day.
- 63% of those surveyed use their apps more than 10 times per day, more than voice, email and even SMS.
- Research by Tomi Ahonen in “Communities Dominates Brands” suggests messaging is used more than any other service on your phone.
Monetisation: Chat Platform vs Pure Chat
The frequency and nature of our interaction with chat apps represents a massive opportunity to engage users in other services and activities that users may be interested in. If an organisation is able to tap into this level of engagement, use it to offer users more of what they want – and hang onto their users in the process - then the opportunity to monetise that engagement is massive.
So far, two organisations - LINE and KaKao Talk – stand out in their ability to monetise their chat communities. Both companies have essentially created “Chat Platforms” - apps and APIs that enable their own developers and third parties to offer a range of games, content, sponsored social feeds, and other apps around the core chat service.
This model has proved extremely successful for LINE who generate approximately USD 12 per user per annum from their Japanese subscriber base. This level of success has attracted a growing number of businesses including global brands such as Coke, MacDonalds, and Barcelona as well as a host of local companies looking to engage with the community. With the recent launch of music services, and an in-app app store, LINE is also looking to expand the platform model considerably.
Kakao has achieved similar results in Korea through an almost identical strategy, generating roughly USD6 per user per annum. With Facebook itself achieving around USD 7 per monthly active user across 2013, those are numbers that are clearly meaningful to Facebook were they to replicate them globally.
However, outside of Japan and Korea revenue generation from chat apps has to date been minimal. Intuitively there would appear to be no reason why users in other markets would not want to interact with relevant content in a similar manner - albeit with content reflecting local tastes and culture. We are all made from the same DNA after all. Tantalisingly, the OnDevice survey suggests that users in other markets are starting to warm to this model. But to date, actual monetistion has been very poor.
The alternative view is that the messaging app should remain pure and unadulterated by “distractions”. Chief amongst the exponents of this view is, ironically, Whatsapp, who as an independent entity, shunned content and advertising and instead charge a portion of their users USD1 per annum for the service. Their leadership of the segment, confirmed in the OnDevice survey, is strong evidence that “keeping it clean” works.
More Chat Platforms will emerge in 2014 ..
I believe it is highly likely that the acquisition of Viber and Whatsapp by two players adept at monetisation of online properties will see those players looking to make the Chat Platform concept work outside of Asia.
In particular, Facebook’s knowledge of a users social graph places them in an outstanding position to offer chat users relevant content and connections. The maturity of their API and the app ecosystem they have built up are tailor made to be extended to the Chat Platform concept.
Judging from the performance of LINE and KaKao Talk, its perfectly conceivable that Facebook could double revenue per user through the monetisation of chat
... and more acquisitions are inevitable
The inexorable shift of online to mobile and the engagement users have with chat apps had already raised interest in chat communities. Facebook’s move yesterday has dramatically increased those stakes.
Regardless of whether you believe in chat monetisation or not, the potential costs of being late to the party and missing such a potentially tectonic shift in the monetisation of the mobile internet landscape is simply too great for other major internet players to ignore.
A billion dollar acquisition of one or more of the remaining chat apps is now an essential bet for the likes of Google, Amazon, and Yahoo! to place.
Disclosure: Mike Grant is a shareholder in Myriad Group AG, a provider of chat apps to emerging markets.