A number of over-the-top (OTT) mobile service providers have come to prominence in Asia, attracted by the potential of the region's fast-growing mobile internet user base and the proliferation of customisable smart devices. They are competing aggressively for market share and are targeting South East Asia, particularly markets where there is still no clear leader in the mobile messaging space, other than costly operator-run platforms. BMI compares the expansion and monetising strategies favoured by Asia's four most prominent OTT applications - WeChat, WhatsApp, LINE and KakaoTalk - including those qualities most needed to succeed in this vibrant market.
These four platforms have grown to be the dominant chat app in their respective home markets and are now looking to extend their brands to new territories. South East Asia is an attractive market given its strong mobile internet subscription growth. BMI predicts regional 3G/4G mobile subscriptions to grow at a 9.0% compound annual rate between 2013 and 2018, providing strong evidence of an increasingly prevalent mobile internet usage in South East Asia.
To appraise the likely outcome of the OTT market share war, we study the operational and monetising strategies adopted by each company. We believe the most successful messaging model will provide more than just a pure communication service, giving end users the experience of a multi-functional platform with the right monetising model to make the product commercially sustainable.
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WeChat - More Than Just A Chinese Juggernaut
BMI believes WeChat has the potential to venture beyond its home market and become a global brand to be reckoned with. Since its inception in January 2011, the Chinese-developed messaging service has grown from strength to strength, capturing a majority market share in China and achieving a phenomenal 120.8% growth rate in its monthly active users (MAU) between 2012 and 2013. In its latest company fillings, WeChat reported 355mn active subscribers in 2013 (up by 120.8% y-o-y), of which more than 100mn user accounts were reportedly based outside China.
The initial traction and success of the company can be attributed to its dominance in its home market and aggressive international expansion campaigns. WeChat has already been well-received in Hong Kong, India, Indonesia and Malaysia across multiple smartphone OS platforms. In July 2013 it became the most downloaded mobile social app on application stores in Argentina, Brazil, Italy, Mexico, the Philippines, Singapore, Spain, South Africa, Thailand and Turkey, according to thenextweb.com. Chinese Internet giant Tencent, which owns WeChat, has been stepping up its marketing activities to push the messaging service worldwide - even launching a TV commercial starring football star Lionel Messi, which was aired in 15 countries. The first stop for WeChat's globalisation is expected to be in regions such as Hong Kong, Singapore and Malaysia, places with a majority or a significant ethnic Chinese population. WeChat has now set up offices in Indonesia, India, Singapore, the Philippines and Malaysia, in addition to investing considerably in marketing.
The company's monetisation model is also paying dividends. Like most other Asian developed messaging applications, WeChat brands itself as more than just a messaging tool, also including mobile games, advertising, e-commerce and mobile payment services under a single umbrella. With the launch of new services, such as Game Center, Official Accounts and Weixin Payment, WeChat is evolving from a pure communications service into a multi-functional platform. The company's willingness to use advertising is what differentiates it from its global competitor WhatsApp. Although there are no official revenues reported for WeChat itself, Tencent has attributed much of its social network revenues growth to the rising popularity of WeChat. Social networking revenues increased by approximately 9% to CNY13.019bn in 2013, according to Tencent. We believe the company's monetising model is feasible and achievable even on a global scale given Tencent's proven execution ability and its resilient and integrated user platform.
LINE - Strong Contender To Be Leader Of Asia's Mobile Messaging Market
LINE is a strong contender to be Asia's mobile messaging market leader. Owned by South Korea's biggest web firm NHN, LINE's three largest markets are: Japan with 50mn registered users, Thailand with 20mn users and Taiwan with 17mn users. Similar to WeChat, the company has experienced strong subscription growth since inception in June 2011. The company took 19 months to achieve the first 100mn users, six months for the next 100mn, and four months between the 200mn and 300mn subscription figure. However, we highlight the figures reported by LINE are of registered users and not active users, which means the figures may be inflated by users with multiple accounts or users who downloaded the applications for trial purposes only.
Based on subscription growth trends, LINE's strategy appears to be focused on developing a strong brand presence in Japan first before pushing out into other countries such as Taiwan, India, Indonesia and Thailand. Similar to WeChat, the company has ventured beyond Asia and has pursued aggressive marketing campaigns targeting users in Europe and Latin America. From a purely operational standpoint, we believe LINE is well positioned to capture the emerging opportunities in South East Asia's mobile internet growth in the next three years, leveraging on its strong brand name and sticky mobile user platform.
LINE's ability to monetise its messaging service is comparable to WeChat. Within its Q413 results announcement, NHN reported that LINE generated revenue of KRW454.2mn (USD430,000), up 690.4% y-o-y on the back of new hit games releases, solid sticker sales and revenue from new services such as LINE Play and LINE Manga. However, LINE's revenue remains geographically concentrated in Japan, deriving more than 75% of its sales from the domestic market. We expect this trend to persist in the near term given its lack of clear leadership position in other Asian markets. In terms of split, roughly 50% of LINE's revenue comes from games, 30% from stamps and the balance from other services. This is in line with the strategy employed by other messaging applications, which is to amalgamate free messaging services with games, commerce and stickers/emoticons adds-on.
Kakao Talk - Strong in South Korea, But Regional Presence Needs Bolstering
KakaoTalk is the top messaging application in South Korea with 133mn registered users at the end of 2013, according to the Wall Street Journal. The company, however, has the smallest overall user base compared with other Asian OTT messaging providers. This is mainly because South Korea has a smaller addressable market than China and Japan, but also has much to do with the fact that KakaoTalk was late to overseas expansion, unlike its competitors.
Despite its weaker regional market share, Kakao Talk has managed to generate positive top line growth. The company differentiates itself from other OTT providers by combining free texting with games and mobile commerce. Looking at the monetising model, it is likely that the company is treating the messaging platform as a subscription growth driver while the gaming platform is the revenue generator. This model has so far proved successful, with the company reportedly earning gross revenue of USD311mn in H113, according to thenextweb.com.
Going forward, the company has identified overseas market expansion as a key strategy to grow its market share and top line, with Indonesia the market earmarked to be the firm's primary battleground in 2014. The firm is also making inroads into other South East Asian countries such as Vietnam and the Philippines. In BMI's view, the company's strength lies in its superior monetising model with a slow-and-steady approach to market expansion. However, we believe KakaoTalk will face several headwinds in its South East Asian expansion strategy. The first is the presence of entrenched competitors such as BlackBerry's BBM which already has a stranglehold on the Indonesian mobile messaging market. This is on top of and beyond the arduous task of having to compete with other OTT services which are also eyeing South East Asia's messaging pie. Second, the disparity in purchasing power between Indonesian and South Korean mobile consumers is likely to create significant downside risks to KakaoTalk's ability to monetise its international user base. This should weigh down the company's ARPU in the near term.
WhatsApp - The Only Non-Asian Company With Huge Indian Presence
WhatsApp is the only non-Asian firm on our list which has made huge inroads into the region's mobile messaging market. WhatsApp's forays into Asia have had mixed success, establishing a strong presence in India, Singapore and Hong Kong but it has yet to impose its brand in other markets. Globally, WhatsApp has more than 450mn MAU - more than any other messaging application - but the company does not disclose how many of these come from Asia.
WhatsApp's biggest strength is its financial backing from parent Facebook, which is keen to expand the mobile messaging application into the fast growing Asian mobile market. WhatsApp's strategy is to remain a simple messaging-only application, unlike its peers which offer games, stickers and communication with brands under the same messaging platform. However, this strategy appears to hinder the company's Asian expansion plan after it failed to engage with users in key markets such as Japan, China and South Korea - all of which have been dominated by their own local-based messaging applications. In South East Asia, the company is also facing stiff competition from its Asian peers which have invested aggressively in marketing campaigns to rival the US-based chat app. Part of the problem is that WhatsApp's approach of linking accounts to a phone number does not suit subscribers in South East Asia who frequently change their SIM cards in order to take advantage of price-based promotions. We predict WhatsApp to continue losing market share to its Asian rivals for this very reason.
WhatsApp's monetising model is different from other mobile messaging applications. While LINE, KakaoTalk, and WeChat charge for games and stickers, WhatsApp makes money with a flat USD0.99 annual fee that follows a free year of service. We do not believe in the sustainability of this monetising model as features like huge animated stickers, games and free calls would soon encourage users to migrate to other messaging platforms. This would eventually reduce the company's market share and subscription fees. The consequence is likely to be a vicious one as the success of a messaging application depends very much on having a large number of users who can communicate over the same platform.
Multi-functional Platforms Are The Future Of Asian Mobile Messaging
From the analysis above, BMI predicts the winner of the Asia's mobile messaging market will need to have at least two qualities. First, the chat app needs to be more than just a messaging tool, incorporating elements of m-commerce, stickers and games to provide an integrated mobile messaging experience to customers. This is the main reason why Asian-developed apps such as KakaoTalk, WeChat and LINE are able to restrict WhatsApp's presence in the Asian market. The extra features would serve as monetising tools, while the messaging aspect of the app is kept free to woo more subscribers. So far, this has proved to be a resilient monetising model.
The second quality of a successful chat app is an aggressive marketing campaign with regional or global appeal. This is the main difference between the higher subscription figures we are seeing in WeChat and LINE over KakaoTalk. WeChat's use of Lionel Messi and LINE's engagement of local celebrities helped the brand to be more than just a Chinese household name or Japan-only application. The huge marketing costs required for such campaign typically tilt the market share war in favour of firms with greater financial resources, such as WeChat or WhatsApp, the latter having just been acquired by global social networking powerhouse Facebook which has its own well-established Asian user base that can now be introduced to WhatsApp.