One topic I have been mulling over the past week is Over-the-top (OTT) messaging apps and their impact on the broader TMT space.
To start off, I would recommend a read of WSJ’s piece last week, which provides a good summary and features some good quotes from key players. The short story is that riding on the wave of smartphone adoption, a whole host of messaging apps have gained massive traction with mobile users. As Benedict Evans tweeted last week (side note – subscribe to his weekly newsletter, it’s a must read):
The number of free OTT mobile messaging services has become absurd. At least two dozen with >10m users, and dozens of others
— Benedict Evans (@BenedictEvans) March 28, 2013
The notable leaders that people often mention are WhatsApp (US), Line (Japan), KakaoTalk (Korea) and WeChat (China). I’ve called out each app’s home base country, but really, these apps are fighting for every consumer across the globe. This feels eerily similar to the social networking hype cycle of the mid 2000s, in more ways than one (more thoughts on that below).
There are two major types of players impacted by the emergence of this category.
The first is telcos, whose SMS revenue is likely experiencing accelerating decline at the hands of these OTT services. (Apple’s own iMessage is also a big player in this regard.) I’m somewhat surprised at the lack of response from US telcos – SMS represent the most lucrative part of their service offering (the cost of one SMS is a tiny fraction of the rates charged). Perhaps they’ve prepared for this by tying expensive data plans to smartphone contracts – the increase in data ARPU certainly offsets the loss in SMS revenue, but from a profit margin stand point the story could be different. Another factor limiting US telcos is the topic of net neutrality, which hinders their ability to negotiate with / extract value from these OTT services.
In contrast, one of the biggest tech stories in China the past couple of weeks is telcos pressuring Tencent to pay for WeChat usage. That would certainly go against US net neutrality principles (it specifically discriminates against one application), but the underlying struggle is nothing new (or unique to China) – remember telcos trying to shut down VOIP providers to retain their voice revenue a decade ago? It is still unclear how the situation will play out, but Kaifu Lee has speculated that Tencent will bow down to the telcos and create some form of revenue-sharing partnership that telcos can be happy with – if that is indeed the case, it would be an interesting case study for companies elsewhere.
The second type of players impacted by these mobile messaging apps are the big social networks on desktops. I had mentioned earlier that the mobile messaging boom is similar to the social networking hype cycle a decade ago – one notable similarity is how these mobile apps have quickly tried to turn themselves into distribution channels for other apps (similar to how Facebook enabled the social gaming boom). A Reuters article on the topic points out that 8 out of the top 10 highest grossing apps on Google Play’s South Korea market are built on top of KakaoTalk.
There is a sub trend worth pointing out here. The mobile platform owners (Apple, and to a far lesser extent, Google) have far more restrictive terms on what functionality apps can provide, so turning these apps into app stores in and of themselves is a non-starter. That’s why these apps currently only promote 3rd party apps via an offer-wall type of interface – essentially, a list of recommended apps which will lead you to the respective official app pages on the official app store. This is obviously a far less integrated experience for users, and there may be problems with tracking the performance of these referrals. An interesting derivative, therefore, is the idea that these 3rd party apps are not native apps, but rather browser apps (e.g. a HTML5 game) that you launch inside the messaging app. This puts limits on app performance, but this scenario also more closely resemble Facebook’s browser-based ecosystem. It will be interesting to see whether platform owners crack down on this.
To wrap up, the growth of these OTT apps are clearly not over, and their experiments in building their own platforms are just beginning. I for one will be keeping an eye on this space.