The Messaging App Sensation

Published in

ILC UChicago

5 min readJan 24, 2016

by Rebecca Li

In the United States where messaging apps are late to catch on, many tech-industry observers still misunderstand why these apps are so powerful. Not only have they become the center of mobile users’ online activity, a worldwide phenomenon most pronounced in Asia, but they are also emerging hubs for e-commerce and business-to-customer interactions, not just free alternatives to SMS texting.

So why are these apps so powerful? Earlier 2015, number of active users of top four messaging apps (Whatsapp, Facebook Messenger, WeChat, and Viber) combined for the first time surpasses that of top four social network apps (Facebook, Twitter, Linkedin, and Instagram). Because of the smaller audience overlap among messaging services (WeChat and Viber are geographically restricted), as compared to social media, their total audience advantage is even greater than what the data indicates. Messaging apps also enjoy a retention rate of 62%, much higher than the 11% average among mobile apps.

(Disclaimer: MAU is subjected to constant changes. Not all valuation is based on transaction. Data does not apply to exact same time periods.)

In February 2014, Rakuten, the big Japanese online retailer, bought Viber for $900 million. The next month, the Chinese e-commerce behemoth the Alibaba Group led a $280 million investment in Tango, valuing the nearly six-year-old start-up at about $1 billion. Facebook paid $21.8 billion for WhatsApp in February. As is indicated in the chart above, why do these apps receive such massive, even exaggerated valuations? Among the general trend of “higher MAU higher valuation”, WeChat, China’s ubiquitous messaging app, stands out with the valuation of $83.6 billion, constituting approximately half of Tencent’s market capitalization, according to HSBC.

So what is so special about WeChat? According to tech blogger Connie Chan, WeChat is a single, integrated app that gives users access to services such as taxi-hailing, ordering food delivery, checking in for a flight, sending money to friends, booking a doctor appointment, getting banking statements, donating to charity and much more. But why should we care about this Chinese phenomenon? The first and foremost reason is that it points to where Facebook messenger and other messaging apps could potentially become. It shows where the future of mobile commerce lies and what it is meant to be both a platform and a mobile portal.

With over 650 million of monthly active users (still growing), WeChat monetizes in mainly two ways. The app-within-an-app model grants businesses access to exclusive APIs for payments, location, direct messages and etc., providing a goldmine of consumer data. For the end-user, adding “official accounts” is as simple as adding a friend; these accounts provide access to lower frequency but important services without the burden of downloading full-featured apps. In other words, WeChat has become a flourishing platform for businesses that hope to exert an online influence in China. The screenshot below shows how an end-user books a doctor appointment at a local hospital through “city services” feature.

WeChat’s payment feature, introduced in 2013 against its competitor Alipay, works in mainly three ways: 1) online transactions and transfers 2) offline transactions through scanning QR code 3) seamless access to third party services such as taxi hailing and online shopping. Below is a screenshot of the many services accessible through the “Wallet” feature. Boosted by its successful “red-pocket” campaign in Chinese New Year 2014, WeChat now has over 200 million user’s credit card information bounded to its payment services.

Tencent’s latest financial report (3Q 2015) pulls a net profit of 7.584 billion RMB ($1.2 billion) on revenue of 26.594 billion RMB ($4.2 billion), of which messaging is a huge part. In-app purchases rose 27 percent year-on-year to reach 14.3 billion RMB ($2.25 billion).

Therefore, it is no overstatement that WeChat is powering a mobile commerce boom. Certainly, investors see potential in these apps and give them high valuations, but “the race to become the WeChat of the West” is never easy. WeChat enjoys many market conditions that apps in the Western world cannot compare: higher texting cost that initially attracts users, mobile-first consumers who prefer making transactions on phone, regulations that minimize foreign competition, and its ubiquitous status as “the mobile app” in China.

Looking forward, the main challenge and goal for messaging apps still lies in monetization. As indicated in the chart above, IM apps takes over 75% of messaging traffic but generates only 2% of the profit. Therefore, it is high time messaging app developers found creative and effective ways of monetization other than blatantly inserting advertisements or simply selling stickers, to truly live up to the Silicon Valley adage: “Get millions of people to use the service first, and eventually it will find a way to make money”.

References:

The Messaging App Sensation

Written by ILC UChicago