Making Money from Messaging - WeChat versus Messenger
Part 3 in a series on how WeChat shines a light on the future of Messaging Apps in the West.
I drafted this series of articles based on my experience using WeChat in China and then coming back to Ireland to work on Leapchat. WeChat is so far ahead of its Western competitors in terms of commercial activity (ARPU > $7), so I thought I would try to explain how and why it is different, as well as look at what we might expect from the likes of Facebook Messenger, Twitter and WhatsApp in the West.
“WeChat’s average revenue per user or ARPU, is estimated to be at least $7 USD — that’s 7X the ARPU of WhatsApp, the largest messaging platform in the world.” Andresen Horowitz
How Do Messaging Apps Make Money?
We have already discussed the Plethora of ways in which WeChat has woven its way into the very fabric of Daily life in China but how exactly does it make money? The answer is it makes money because it is woven into the fabric of everyday life. The range of services within the app means WeChat has a number of revenue streams. These can be broken down into three groups: value-added services (gaming and stickers), advertising and others (mainly revenue from payments). Where WeChat leads, other messaging apps follow. In this post, I will dissect the WeChat business model and show the instances where Messenger is converging and diverging from this model. I will also give some insight into how this will play out into the future.
1. Value added services- games and stickers
“Most internet companies that make money do so by selling online ads, but Tencent (WeChat’s parent) makes most of its money selling customers virtual goods (like gaming avatars, online stickers and other icons). About 85% of the money Tencent will make this year from the app will come from gaming”. Anne Freier , Business of Apps
WeChat Gaming
Mobile gaming is huge in China. In an earlier post I described how China’s 1.38 billion inhabitants have largely leapfrogged the personal desktop and even laptop era. Whereas Western consumers have grown up playing computer games, the Chinese know only mobile gaming. It is common to see adults playing games on their phones that we would consider childish.
WeChat’s parent company Tencent has always been a leading player in the Chinese gaming industry and they have been very successful with games published on WeChat. Tencent’s smartphone game revenue climbed 87% year over year last quarter to 9.9 million RMB ($1.4 million) accounting for more than one-third of Tencent’s total value-added services revenue says Adam Levy.
“Once users are hooked on a popular game, Tencent then persuades them to pay for “value-added services” such as fancy weapons, snazzy costumes for their avatars and online VIP rooms” the economist.
Facebook Gaming
Closer to home, Facebook has just announced its games platform with the intention of encouraging users to spend even more time in Messenger. Instead of downloading yet another gaming app from Apple iTunes or Google Play, users can play games directly through Messenger without leaving the Messenger interface. Today, only about 3% of Facebook’s revenue comes from games. In the future, Instant Games could earn Facebook ad dollars from developers promoting their games, or a cut of payments, though there are no in-game purchases allowed just yet.
“Over time we’ll find ways for game developers to monetize. That’s our commitment to them in the new year.” David Marcus revealed to Techcrunch
WeChat Stickers
Stickers are a form of rich emoticons that enhance user experience and ‘stickiness’ of WeChat. Every user has access to a range of free stickers but there are thousands more available at an average price tag of $0.99 per set.
Facebook Gifs
Facebook’s equivalent to WeChat stickers appeared in 2015 with the Giphy integration. As yet, there is no revenue being generated from the service, but it is not a major stretch to see this evolving into the ‘value-added service’ model we have seen with WeChat.
2. Advertising
“WeChat is there at every point of your daily contact with the world, from morning until night.” In a country where more people reach the Internet via their mobiles than in America, Brazil, and Indonesia combined, WeChat is particularly attractive to advertisers.” The Economist
Wechat Advertising
Starting in late 2014, WeChat embarked on a slow but steady journey to open up its advertising platform for brands.
- August 2014 — Introducing banner advertising at the end of articles
- January 2015 — First WeChat *Moment Ads were introduced
- December 2015 — Introduced video ads for WeChat Moments
- January 2016 — WeChat Moment ads are manageable directly from backend
- May 2016 — Introducing coupons for WeChat Moment ads:
- August 2016 — Local-hosted Moment ads (原生广告) were introduced: advertisers target Moments ads based on user’s physical location It is likely you will start receiving discounts for a nearby Starbucks while walking around.
- September 2016 — WeChat Moment ads for local businesses were introduced, not just huge corporations.
*A ‘moment’ is just like a post to Facebook’s Timeline. Nowadays, 3 billion+ individual pieces of content are shared per day through WeChat Moments.
WeChat ads are generally well-received by Chinese consumers. For example, when BMW, the German carmaker, launched the first-ever ad to appear on the WeChat Moments page (which is akin to a Facebook feed) of selected users, no one complained about commercial intrusion on privacy. Instead, an uproar ensued from non-recipients demanding to know why they had not received the ad!
(insert WeChat Moment ad and Messenger sponsored content ad-)
Facebook Advertising
Focusing back on Facebook, advertising makes up 78% of the firm’s revenue. Within the Messenger platform, Advertising takes the form of sponsored messages which take place between businesses and the consumers who “have an open, existing conversation with” that business, according to Facebook. In November 2016, Facebook opened up the ability for any advertiser to run an ad on Facebook that links to the advertiser’s Messenger account. This provides a further avenue for businesses to initiate conversations with potential customers.
3. ‘Other’
3.1 Wechat Payments
In 2016, Tencent revealed the first figures for its WePay mobile payments service, which sits inside WeChat and was seeing $50 billion in bank transfers flow across its platform per month. The company didn’t release specific payment data in 2016. It did, however, say that WePay and its cloud service pushed “revenues from our others businesses” up 348 percent to RMB 5 billion in the quarter.
However Tencent president Martin Lau doesn’t anticipate WeChat Pay becoming a profitable business itself because of subsidizing merchants and other costs. But, the real value, Lau argued is that WeChat Pay “will benefit our overall ecosystem,”. For example empowering future advertisements with one-click purchasing from users, and synergies with financial services like Tencent’s wealth management fund and online bank.
Since March 2016, WeChat began charging users 0.01% to withdraw funds from their WeChat wallet but not to transfer within the ecosystem. This fee is now levied on digital transfers to bank accounts where the sum exceeds 1,000 yuan (US$153), the company said. The minimum fee per transfer will be 0.1 yuan. Tencent CEO Pony Ma said the fees of 0.1% of each transaction totalled more than RMB 300 million in January 2016.
“The transaction fees will encourage users to make fewer withdrawals and thus keep more money circulating within the WeChat Wallet ecosystem, therefore increasing the opportunities for other spending within it,” said Michael Yeo, an analyst at market research firm IDC.
Messenger Payments
Facebook, on the other hand, already offers peer-to-peer payments in the U.S. and has just received permission to roll out the service in Europe. The company currently gets no revenue from the service but if the company continues to follow WeChat’s lead, monetisation of the Payments platform is a strong possibility.
3.2 WeChat Official Account Registration fee
Another element which comes under WeChat’s ‘other’ revenue stream is the fee paid by businesses to ‘verify’ their official account.
According to the WeChat website, individuals, media, enterprises, government, or other organizations can set up both types of public accounts( subscription and service) for free. In the most simplest terms, subscription accounts are for pushing content and service accounts are for advanced features such as interactive menus, customer service, and e-commerce.
After initial setup, many businesses choose to ‘verify’ their account in order to gain access to more advanced APIs. This provide users with more valuable, personalized services. Verified pages also rank higher in search engines. WeChat verification intends to guarantee truth and security of official account information on the WeChat Official Account Platform. Verification costs 300 rmb or $45 per annum and is mandatory after the first year of use
Messenger For Business
Facebook’s approach to handling businesses on its Messenger platform bears some striking resemblances. In 2015, Facebook turned Messenger into a platform that can accommodate bots and businesses. There are currently over 33,000 chatbots on the messenger platform. These bots can accept payments natively within the Messenger platform but unlike WeChat, Facebook does not take a cut of these Payments (yet!)
What next for Facebook Messenger?
“Quite frankly, the trope that China copies the U.S. hasn’t been true for years, and in mobile it’s the opposite: The U.S. often copies China,” said Ben Thompson to The New York Times.
The above comparison shows how Facebook’s messaging strategy appears to be a few steps behind where WeChat is at right now but, potentially, it is on a similar path. The WeChat example proves that it is possible to monetize chat apps BUT the service offering has to go beyond just being a free alternative to SMS. Messenger is doing just that.
Messenger is moving further in the direction of the ‘All-in-one’ App model we see with WeChat. With the growing range of services, we expect to see a growing number of revenue sources for the company from within the app.
This is the third post in a series of pieces on WeChat and how its business model and user experiences might succeed in the west, as well as where different tactics may be required. Keep an eye on our blog for the rest of the series.
