[In the first part of this two-part blog post, we introduced a second tidal wave of mobile ecosystems (after Android/iOS), mobile-first and twice over-the-top (OTT²): messaging apps. OTT² ecosystems drive engagement by commoditizing hardware, apps and services. In part 2, Stijn Schuermans explores the unexpected way in which the engagement from messaging apps is monetized. (Hint: it’s not advertising.)]
In the first part of this two-part blog post, I introduced a second tidal wave of mobile ecosystems (after Android/iOS), mobile-first and twice over-the-top (OTT²): messaging apps. Messaging apps are proving to be so much more powerful than just chat. While most apps are just value-adds for iOS and Android, messaging apps are the first that can create a substantially new mobile landscape. They are important not just because of their market momentum of 100s of millions of users, but because they build on asymmetric business models, the same economics that brought Apple and Android to their dominance.
By definition, a company with an asymmetric business model creates (and sometimes destroys) value in one vertical, in order to capture value in its core market. For example, Google commoditized handsets by providing the Android OS for free in order to defend its advertising business. So what is the core business of messaging apps that is being boosted?
The surprising core business of second-wave mobile ecosystems
[tweetable]The dominant business model for OTT² messaging apps is – perhaps unexpectedly – not advertising, but m-commerce[/tweetable].
With messaging apps, the business model focus shifts from selling the app (up-front or using in-app payments) or selling the audience (via ads) to selling goods through the app. The business model entails the promotion and sale of virtual goods (stickers, mobile games, apps), physical goods and services (like taxi rides, as explained in part 1 of this post). Mark Watts-Jones offers this handy overview of how messaging apps make money:
Let’s take a closer look at some examples.
WeChat’s revenue About 85% of the $1.1B that Tencent’s WeChat app will earn this year will come from online gaming, estimates The Economist. The rest will come from stickers, services like sponsored accounts, and the fast-growing area of m-commerce. Already merchants are selling goods via WeChat as diverse as fruits, smartphones (150K Xiaomi phone in 10 minutes), movie tickets, taxi rides and insurance against malignant tumors. You can pay at vending machines with the app. Entire books have been written about how to do marketing on WeChat.
Line’s revenue Games accounted for 60% of the $338M that Line made in 2013. Another 20% comes from sticker purchases and the rest from business services like official accounts and branded stickers. Line has been actively testing the e-commerce waters with flash sales, hot deals and the Line Mall marketplace.
Messaging and e-commerce in investments Investment activity gives another view on how crucial m-commerce is as a revenue model for messaging. Viber was acquired by Japan’s e-commerce champion Rakuten. Alibaba, China’s king of online sales, invested $215M in Tango. In the other direction, Tencent has invested in JD.com, another large Chinese e-commerce player.
Also somewhat surprisingly, the innovations in this business models don’t come from US entrepreneurial hotspots like Silicon Valley or Boston. It is Asian companies that lead the way. The subscription model of WhatsApp (prior to its acquisition, at least) is the exception, not the rule.
The dominance of m-commerce makes sense
While advertising is certainly a popular and straightforward choice when monetizing user attention, the prevalence of m-commerce in messaging apps should actually come as no surprise.
First, consumers are increasingly comfortable with buying on their mobile devices. Mobile now accounts for a quarter of e-commerce traffic, a fast-growing category by itself. On the web, e-commerce is a trillion-dollar industry, an order of magnitude larger than advertising (which broke the $100B barrier in 2012) and dwarfing other revenue models like gaming, gambling, SaaS or media streaming. We can expect the same to happen in mobile. In fact, many retailers see a substantial amount of their online audience coming from mobile devices.
Counterintuitively, this growth of mobile retail might accelerate as more people in emerging economies come online. Connie Chan from Andreessen Horowitz says that in third and fourth-tier cities in China, for example, traditional brick-and-mortar retail infrastructure like shopping malls might not exist, leaving m-commerce as the more convenient option.
For app developers, m-commerce is a good choice, too. e-Commerce and affiliate programs are among the highest-grossing revenue models for mobile developers, dwarfing the median revenues that developers can expect from ads or even in-app purchases.
It’s no wonder then to see significant investments in mobile commerce. David Marcus, Paypal’s CEO since 2 years, has made mobile a strategic priority for the company and (as a former founder of mobile payment company Zong) has in fact been selected by eBay’s executives to do exactly that. Tencent, being of the protagonists of this story as the company behind WeChat, has recently made investments worth hundreds of millions of dollars in e-commerce companies like JD.com, Dianping (often referred to as China’s Yelp) and E-house (real-estate). m-Commerce has been hailed as the next big thing for many years – these investments indicate that things are finally starting to move in a significant way.
Developers are catching on
The m-commerce megatrend, especially in OTT² ecosystems, has not escaped the attention of mobile developers.
[tweetable]Messaging ecosystems are fast becoming a major channel for the discovery and promotion of apps[/tweetable], a long-standing pain point in iOS and even more so Android. Look at the recent move by Tencent to enable app downloads from WeChat. It capitalizes on the trust inherent to social referrals (in earlier editions of Developer Economics, Facebook was highlighted as a main app promotion channels for the same reason). It might also tip the balance to Tencent’s own app store in a country where Google Play is mostly absent and a plethora of app stores compete for attention.
The high earnings potential of m-commerce for developers is also translating in fast-growing adoption. In our Developer Economics research, we found that e-commerce sales grew significantly in popularity as a revenue model from 5% in Q3 2013 to 8% in Q1 2014. The role of app makers is changing from Developer-as-a-Programmer to Developer-as-a-Salesperson.
The mobile success recipe
In summary, a clear recipe is emerging for the next giant tech companies in the age of mobile. First, use ecosystem economics to create value for your users, and don’t be afraid to subsidize or undercut adjacent market arenas if that helps to boost traction. The network effects in your ecosystem will help to solidify your competitive position and make it difficult for others to attack you, including the carriers and operating systems on which your platform is built. Next, use the highest-earning revenue model on both the web an in mobile to monetize: e-commerce. Any app that succeeds in doing this, messaging or not, will have a bright future ahead.