(Disclosure: Kakao Corp. is an investor in our company, Ultra. This post does not include any confidential information).
KakaoTalk is Korea’s leading messaging service with over 100 million users. Launched in 2010, the mobile app has completely swept the Korean market. To fully understand KakaoTalk’s dominance within Korean culture, consider these three scenarios: When you need to get in touch with your mother, you’d message her using KakaoTalk. When you need to organize a meeting with your co-workers, you’d discuss potential times via a group chat on KakaoTalk. And when you ask someone out, you ask for their KakaoTalk ID.
KakaoTalk is an interesting hybrid of messaging service meets personal profile. While other applications, such as Facebook, also provide messaging and profile services, KakaoTalk’s early cultural acceptance, market dominance, and varied business model makes it an interesting service worth analysis. In 2012, KakaoTalk reported $46M in revenue with the following channel breakdown:
- Gaming 67.5% ($31.1M)
- Advertising 26.2% ($12.1M)
- Emoticons 6.3% (2.8M)
Revenue for 2013 is expected to quadruple to $250M. In fact, mobile gaming alone posted $73M in revenue for the first half of the fiscal year. This puts Kakao’s current valuation at $1.5~2B. KakaoTalk’s success in converting its massive userbase into a profitable and growing business naturally lead us to question: What is KakaoTalk’s business model?
KakaoTalk’s 3 Primary Revenue Sources
KakaoTalk’s primary sources of revenue stem from Gaming, Advertising, and Emoticons.
Aside from being a messaging service, KakaoTalk also serves as a social gaming platform. The company reviews and selects games from independent development studios to host within the app’s internal game center. Like other app platforms, users can browse games by popularity, recentness, or top sales. Unlike Google Play or the App Store, the game center is a highly curated experience, with only 200 games available for download.
KakaoTalk actively promotes certain games by displaying them within the app’s main menu–and for good reason. For every in-app purchase made within a Kakao game, the company receives a 21% cut. This is in addition to the 30% cut Google or Apple takes for hosting and delivering the game via their app stores. Kakao game developers are in turn left with only 49% of the total sales their games produce.
For more info on Korea’s booming game market, read our article: Why is Mobile Gaming so Popular in Korea?
Why would developers choose to give up another 21% of sales and publish on KakaoTalk’s game center when they could host their titles solely on Google Play or the App Store? It all comes down to KakaoTalk’s massive social network. To clarify, these games still must be downloaded via Google Play or the App Store, but they must also receive authorization from KakaoTalk to utilize the application’s social graph. Once authorized, games can leverage a KakaoTalk user’s social graph to provide a more social and competitive gaming experience, which in turn can lead to blockbuster hits such as Anipang or Dragon Flight–two games developed by small studios which have each garnered 20M+ users.
Advertising within KakaoTalk accounted for 26% of revenue in 2012. Instead of banner ads, KakaoTalk developed a brand advertising channel called Plus Friends. Plus Friends works similarly to Facebook Fan Pages. Companies create profiles on KakaoTalk and then push users content and messages via a one-on-one channel between the user and the brand. Companies must pay to create a Plus Friends account (plans vary, but most start at $20K) and each brand is vetted by Kakao prior to their enrollment in the service.
Brands will often use PlusFriends to drive sales by sending their friends (followers) notices of sales and coupons via text message. In this example, Uniqlo, a Japanese clothing company, pushed the details of a sale to its friends. For the upcoming week at Uniqlo stores, customers that checkout $50 worth of merchandise can receive $10 off their purchase by displaying the coupon linked at the bottom of the screen.
Celebrities also use Plus Friends to stay connected with their fans and to deliver content their way. In this screenshot, Psy, of the global hit ‘Gangnam Style’, shares behind the scenes photos of himself with Gwyneth Paltrow and Beyonce.
Communication on Plus Friends isn’t necessarily one direction either–radio stations are known for using Plus Friends to receive song requests from their listeners. In this way, Plus Friends plays a role similar to that of Facebook Fan Pages with the added personal touch of one-on-one messaging similar to that of Twitter.
Emoticons account for 6% of KakaoTalk’s revenue, though it is generally perceived as the company’s main source of income due to its overwhelming popularity and visibility. Emoticon packages are a set of 15-20 images that users can purchase within KakaoTalk for $2-3. Once purchased, users will find their new emoticons alongside the stock emoticons that come free with KakaoTalk.
Emoticon packages are limited to what KakaoTalk approves within its in-app store and often feature characters from popular comics, cartoons, and brands. In this example, users have the option to purchase a variety of emoticon packages including those from popular brands such as Sanrio’s Hello Kitty.
Emoticons have also spurred a market for incentive-based downloads. A KakaoTalk user could either pay $2-3 for a set of emoticons, or they could download a promoted game and receive the emoticon package for free. In this example, Candy Crush Saga is giving away its set of emoticons to any user who installs the game and logs in.
Secondary Revenue Channels
Gaming, advertising, and emoticons are a financial boon for Kakao and are the company’s most mature revenue streams. Next, we explore two additional features within KakaoTalk and their associated business models.
Friends can also send each other real, tangible gifts via KakaoTalk’s gift center featured within the apps main menu. Users can browse various items such as birthday cakes, cups of coffee, jewelry, or clothing and purchase them directly for their friends. Once purchased, the intended recipient receives a digital coupon with details of their gift and instructions on how to receive it. Some gifts are available for delivery while others must be picked up in person at a storefront.
In this example, a KakaoTalk user can purchase a small birthday cake for their friend with same day delivery. In other cases, such as with coffee coupons, gifts may be redeemed at a future point by scanning the digital coupon at the register.
The digital gifting market is not exclusive to KakaoTalk. Within Korea, telecom giants KT and SK maintain their own in-phone gift stores. In fact, these stores actually power Kakao’s gift center–when a user purchases a gift from KakaoTalk, they are actually purchasing from KT or SK’s back-end network. In exchange for access to its huge userbase, KakaoTalk receives a few margin points from each sale it helps drive.
In the near future, it will be interesting to see how KakaoTalk’s gift center further develops. While the current focus is on gifts for friends, there remains much opportunity in building an e-commerce platform for everyday purchases within the country’s most popular messaging service.
Chatting Plus is a feature built for group chats within KakaoTalk. Chatting Plus allows friends to use apps together–like photo editing or task management services. Similarly to mobile games, users can make in-app purchases or upgrades within these social utilities.
For example, here at Ultra we created a social service called Meeting 101, a group dating app for university students in Korea. Students form teams on Meeting 101 with their existing KakaoTalk friends. These teams then browse and connect with other students groups to organize meetups over drinks. Special upgrades, such as the ability to be a member of multiple groups, require an in-app purchase. These purchases are split with Kakao (21%) and with either Google or Apple (30%).
WHAT’S NEXT FOR KAKAO?
KakaoTalk is building upon its existing framework with new applications that utilize the service’s social graph. Although these services exist as separate apps, they are functionally integrated with KakaoTalk via quick-links, activity feeds, and of course, a user’s friend data.
KakaoStyle is an app for the discovery of fashion trends and clothing. Users browse styles uploaded by clothing companies and can either favorite an item or purchase it. Products are organized by what’s trending, by what’s on sale, by brand, and by styles a user’s friends like. Users that wish to purchase an item are redirected to a brand’s mobile store.
Interestingly, Kakao does not take a percentage of each sale–Rather it sells access to KakaoStyle as a form of ad inventory. Monthly service fees are $4K per account, and only a select number of clothing brands are granted access to join. KakaoStyle launched in September of 2012.
KakaoPage is Kakao’s platform for digital content publishing and consumption. Content creators use KakaoPage to host and deliver their videos, podcasts, comics, or books to users browsing the platform. Consumers can browse by category or popularity. Content can also be suggested based on a user’s interest or by what their friends like.
In this example, a content publisher has licensed a series of CNN news clips to use as english learning material. Users can download the initial clip for free and pay about $1 (a price set by the publisher) for each additional clip in the series. Once purchased, users can watch and listen to the video, read its transcript, or take a quiz testing their understanding of the content. KakaoPage launched in March of 2013.
KakaoMusic is an app for the discovery, purchasing, and playback of music. Users can search for songs and buy them for roughly $0.60. Once purchased, a user’s friends can browse their music and stream it for free. The app features an activity feed which shows the songs friends like or are listening to. Additionally, friends can purchase songs for each other as yet another form of gifting. KakaoMusic launched in September of 2013 and is powered by Bugs Music, a Korean music company.
KakaoTalk’s origin as an early player in the Korean mobile-messenger space helped the company land a massive initial userbase. In turn, the service has changed the way family and friends connect. Originating as a “mobile-first” service also spurred the development of several novel business models: emoticon packages, an advertising channel for brands and celebrities, and an internal game center.
Moving forward, Kakao’s introduction of Style, Page, and Music will be interesting to follow. While these services are independent from KakaoTalk, they are complimentary and utilize Talk’s social graph. Quicklinks and social sharing between Talk and these applications will certainly aid in their discovery and initial usage. As these services are further developed, their feature sets, business models, and overall popularity will be worth keeping an eye on.