April 2014 - SlashData Blog

The surprising business model of OTT2 messaging apps

[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.

From 4 to 4000 apps: disruption deja-vu in the car industry?

[What if cars were like mobile phones? There are some eerie similarities between the approaches of car makers in 2014, and operators and handset makers in 2008. Will car makers be disrupted in the same way that the mobile industry was? Senior analyst Stijn Schuermans shares his feeling of deja-vu.]

“Cars are the biggest and oldest mobile devices. We are the face of mobility. We’ve been around for over a century. But we welcome the competition from newcomers like Apple and Samsung.”
— paraphrasing John Ellis (Head of Ford’s developer program) at CES 2013

Let’s entertain that thought for a moment. What if cars were like mobile phones?

At the moment, they would be like the feature phones of yesteryear. Today’s mainstream cars have 4 “apps”: driving from A to B (obviously), climate control, music (AM/FM radio, CDs, and more recently internet radio) and GPS navigation.

Feature phones in 2008	Cars in 2014
Telephony	Driving
Texting	Climate control
Contacts	GPS navigation
Camera	Music

In fact, this is not the only parallel we can draw between these two industries, as car makers are betting heavily on the concept of apps in the car. There are some eerie similarities between the approaches of car makers in 2014, and operators and handset makers in 2008. We’ve listed some in our latest report: “Apps for connected cars? Your mileage may vary”.

QNX is the new Symbian. Genivi is the new LiMo. Windows Embedded Automotive is the new Windows Mobile. Just like mobile operators in 2008, car makers are very hopeful that apps under their control will bring significant new revenue streams from value-added services. Developers are named “partners”, but it is clear that car makers (as were telcos) are mostly see them as suppliers of content and treat them accordingly. (For the full list, take a look inside the report.)

How mobile was disrupted

Can we use this insight – car apps are just like mobile, shifted in time – to predict the future of the car app market? In our report “The Telco Innovation Toolbox” (2 years old, but still highly relevant), we showed what has happened in the mobile industry.

From the 4 “most wanted” apps of the feature phone days (according to market research acquired at great expense, no doubt), we went to smartphones with now over a million apps, encompassing every imaginable user need. Service distribution and industry power shifted from telcos to mobile platforms: Android and iOS.

Fundamentally, the basis of competition in the mobile industry shifted from reliability and scale (which network has the most bars) to choice and flexibility (which handset has the most apps). This wealth of applications unlocked a user demand that far exceeds that of a selection of “best” or “most important” features in a product designed by a single organisation.

The same shift in cars?

Can the same shift happen for car apps? Will the basis of competition for car makers change from reliability and scale in the production of cars and infotainment systems, to choice and flexibility of in-vehicle and out-of-vehicle services that will unlock new user demand? We believe it can, and it will.

Already car makers like Ford and General Motors and over-the-dashboard players like Mirrorlink, Apple, Google and most recently, Microsoft are working towards app platforms for cars. The introduction of Apple’s CarPlay, Google’s Open Automotive Alliance and Microsoft’s Windows in the Car seems to herald a tipping point in the industry. Here are players that have a deep expertise in fostering vibrant ecosystems, in building developer communities and in enabling developers to add value. There is now a realistic and acute possibility that these new entrants will sweep away the existing car app platforms with a dominant, over-the-top solution, just as they did in the smartphone world.

In short, car makers should take the following statement as a heads-up:

I want to buy Carplay. I don't really care that much about the vehicle around it.

— Dave Pell (@davepell) March 16, 2014

Now you know what’s at stake. Find out how the car industry is changing and what to do about it. Our full report on automotive developer programs is available as a free download.

7th Developer Economics survey!

We just launched our new Developer Economics survey! If you’re an app developer, take the survey and help shape the opinions of Microsoft, Intel, Nokia, Amazon, and many others reading the reports from this survey – and win some cool prizes while you’re at it! The findings will be released as a free report in July.

The 7th edition survey explores some key trends: How are challenger platforms moving up? Is HTML5 in decline? Who is making most money? What language do most devs use? What are the trending tools of the trade?

Participants will enter a draw for some cool handset prizes: an iPhone 5s, a Galaxy S5, a Lumia 930 and more. If you’re also a VisionMobile panelist (or join the panel), you’ll get the chance to win a Lego Mindstorm robot, a Raspberry Pi Ultimate Starter Kit, a Das Keyboard or a Sphero!

Take the survey

Emerging developer opportunities in Enterprise & Productivity apps

[Andreas Pappas shares our latest findings, from our Business & Productivity Apps report which takes a look at developer opportunities created by emerging trends in enterprise mobility (such as bring-your-own policies and mobile SaaS) and professional and vertical app markets (e.g. healthcare apps). This market was worth $28 billion in 2013 and is set to grow to $58 billion by 2016.]

[Want to help us with data for our reports? We’ve just launched our latest Developer Economic survey – take the survey and have your say on the latest trends]

[tweetable]Apps are changing the way people communicate, work and play[/tweetable]. App development has grown into a huge industry, that we estimate to be worth $67 billion in 2013. We expect the app economy to more than double in size by 2016.

Most of the publicity and media spotlights currently fall on superstar consumer apps like Angry Birds or Candy Crush Saga and communication apps like WhatsApp. These success stories have certainly highlighted the massive scale and revenue potential of mobile apps, reaching from zero to tens of millions of users in record-breaking time.

At the same time, a growing audience of prosumer and business users depend on Box, Evernote and Trello to help them be more productive in their work. Enterprises are now allowing employees to use the apps they love at work, inside the corporate Intranet. Organisations of all shapes and sizes are integrating mobile apps within their business processes. This mobilisation creates a demand for off-the-shelf or custom mobile apps and services, translating into new and bigger opportunities for mobile app developers.

Most app developers currently target consumer app markets (think games and lifestyle apps) but they could be missing out on opportunities in the enterprise (aka business & productivity) market. Our research indicates that the business & productivity app market, is not only growing at approximately the same rate as the consumer app market but is also less congested, and offers better revenue potential, for more developers. Read the report to find out more.

Consumer vs. Enterprise & Productivity apps: how do revenues compare

App publishers that target business and productivity markets have a much better chance of generating sustainable revenue than those targeting consumer markets, with just 32% of them below the “app poverty line” ($500 per app per month) compared to just under half of consumer-focused publishers (48%). At the same time, [tweetable]publishers that target businesses or professional users have a much higher chance to generate very high-revenues[/tweetable]: 16% of those targeting the business & productivity market generate revenues exceeding $500,000 per app per month, compared to just 6% among consumer-focused publishers.

While consumer apps and particularly games (e.g. Angry Birds, Candy Crush Saga) can generate extraordinary revenues, it is quite clear that this is not the case for the vast majority of developers that target consumer markets. Business & Productivity apps allow developers to build a sustainable business around more solid business models with recurring revenues from a loyal customer base.

As bring-your-own policies and enterprise app stores become increasingly popular among businesses, the market and the opportunity for developers is likely is set to expand in the next three years.

Which platform should you prioritise if you build business and productivity apps?

While Android is dominating the consumer market in terms of market share, iOS maintains a healthy lead among professional and business users. Data provided by enterprise cloud content platform Box, indicates that 94% of their tablet users are on iPads, while enterprise mobility management services provider Good Technology indicates that 54% of enterprise smartphone activations came through iPhone devices in Q4 2013. It is clear that Apple has an edge in the business device market and this is also reflected in revenues generated via iDevices: VisionMobile estimates that revenue generated via iOS devices accounts for at least 60% of the total revenue in the business and productivity market.

For developers that target the business & productivity sector it makes sense to prioritise iOS for development over the other platforms they develop for. However, there are several considerations to take into account such as integration with existing enterprise services, which may call for an HTML approach or the specific market that you target.

Where are the opportunities in the enterprise app market?

There is an inherent unpredictability associated with the future use of apps and it is exactly this unpredictability that empowers developers to create innovative apps that continue to redefine whole markets and industries. Nevertheless, we can still identify a number of areas that currently attract considerable attention among businesses and where we see future value being unleashed in the business & productivity market:

Vertical apps
Specialised industry apps such as healthcare, real estate, finance or automotive. Vertical specialisation provides a great opportunity for differentiation and for building strong brands as the app economy diffuses into every single industry. Existing industry stakeholders can leverage apps as a differentiation strategy against “un-apped” competitors, integrating apps and exposing APIs across their product offerings. For independent developers, specialisation is a means to capture a niche and survive the discoverability labyrinth.

Productivity/BYO
Apps that cross the boundaries between private-use and work-use, such as storage, lists, calendars, office-type apps are key drivers behind the consumerisation of enterprise IT. Once into an organisation or an enterprise app store, such apps can spread rapidly within organisations.

Mobile SaaS
Software-as-a-Service, delivering CRM, HR, ERP, BI services to small businesses and large enterprises is a booming sector. Mobile apps extend these capabilities much further by allowing anytime/anyplace access to these core business services.

Custom apps/services
Bespoke mobile solutions delivered outside of app stores will continue to take the lion’s share of revenues within the business and productivity app market. As we discussed, the dominance of this model will erode during the next few years as app store purchases increase among enterprises.

MDM/MAM
Apps and services that tackle security and complexity of the decentralised IT department are already essential for any enterprise that adopts BYO policies. More sophisticated app & device management models, that tackle some of the key issues associated with this trend (e.g. managing private/work services, remote deletion of work content) will continue to be hot areas in the next few years, catering to an increasing number of use cases.

Download our free “Business and Productivity Apps” report to find out more about the developer opportunity in this market and the reason you should be developing business and productivity apps.

Have your say in Developer Economics research
Help us continue bringing you great insights about the app economy and app development. Take part in our 7th Developer Economics survey that is launching today! Help us break our earlier world record of 7,000 app developers that took our 6th survey. Take part, spread the word, win prizes and help us do great research !

OTT2: the second tidal wave of mobile ecosystems

[The mobile space is about to be shaken up again. Get ready for the second tidal wave of mobile ecosystems to reshuffle the market. These powerful new ecosystems are mobile-first and twice over-the-top (OTT²): they are built on top of telco services and on top of app platforms.]

It’s 2014. We’re 6 years into the smartphone revolution, and the mobile space is starting to settle down. iOS and Android are clearly in the lead among app platforms – their ecosystem strategy has created a natural duopoly in which competing platforms no longer stand a chance. Smartphone innovation is no longer radical, but mostly incremental. There are signs that smartphone users are becoming overserved by the latest and greatest flagship devices: smartphones are becoming “good enough” as such and undifferentiated for mainstream users.

But things are about to be shaken up again. [tweetable]A second tidal wave of mobile ecosystems is gaining strength, ready to thoroughly reshuffle the mobile market once more[/tweetable].

These powerful new ecosystems are mobile-first and twice over-the-top (OTT²): they are built on top of telco services and on top of app platforms. I’m talking about messaging apps of course: WhatsApp, Line, WeChat/Weixin, Viber, Telegram, KakaoTalk, Kik.

Gaining momentum

[tweetable]Messaging apps are proving to be so much more powerful than just chat[/tweetable]. Even well established social networks and ecommerce giants are getting nervous enough to make high-value surprise acquisitions (we’ll talk about Facebook in a moment).

The first indicator of their momentum is the sheer size of their user bases. Tango, considered to be a smaller player, has 200M registered users and 70M monthly active users (MAU). Wechat has passed 350M MAU, WhatsApp has over 450M MAU. Chat apps don’t just get downloaded often, but they are incredibly engaging. A large share of engagement minutes is going to staying connected with friends, family and business partners, and chat apps are increasingly the way to do so. Chat messages overtook SMS in global message volume in April 2013. In essence, the rise of messaging apps relegated telcos as a group to the status of just another communication ecosystem.

Investors agree when it comes to their value, if we can believe the recent M&A, IPO and investment activity.

WhatsApp was acquired by Facebook for $19B
Viber was acquired by Japanese e-commerce player Rakuten for $900M in cash
Tango received a $280M series D investment, including $215M from China’s e-commerce king Alibaba
Line is rumoured to prepare for a $28B IPO
KakaoTalk is also preparing for an IPO, aiming at a $2B valuation

Unfair advantage

[tweetable]Messaging apps are important because they build on asymmetric business models, the same economics that brought Apple and Android to their dominance[/tweetable]. They are subsidizing or commoditizing hardware, apps and services to grab users and boost their core business. The first examples of this are already evident.

Messaging apps are of course commoditizing the quintessential telco services: voice and texting. Whatsapp announced a VoIP play. Even large operators in emerging markets with incomplete mobile penetration like China Mobile are reporting financial performance challenges, citing competition from chat apps as the reason.
Tencent (known from the wildly popular instant messenger QQ and chat app WeChat) and Alibaba (China’s e-commerce champion) are fighting their battle for user acquisition and engagement in the most unexpected of places: taxis. Not only have Tencent and Alibaba both invested in taxi hailing apps (DiDi and Kuaidi respectively), they are both actively subsidizing taxi rides by giving discounts if users use their apps. The mini price war is so intense that in some cases, users actually get paid when taking a taxi.
Apps like Line and Tango are taking a page from iOS and Android’s playbook, using game developers and content providers to add value to their platforms.

With this “user landgrab” and high engagement, messaging apps are competing with the telco services and app platforms on which they are built, who are trying to achieve the same reach and share of attention. [tweetable]While most apps are just value-adds for iOS and Android, messaging apps are the first that can create a substantially new mobile landscape[/tweetable].

So what is the core business of chat apps that is being boosted? We’ll discuss the surprising dominant revenue model of social apps in part 2 of this post. Stay tuned!

— Stijn