Daum Kakao’s instant messaging app, Kakao Talk, has virtually replaced SMS texting in South Korea. Estimated to be used by over 90 percent of smartphone owners in the country, Kakao Talk boasts a worldwide user base of over 140 million.

But there is a fly the ointment here, as making money from letting people send texts for free has proved tricky. The company has been haemorrhaging net revenue over the past two quarters.

Net income dropped 23 percent year-on-year in the first quarter of this year. For the second quarter it plunged to 21.3 billion won ($17.75 million) from 55.8 billion ($46.5 million) in the second quarter of 2014, a 62 percent drop.

Those grim figures came on the heels of a pessimistic forecast by UK-based market analysis firm Juniper Research that said revenue from the worldwide messaging market will decline by $600 million, down to $112.9 billion, over the next four years — even though messaging traffic in the same period will double. The South Korean company’s struggle with profitability, despite its immense popularity, could embody the challenge that the global messaging sector faces going forward.

Still worth $7 billion, Kakao is combating falling profit margins with a battery of new features, including launching online board games and gambling.

The route to success for Kakao Talk — and global competitors such as LINE and WeChat — is based on a simple proposition: Get the enormous user base to start using transactional services, like playing online games, buying emojis or hailing a cab. But that’s easier said than done.

Mobile Games

“The thing with games, it is all about having that one hot game that can make a tremendous amount of revenue for that quarter,” a Kakao spokesperson said, before admitting “we unfortunately did not have that hot game in the first quarter.”

The company has a new game, “Kakao Friends Pop,” though declined to provide any hard figures on its use. Additionally, it’s also looking to launch a series of online board games as early as October, hoping to partner with local developers like Sunday Toz, Pati Games and NZIN.

“Board games are one area the company is looking at,” the spokesperson explained. ” It is mostly what you would consider head-to-head games, like Chess, Baduk, and Go-Stop, a traditional Korean card game, and this is something we will launch this year probably around October. And that is something we have not done before.”

Many of the games will feature elements of online gambling, which has historically been illegal in South Korea. The government recently relaxed regulations, though there are still some restrictions, including a 300,000 ($258) won monthly betting limit per person and a 30,000 ($26) won limit per game session. The company is also cautiously avoiding its image being attached too closely to online gambling.

“Users purchase game money and play each other using that money. It is a little bit like gambling, but there are limitations on how much you can bet on a single game and how much [game money] you can purchase,” the spokesperson says.

Kakao’s online-to-offline play

According to Jay Park, a Seoul-based mobile contents analyst, Kakao has to diversify its revenue sources to return to profitability. Social messaging service providers found their first revenue generator in selling emoji and other stickers, he says. The next cash cow was mobile games. Now, companies like Kakao are focused on mobile platform advertising.

“But in my opinion, when I see the SNS [social networking services] market and the instant messaging market, it looks like social networking services do it better. Facebook and Twitter are doing well with advertising, better than companies like Kakao and Tencent,” he says, adding that Kakao would be better served to focus on online-to-offline services “such as Kakao Taxi and Kakao Pay.”

“Online to offline” refers to an online service that lends itself to users spending money offline. Kakao offers several of these, including the aforementioned Kakao Taxi, where Taxi’s are hailed through the app, and Kakao Pay, which is similar to Samsung’s touted Pay function.

In August the company reported revenues of 226.5 billion won for the second quarter, with mobile-related businesses making up 52 percent, or 117.78 billion won. Kakao has said it is focused on moving its revenues to mobile. Its third quarter results are scheduled to come out sometime in November.

“It is still [advertisements] and games that make up 90 percent of our revenues. Within those two, especially with advertising, we are trying to move our revenue source from PC to mobile,” said the spokesperson. The company said revenues are split 60-30 between advertisements and games with the remainder coming from a variety of other sources.

The company is working on several key online to offline businesses, including expanding the popularity of Kakao Pay, which in August passed the 5 million-users mark. “For Samsung Pay a user is required to have a newer Samsung device in order to use the service. But with Kakao Pay, all that is required is to download KakaoTalk app regardless of the device or the phone’s OS,” the Kakao spokesperson boasted.

“We have always been a mobile-focused company. We felt it would be best for our identity to match that with a new name. Kakao Talk is our signature service, and we will focus on services linked to Kakao Talk and online-to-offline services like Kakao Taxi and Kakao Pay.”

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Kakao bets on online board games and gambling to nab elusive profitability