(2/3) Idea on platform business, and profit model (business model) of Kakao Talk - English ver
Idea on platform business, and profit model (business model) of Kakao Talk' (2/3)
Category: <Business>
Kakao is now going through difficult times due to its deficient profit. The major obstacle, in my view, is lack of ‘web
based service’ which take the largest share of online services. There is no
doubt that Kakao Talk is the most dominant standard of online messaging
application in Korea. Kakao is expanding its services on the dominant platform
and user base. However, Kakao as a platform is little bit different from other
platform businesses (which earns huge and constant profit) in business
perspective.
1. How
does Kakao make money?
High dependency on contents revenue
How does
Kakao make money? Does it generate immense profit via advertisement like
Facebook or Google? Ad revenue is taking quite high portion, but not the most.
Recent revenue of Kakao is highly dependent on ‘contents’ related revenue. From
the quarterly report and financial statement of Kakao (from 2016 4Q to 2017 2Q)
content revenue have maintained its highest share from the entire revenue. Ad
revenue have been approximately 30 per cent, while contents revenue including
games, music, emoji, web-comics and web-novel have reached 50 per cent of
entire revenue.
(Source of Image: 2017 2Q Kakao report)
I believe,
for the platform businesses like Kakao, depending too much on contents rather
than service itself accompanies substantial risk factors. At the very beginning
Kakao have established its platform and customer base as a ‘1 on 1 mobile
messenger’ service, and contents like games or music have been subsidiary
business model followed up by their major service. Therefore, there exist
limitation of collating and retaining large customer base based on contents for
Kakao. ‘Kakao games’ had successfully made series of hits(With games like
Ani-Pang) in their early days (2014 ~2015), but the fever generated by their
games did not last long. Since most of the Korean population use Kakao Talk
(and have Kakao account) Kakao could effectively collate game users by going viral.
However, at some point many people starts to recognize themselves not playing
games installed on their smartphone as frequently as before, and last access of
their friends who used to play together had been quite long ago. Slowly people
start to exit from the game, and delete it. They are not the customers of the
game –or contents – but they had been (and continue to be) customers of ‘Kakao
Talk’. They didn’t join Kakao to play games. They are the customers who used to
be Kakao Talk users who ride on the tide. When Kakao aggressively go through
contents business, they would collate many users, but those users are customers
of ‘Kakao Talk’, not the contents itself. Sooner the fever alleviates, easier
the users leave.
Amazon,
which is expanding its business from online bookstore to commerce, logistics,
and even big data utilizing cutting edge services give large share of revenue
to ‘contents’ too. However, the case is quite different. Amazon maintains
customer base who goes to Amazon for contents itself. In the red-ocean of smart
devices Amazon have pioneered e-book market. Many people use Amazon service to
buy e-book contents. Customers who purchase relatively cheap Amazon digital
contents devices also consume Amazon digital contents through online channels
like ‘Amazon prime movie’. They are not derivatives of Amazon customer, but
customers for ‘Amazon contents’.
In
conclusion, since Kakao customer based have been established on its ‘service’,
high dependency on contents bears risk of merely creating weakly-tied ephemeral
customers – which is contrasted to holding customers tight by providing
service. Kakao need more sustainable source of profit.
Is Kakao’s profit sufficient right now?
Putting
component shares of revenue aside, is Kakao’s aggregate revenue and profit
sufficient? No. Kakao service succeeded infiltrating into our life like Naver,
Faceook, and Google, but in perspective of profit Kakao is far inferior to
others. When we compare Kakao’s business revenue and profit with those of Naver
(who’s the largest in-frontier competitor of Kakao) it becomes clearer.
[2017 1Q
Revenue
Kakao:
440, Naver: 1,100 (Billions)
Profit:
Kakao:
38.0, Naver: 290 (Billions)
2017 2Q
Revenue
Kakao:
470, Naver: 1,100 (Billions)
Profit:
Kakao:
44.6, Naver: 285 (Billions)]
Reference: Annual report of Kakao/Naver
High PER
value (Price - Earning Ratio value; High PER value indicates the price of stock
is over-evaluated considering earning of the company. However, this value is
significantly considerable for Korean companies) of Kakao shares is one of the
factor rousing criticism that expected momentum of the company is
overestimated. In case of IT platform businesses, since it is common for high
expectation toward 4th industrial revolution or Google effect to
push stock prices up to the sky while the business itself encounters the
difficulty of establishing profit model, high PER value is not abnormal. However,
considering average PER value of IT platform business in Korea roams around 50,
I believe ‘160 PER value’ definitely implicates that Kakao is not making enough
profit to push itself forward.
2. Other
platform businesses
So then,
how are other platform businesses making money? Let’s look through the example
of Google, No.1 platform business in the current era.
Google
Google
started its business as a search engine. At the very initial stage, the range
of services it provided was not broad as it is now. It provided search engine,
email, and all the other functions that we could find out from other web engines.
When google first entered Korea, Naver was still dominating local search engine
market. However, through ceaseless acquisition of various businesses it started
to widen its range of services - Android mobile, Youtube video, google docs and
drives, etc - as well as dominance in online market. Google is now a Behemoth
in online market.
Google’s
continuous expansion of business area and products through M&A is not so
far from what Kakao have also been doing. However, the crucial point which pushed
Google far away from the deadlock which Kakao is now situated, between the
innovation and sufficient profit generation, is in the very nature of the
service. The nature of Google is no.1 global search engine – not an online SNS messenger, not a video contents
provider, not a mobile product producer. Google’s dominant business model to
generate profit is advertisement. Google does not create and sell contents
(though they produce product), but they provide cyber venue to display ads to their
clients, and show personalized advertisements to customers.
Google
arms itself with splendid search engine and database. When we get cold, we go
to Google, search on keywords such as ‘flue’, ‘influenza’, ‘infection’. If I am
interested in a candidate for president election, I search information on the
candidate. Google is one of the pioneers of data who recognized keywords and
search results from everyday life of every people could be a huge database projecting
people’s patterns of behavior. As keywords search results accumulated, Google
search create database which shows past, present and future. Google designed its
own database management system – GFS (Google File System – to efficiently collect
and manage myriad of data. Also they started to analyze correlation of linked
pages and keyword search, and finally come up with its ‘Page Rank’ search
system. Now Google can selectively show you the most relevant search result which
you have been looking for among tons of data flow within cyberspace, because Google
knows what you are looking for based on analysis of your search pattern and
Google database. Google, who knows what
you want and are looking for, manipulates only the advertisement you might be
interested to reach you. After searching on 2017 autumn coat trend for a while,
you recognize an advertisement of a coat that blows your mind at the edge of
your web page.
Advertisement
revenue of Google who has now dominated most of the internet service area
through M&A is tremendous. Google ‘AdSense’ even created an algorithm to
distribute Ad revenue to the publisher of the web page or contents which display
the Ad. It induces more and more users of Google blog or Youtube to display Ads
on their contents, thereby making Google more attractive advertisement agency.
Today,
based on its search engine, web services and tremendous database Google is on a
lead of 4th industrial revolution. And revenue from advertisement has
become a *cash cow of Google, bringing tremendous profit and source of finance
to re-invent in innovation.
[Google Ad revenue (2015): Over $51 billion.
Growth rate stumbled for a while due to massive immigration from desktop search
to smartphone search, but overall Google Ad revenue is still growing.]
*Cash
cow: From BCG matrics, cash cow refers to a business with high market share and
revenue, so it brings enough finance for re-investment, but market growth is
comparably low. In this article I used the term to emphasize high market share
and revenue of Google Ads, not low market growth.
Facebook – Not all SNS make the same revenue
I also
want to give a careful look on Facebook. Facebook also generate 85% of its revenue
from advertisement (2016). According to report from Dazeinfo, an IT and
technology magazine, 2017 Facebook have become the top ad revenue generating
company leaving Google behind itself. However, Facebook is a SNS service like Kakao
talk, not a search engine like Google.
However
there exist a big discrepancy between Kakao and Facebook in terms of data flow.
In Facebook, which is web based SNS service myriad of information on its user
flow. Everyone can instantly share and post information and ideas. If you are
willing to pay only a little amount the user could spread his/her post so it
could reach out more and more (targeted) people. People reveal their interest
by sharing post, commenting, and clicking ‘like’ button. The flow of data
within Facebook is concatenated with profile of individuals and their interests.
Facebook is armed with a database, which is based on individual’s interest + network.
While
Google provides individualized keyword based advertisement, Facebook provides ‘targeted
advertisement’ based on their analysis of emotion, interest, and ‘likes’ of
users. Personal user data (including all the activities, networks, and
interests of individual) of Facebook creates product ecosystem, thereby
displaying Ads of right products and services to right people – who are highly
likely purchase the product or service, or at least interested in, so they
become potential 2nd advertiser by sharing or ‘liking’ the ad. A
person may form a network with people sharing similar interest, and like dominos
advertisement within Facebook go viral
Facebook
also provide ‘Facebook Business’ service, by utilizing its advantage of networking.
Everyone could display one’s own Ad by paying fee and designating appropriate
target.
3. Lesson
from Naver: why web infrastructure is important, and risky sticking to messaging
service
Look what
Google and Facebook have. AdSense of Google provide individualized
advertisement, observing behavior right beside users, tracking down their every
single footstep. ‘Search of information’ is highly likely to lead consumption (Imagine
any moments you searching for something you are interested in, and end up
deciding to buy them). Also, most of the consumptions (or consumption plans) nowadays
lead to search of information (you look for reviews and detail online before
you buy nearly any stuffs). Facebook is not merely a SNS to communicate with your
acquaintances, but a square where interest and taste of everyone flows and
linked. Everyone stack human connection (network), relationship, interest, and
even contents on their own ground – ‘Facebook profile’. Interest lead to
consumption, and any attempts, impulses, to consume, or even a click of ‘like’ is
reflected on Facebook Feed. So, what do they have? They have ‘web’
Thinking
of revenue (especially from advertisement), we could find out expansion of web-based
service has a great advantage. I’m not talking about a banal discussion of ‘Either
web or app’. The important thing is capability to track down user behavioral
data which could lead to consumption and profit generation. In general, web
based services have much broader range of capability to project individual’s
behavior.
Unfortunately,
Kakao is deficient in expansion of web based service area. Since ‘Kakao Talk’
is 1:1 messenger service, the service itself is not ‘open’. It’s only
communicative within the participants of messaging, and not much data or
information flows. ‘Kakao Story’ was an attempt to create an Agora in which user
information flows based on ‘Kakao ID’ but it didn’t make a hit. Its market
share based on number of users in Korea shows quite high ratio, but the net
usage share (which only take times application used after joining the service) is
far beyond Facebook. Also, dominant user base of Kakao Story is formed by 30s ~
50s, while Facebook is taking 91% and 88% of shares within teenagers and 20s.
Kakao
have acquired web portal ‘Daum’, but web service market share of Daum is far
behind Naver. Even Google, who was a late starter in Korean web service market overwhelmed
Daum by recording 37% market share on 2015.
(https://www.thesearchmonitor.com/the-search-monitors-new-release-south-koreas-naver-search-engine/)
Since database
accumulation and customer base (or market share) is especially significant in
web services, if there exists far dominant ‘standard’ in the market it is
nearly impossible to change the flow and achieve dominance.
* Data collection & analysis method
differs depending on research institutions, so the result on market share
varies. The research I cited is the one which yielded highest value in Google’s
share.
‘Kakao
Pay’ was one of the pioneers in mobile payment market, and Naver Pay was fast
follower. However, in 2016 (only 1 years after Naver Pay had launched) Naver
Pay overwhelmed the market, by becoming top mobile payment services both in
terms of number of users and the volume of business. This was because Naver,
the largest web portal in Korea has advantage as an online shopping service platform.
Naver which has established stable web infrastructure over time is an
attractive platform for countless business holders who are looking for
distribution and advertisement channel. This brings Naver huge advertisement revenue
along with additive revenues as commission per transaction (times numerous
users).
It is
interesting to look at annual report of Naver to find out how they are making
money. The precedent of Naver LINE messenger, ‘Naver Talk’ quickly shifted its
direction to global market as Korean messenger service market was dominated by
Kakao Talk. It established a subsidiary company in Japan, and burgeoned by
dominating messenger service market of East Asia. Like what Kakao is doing in
Korea, they are expanding services in payment, mobility, and even in contents.
Revenue
from contents is taking significant part of LINE corporation (though not as
much as Kakao), but it’s earning way much more than Kakao. This is because LINE
brings many of exclusive contents so they gather consumers of ‘contents’ (not
providing contents to platform users, as I mentioned above.) Naver Webtoon, for
example has become one of the momentum of Korean wave, and Naver LINE is the
exclusive distribution channel of the contents. Unlike Kakao, contents revenue
of LINE is a cash cow.
Other
than contents revenue, Naver’s mainstream source of revenue is business
platform service. With two core products - CPC (Cost Per Click) which generate
commission per click and CPS (Click Per Sale) which generate commission per
transaction – Naver has established business platform within web portal. Myriad
of online business owners are willing to expose themselves through Naver
portal, and myriad of consumers are exposed to advertisement and purchase
products through Naver portal. CPC/CPS revenue takes 50% of entire revenue of
the corporation, but cost of running the business is comparatively low.
4. O2O
business’ dilemma – Empty pocket of an innovator
There is a
field of business which Kakao have consistently and significantly poured its
endeavor, and have comparative advantage than other web service providers – O2O
(Online to Offline) business. Even though internet technology dominates our
future and online replace many of our offline processes, we still live in
offline world. Therefore, endpoints of many services are still located ‘offline’,
and O2O business which connect between online procedures to offline endpoint of
users is center of the innovation. Services like Kakao Taxi, Kakao Pay, Kakao
reservation system (for barber shop), or Kakao bank are part of them. Google or
Amazon are also utilizing their platform to provide services linking our
offline and online procedures.
However, the
largest obstacle of O2O platform business is that revenue generated by the
service itself is meager. Kakao have succeeded stretching first step of
changing our lifestyle and provide convenience, so they were planning to expand
O2O services. However, in 2017 due to profit deficiency they announced that Kakao
O2O business would be reduces. While most of O2O services are provided free –
in perspective of consumer – O2O market have become red ocean, increasing
marketing cost of service providers. Companies like Google are still secure though,
since they have a cash cow. In contrast, Kakao is an innovator with empty
pocket.
Then,
should Kakao reduce O2O business and only concentrate on its other platform
businesses? I believe not. Why would
Kakao give steppingstone of online to offline platform it has built to others,
if it is owner of the messenger which 80% of South Korean population use every day?
In spite of deficient profit Kakao have shown innovation, and momentum to
change our lifestyle. So what should Kakao do?
I would
like to suggest two directions. First – actively merge Daum with Kakao services
and expand web based service, so that Daum and Kakao would not only share its ‘companyhood’,
but synchronize entire services throughout app and web. Their next move would
be to maximize advertisement/business related revenue, fill their pocket and
step forward as an innovator. Second, go for O4O (Onliee for Offline) over O2O and
design method to generate profit.
Through
next post, I would like to elaborate more on my two suggestions. In addition, I
would like to talk more about O4O and Amazon.
***
References
(You may also be interested in):
Big data, changes management (빅데이터, 경영을
바꾸다)
Author: Chae Seung Byung, Ham Yoo Geun
About Kakao and Naver:
Declining revenue of Kakao Games
Kakao reports 2016 4th qrt~2017 2nd qrt
Naver report 2017년 1st qrt ~ 3rd qrt
Market share of mobile payment
Modification of Kakao O2O strategy
Naver LINE - dominate Asia market
LINE revenue - Japan
About Google:
Core technologies which formed Google
Core competency of Google
Google app dominace
Google and Ad revenue
About Facebook:
2017, Facebook Ad revenue exceed Google's
Others:
Social media market share in Korea
2016 NPR report - SNS market share in Korea
Korean portal market share
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