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Why chat apps are the next 'breed' of social networks

The Tencent Holdings Ltd.'s WeChat application icon and website are displayed on an Apple Inc. iPhone 5s, right, and Apple Inc. iPad respectively in an arranged photograph in Hong Kong, China.
Brent Lewin | Bloomberg | Getty Images
The Tencent Holdings Ltd.'s WeChat application icon and website are displayed on an Apple Inc. iPhone 5s, right, and Apple Inc. iPad respectively in an arranged photograph in Hong Kong, China.

Facebook's $19 billion acquisition of WhatsApp has made the world sit up and take notice of messaging apps and their importance as the players to watch in 2014.

"The likes of WhatsApp, WeChat, Kakao Talk and Line - are the future of social networking," Claus Mortensen, a director of IDC's Asia-Pacific emerging technology research group told CNBC. "They are the next breed of social networks, especially in emerging Asia where the use of social networks is highly mobile."

(Read more: Just how big will the messaging app industry get?)

According to investment bank Macquarie, mobile messaging apps are poised for explosive revenue growth over the coming years as they expand offerings beyond basic chat services to monetize their rapidly growing user base.

The bank forecasts messaging apps will generate nearly $25 billion in annual revenue by 2017, up from under $1 billion, as user numbers jump to 2.9 billion from the current 1 billion.

And Macquarie singled out Japan's most popular chat app LINE as having the biggest opportunity from a gaming/advertising perspective, and expects it to generate $2.2 billion by 2017, up from $335 million in 2013.

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Decentralized behavior

According to Christian Ward, social media and market trend expert at UK based advisory firm Stylus, the rise of messaging apps is all do with social network behavior becoming more fragmented and de-centralized.

Previously, most users of social networks - especially those who started with Facebook, would use a certain site for all their networking needs. Nowadays, however, as more and more new sites offering a more focused service emerge, users are more inclined to use a cluster of different sites.

For instance, a teenager might use WhatsApp to message their friends, Instagram for photo sharing, Twitter to monitor the news, Whisper to confess their secrets. A one size fits all network is no longer the preferred choice, analysts told CNBC.

(Read more: Yahoo wonderkid not jealous of WhatsApp billions)

"I think the traditional idea of a social network, like Facebook, where you have all your stuff in one place, is probably over. Generation Y and Z don't have any particular brand loyalty, and they're always-on and multi-platform, so all they want is the feature that's going to solve their problem right this moment," said Ward.

Gavin Hammar, the CEO of social media marketing platform Sendible, told CNBC the popularity of messaging apps was also being fueled by the desire for more privacy.

"As younger people seek more private social networks where they can contact their friends without their parents watching, we will continue to see an exodus of teenagers from Facebook," he said.

"For teenagers, Facebook has become like going to a party with their grandparents and even grandparents. Teens will continue to move away from social networks to instant messaging apps on mobile," he added.

The key players

Although Facebook's 1.11 billion user-base keeps the social networking giant firmly established as the most dominant player in the space, chat apps are closing in at an alarming pace.

WhatsApp has 450 million active users, and has said it is adding a million per day since its buyout by Facebook. While LINE says it has 330 million registered users (which is not the same as active users), South Korea's Kakao Talk has 120 million users and Cyprus-based Viber has 280 million global users.

Not forgetting China's WeChat, which says it has 300 million users, and Russia's most popular free messaging service Telegram Messenger, which hit the headlines recently after it became the number one downloaded app in 48 countries after WhatsApp suffered a technical malfunction for four hours in mid-February.

(Read more: Advocates say WhatsApp users hate Facebook deal)

Monetization methods

But despite the popularity of these apps, many analysts have pondered how their explosive growth will be monetized further, given that chat apps are not as suited to the targeted advertising route taken by the likes of Facebook, Twitter and YouTube.

WhatsApp, for example, has made it explicit that it doesn't want to go down the advertising route and prides itself on its no-frills messaging service free of ads, games and gimmicks. It currently makes its money from a one-off user charge.

However, other messaging apps have taken further steps down the monetization route.

LINE and South Korea's Kakao Talk sell stickers and oversized emoticons and games to users, while also acting as a portal to online shopping sites.

Earlier this month Kakao Talk moved into Indonesia, seen as a prime growth market for app makers, given half the population is under 30 and only 20 percent of its population use smart phones. WeChat, meanwhile, is perhaps the most expansive in terms of monetization methods, offering a platform for chatting shopping, gaming and even banking.

According to Gregory Gunn, global vice president of business development at social media management system HootSuite, although it is not yet clear how these apps will monetize, he said he was confident this would be figured out further down the road.

Gunn said messaging apps had already conquered the first hurdle in terms of getting people's attention.

(Read more: Can Japan's answer to WhatsApp take on the world?)

"It's not often that you see a technology that has the ability to have a billion users," he said. "We're still in the nascent process with these messaging apps and perhaps defining what their upper tier is will come with time. As long as you have someone's attention and they are inside your system then there's a whole slew of ways you can make money," he added.

Acquisitions of smaller, niche social networking sites is set to be trend in 2014, analysts told CNBC. Already we have seen Japanese online retailer Rakuten buy Viber, while there were rumors of SoftBank looking at buying a stake in LINE last month, and the most recent being Facebook's buyout of WhatsApp.

"Acquisitions along the lines of Facebook and WhatsApp will continue, as the mobile real estate wars gather pace. Messaging and video will be the battlegrounds I think – both are evolving at a fast pace as phones get ever more powerful," said Stylus's Ward.

IDC's Mortensen told CNBC that a key headwind for these messaging apps will be conquering the challenge of moving into new geographies. He gave the example of WeChat which is popular in China and South East Asia, but has so far failed to crack Europe and North America.

"The battleground will be emerging markets. In this battle, size matters - people will only join messaging apps if the people they communicate with are already on it. On the other hand things can change quickly," he said.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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