Why messaging apps attract big valuations

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New York - For an idea of why messaging applications are attracting valuations in the tens of billions of dollars, look no further than WeChat, a 600 million-user messaging application that’s part of Tencent Holdings.

WeChat, a smartphone instant-messenger, digital wallet and car-booking service rolled up into one, is probably worth $83.6bn, according to HSBC.

As people spend more and more time sending short messages to each other—instead of, say, browsing websites or shopping online—such services have become some of the hottest technology businesses around.

As a result, valuations of other messaging apps, which are racing to amass users, are reaching lofty heights. Facebook paid $18bn last year for WhatsApp, which currently boasts more than 800 million users.

Snapchat, a startup that lets people share disappearing pictures, was valued at $16bn in May.

Even though few of these generate any income, they're seen as the building blocks for an ecosystem that will include e-commerce, transport, advertising and other opportunities.

"There's not many categories of technologies that are going to consume a mass number of people, and messaging appears to be one of these now," said Brian Blau, social-media analyst at Gartner.

"That's probably one of the most attractive parts for these investors, which is driving those valuations."

WeChat's user count jumped by 37% in the latest quarter, according to Tencent's results—and it isn't even the internet company’s biggest messaging product.

That honour goes to QQ, which has 843 million users. Facebook’s own Messenger has 700 million users. Skype, the Internet calling service operated by Microsoft, also lets people exchange messages and boasts 300 million users.

By comparison, Twitter, which is projected to generate $2.24bn in revenue this year, only has 316 million users.

When it comes to innovation, however, WeChat may be far ahead of the pack in terms of money-making opportunities.

It already includes shopping and in-app games, features that other services are rushing to replicate, according to Adley Bowden, senior director of analysis at Pitchbook.

"WeChat's success is a little bit of a game-changer in the take on messaging as a platform," Bowden said.

Line, a messaging app popular in Japan, may soon offer a better picture of how investors are valuing messaging apps.

The company, controlled by South Korean search portal Naver, is preparing for a dual listing in Tokyo and New York next month, people with knowledge of the matter said in May.

Line, which makes money by selling teddy bear icons and games to its 211 million users, had $223.9m in revenue in the latest quarter.

Competition for users remains fierce.

Viber, a popular messaging app, has 249 million users. Kik, a Canadian messaging service, has more than 200 million, while South Korea’s KakaoTalk has 48 million people exchanging messages and photos.

Eventually, within three to five years, there will be a few winners that survive, said Gartner's Blau. That will probably involve more acquisitions by the biggest messaging service providers, with the main question being how much further valuations can go.

"There are probably going to be more of these top-line companies that aren’t going to be satisfied to grow organically," Blau said.

"What we’re seeing today is a race toward an ecosystem, which is more powerful than a single- function app and will serve as a conduit to other types of engagement."

That estimate would make WeChat bigger than American Express, Ford or Target.

*Fin24 is part of Naspers owned Media24. Naspers also has a stake in Tencent, the owners of WeChat.

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