Kakao bets on gaming for profits

Daum Kakao's messaging app, KakaoTalk, has virtually replaced SMS texting in South Korea and has a subscriber base to match, with 38 million people in the country -- amounting to two-thirds of the population -- and another 10 million abroad, many of those in Indonesia.

But there is a fly in this ointment. Making money from simply letting people send texts for free has proved tricky. And Kakao's net revenue has reversed course, from profitability last year to hemorrhaging money in the past two quarters. Kakao's struggle with profitability could presage a challenge for the global messaging sector going forward.

The $7 billion corporation that styles itself as a "mobile lifestyle platform" has a battery of new features to stop the bleeding, including web games that involve gambling.

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

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 to $112.8 billion over the next four years, even though messaging traffic in the same period will double.

"We also think profit will not be recovered in the short term, because their main revenue was based on the games. Their market share in the gaming platform has dropped seriously and that hemmed their revenues for three quarters in a row," said Jay Park, a Seoul-based mobile contents analyst. "It can recover a bit, but it will not be like 2013 and 2014."

The success underlying Kakao and global competitors such as LINE, WeChat, Kik, Snapchat and Facebook Messenger is a simple proposition: Leverage enormous popularity into all manner of other services -- from ordering groceries to take-away food, to sending money, playing online games, and hailing a cab. But that's easier said than done.

"The thing with games, it is all about having that one hot game that can make a tremendous amount of revenue for that quarter. We unfortunately did not have that hot game in the first quarter. [But] Kakao Friends Pop has been No. 1 [in South Korea] on Android and iOS. Those characters are already popular in Korea," said a company spokesperson.

The company's new game, Kakao Friends Pop, does seem popular, although Kakao declined to give any hard figures to back up the claim.

In addition, Kakao is also looking to launch a series of online games as early as October, such as chess, baduk (a traditional game like chess that is popular in East Asia), and go-stop, a traditional card game that is very popular in South Korea. These games will involve a limited amount of gambling.

Kakao is looking to partner with game developers Sunday Toz, Pati Games, and NZIN to launch games on the company's mobile platform.

"Web board games are one area the company is looking at. It is mostly what you would consider head-to-head games, like chess, baduk, and go-stop, and this is something we will launch this year, probably around October. And that is something we have not done before," the spokesperson said, adding that Kakao has yet to decide on the game lineup.

Online gambling has been illegal in South Korea, but the government recently relaxed some regulations. Gambling has a social stigma attached to it in South Korea, and Kakao had to ward off speculation in the local media that the company was jumping into online gambling, referred to as "social casinos" locally. Online gambling is such a concern in South Korea that the country's Ministry of Culture, Sports and Tourism sets a 300,000 won monthly limit on betting and a 30,000 won limit per game session.

"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 said.

Kakao's online-to-offline play

Park said 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 said. The next cash cow was mobile games, and 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," said Park, adding that Kakao would be better served to focus on businesses such as Kakao Taxi and Kakao Pay.

On August 13, Kakao reported revenues of 226.5 billion won for the second quarter, with mobile-related businesses making up 52 percent, or 117.78 billion won. The company said it is focused on moving its revenues to mobile. Its third quarter results are scheduled to come out in November.

The company is working on developing a couple of key businesses, as it completes the finishing touches on folding Daum into Kakao, the two companies having merged last year. A new name for Kakao and other changes will be made official at its shareholders meeting on September 23.

"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," the company said. Its revenues are split 60-30 between advertisements and games, with the remainder coming from a variety of other sources.

The payments market is already a crowded one in South Korea. Even before there was Samsung Pay, shoppers had a dizzying array of mobile payment services to choose from, such as SK Planet's Syrup Pay, Shinsegae's SSG Pay, NHN's Payco, and even portal site Naver with its Naver Pay.

Kakao Pay passed the 5 million users mark in August, the company said.

"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," Seo said.

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

Source: ZDNet.co.kr