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Youth flock to mobile messaging apps, may be threat to Facebook

A man uses an iPad with a Facebook app in this photo illustration in Sofia January 30, 2013. REUTERS/Stoyan Nenov
A man uses an iPad with a Facebook app in this photo illustration in Sofia January 30, 2013. REUTERS/Stoyan Nenov

By Gerry Shih and Alexei Oreskovic

SAN FRANCISCO (Reuters) - Create personal profiles. Build networks of friends. Share photos, videos and music.

That might sound precisely like Facebook, but hundreds of millions of tech-savvy young people have instead turned to a wave of smartphone-based messaging apps that are now sweeping across North America, Asia and Europe.

The hot apps include Kik and Whatsapp, both products of North American startups, as well as Kakao Inc's KakaoTalk, NHN Corp's LINE and Tencent Holdings Ltd's WeChat, which have blossomed in Asian markets.

Combining elements of text messaging and social networking, the apps provide a quick-fire way for smartphone users to trade everything from brief texts to flirtatious pictures to YouTube clips — bypassing both the SMS plans offered by wireless carriers and established social networks originally designed as websites.

Facebook Inc, with 1 billion users, remains by far the world's most popular website, and its stepped-up focus on mobile has made it the most-used smartphone app as well. Still, across Silicon Valley, investors and industry insiders say there is a possibility that the messaging apps could threaten Facebook's dominance over the next few years. The larger ones are even starting to emerge as full-blown "platforms" that can support third-party applications such as games.

To be sure, many of those who are using the new messaging apps remain on Facebook, indicating there is little immediate sign of the giant social media company losing its lock on the market. And at a press event this week, the company will unveil news relating to Android, the world's most popular smartphone operating system, which could include a new version of Android with deeper integration of Facebook messaging tools - or possibly even a Facebook-branded phone.

But the firms that can take over the messaging world should be able to make some big inroads, investors say.

"True interactions are conversational in nature," says Rich Miner, a partner at Google Ventures who invested in San Francisco-based MessageMe, a new entrant in the messaging market. "More people text and make phone calls than get on to social networks. If one company dominates the replacement of that traffic, then by definition that's very big."

Facebook spokespeople declined to comment for this article, citing this Thursday's planned announcement.

Facebook's big challenge is reeling back users like Jacob Robinson, a 15-year old high school student in Newcastle upon Tyne in the U.K., who said the Kik messaging app "blew up" among his friends about six months ago. It has remained the most-used app on his Android phone because it is the easiest way for him to send different kinds of multimedia for free, which he estimated he does about 200 times a day.

Robinson said he trades snapshots of his homework with friends while they stay up late studying for their exams — or not.

"We also stay up in bed with our phone all night, just on YouTube searching for funny videos, then you quickly share it with your friends," he added. "It's easy. You can flip in and out of Kik."

Facebook "has really started to lose its edge over here," said Robinson, who found his interactions on Facebook less interesting than his real-time chats.

Waterloo, Ontario-based Kik has racked up 40 million users since launching in 2010. Silicon Valley entrants in the race include Whatsapp, funded by Sequoia Capital, and MessageMe, launched earlier this month by a group of viral game makers. MessageMe has received seed-stage funding from True Ventures and First Round Capital, among others, and claimed 1 million downloads in its first week.

Meanwhile, Asian companies are producing some of the fastest-growing apps in history. Tencent's WeChat boasts 400 million users - far more than Twitter, by way of comparison - while LINE and KakaoTalk claim 120 million and 80 million users, respectively. Both have laid the groundwork to expand into the U.S. market.

MOBILE WAVE

The growth in the messaging apps reflect the dramatic shift in Internet usage in recent years, as Web visits via desktop computers have stagnated while smartphone ownership and app downloads have skyrocketed.

Chief Executive Mark Zuckerberg has publicly called Facebook a "mobile company" to emphasize the company's priorities. Last year, he splashed $1 billion for photo-sharing app Instagram, which has remained red hot, while Facebook also launched its own Messenger app, offering a suite of smartphone communication tools.

Still, Facebook has also been forced to play defense. Earlier this year, the company cut off its data integration with a young startup called Snapchat and then mimicked its feature with a new messaging tool called Poke, which sends messages that self-destruct. It has also shut off its integration with messaging apps like MessageMe and Voxer.

At the same time, Facebook has also hired graphic artists to draw emoticons and graphics for Messenger that emulate features of the wildly popular Asian apps like LINE, according to people with knowledge of the matter.

Dave Morin, an early Facebook employee who left to found the "private" social network Path in 2010, said he recognized last summer the critical role of messaging functions in smartphone apps, and quickly began working to incorporate them.

Since Path released a new version of its app earlier this month, the number of Path's daily users has risen 15 percent, which Morin attributed to the new messaging features.

"What's the number one reason why people have this thing?" said Morin, holding up his iPhone. "It's to call, to text, to communicate."

Messaging, Morin added, is "the basis for the mobile social network."

PLATFORM THREAT

While established social networks move to incorporate messaging features, the new-wave messaging apps are looking to grow into social networking platforms that support a variety of features and enable innovations from outside developers.

"The tried and true approach for a social network is first you build a network, then you build apps on your own, then you open it up to third party developers," said Charles Hudson, a partner at early stage venture capital firm SoftTech VC.

The moves mirror Facebook's younger days, when its user growth and revenues were boosted by game publishers like Zynga Inc, which made popular games like FarmVille for the Facebook platform.

In the South Korean market, for instance, eight of the top ten highest grossing Android apps are games built on top of KakaoTalk. Tencent announced in November that it would introduce a mobile wallet feature enabling payment for goods with WeChat. And Tencent also makes money in China by using the app's location data to displaying nearby merchants' deals to potential customers.

If the messaging apps reach a certain scale, they could form networks that rival Facebook's "social graph," the network of user connections and activities that enable highly targeted delivery of content and advertising.

"The folks on your address book are very different from your Facebook friends and your LinkedIn contacts, and that's a natural place for a very powerful graph to be created," said Jim Goetz, a partner at Sequoia Capital.

Ted Livingston, the 25-year old chief executive of Kik, said he developed the capability for his service to support external features in November, and he plans to open the platform to outside developers in the near future.

Livingston said Kik and Whatsapp were "in a race to see who's the first to build a platform."

Whatsapp, which has been the most widely downloaded communication app for both iOS and Android in recent months, according to analysis firm App Annie, has been profitable by selling subscriptions to its service for $1 a year. Although it has remained mum about its platform plans, the company has been rumored to be in talks with Asian game publishers about hosting games, according to news reports in South Korea.

Goetz declined to address the reports, saying only that because it relied on a subscription business model, Whatsapp did not need to sell games or ads to make money.

Still, he said, the Whatsapp team "spends a lot of time thinking about the developer community."

DEAL POTENTIAL

Established social networking giants could also swoop in for the upstarts - and Facebook has demonstrated its appetite for acquisitions.

Indeed, investors are eyeing a round of potentially lucrative buyouts resembling the series of deals involving group messaging applications in 2011.

Facebook acquired group messaging app Beluga in March of that year, enlisting its founders to help build its own stand alone app, Messenger, which launched six months later.

In late 2010, First Round Capital, an early stage venture capital firm, invested in GroupMe, a group messaging startup that was sold to Skype just fifteen months after it launched.

Kent Goldman, a First Round partner who has backed MessageMe, said it was unlikely that the market in the long term could support numerous independent messaging startups, which by their nature become more powerful as they grow larger.

"You don't want to be the smallest one when the music stops," he said.

(Editing by Jonathan Weber, Martin Howell and Chris Reese)

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