(Chinese Version)

On January 13th, 2016, Kakao, the South Korean mobile information service provider, announced that it had acquired 76.4% share of Loen Entertainment, one of the biggest record companies, with 1870 billion KRW (around 10.3 billion CNY).

Kakao owns Kakao Talk, the most popular social networking app in Korea. With 150 million registered users, over 100 million pieces of message are sent on Kakao every day. Although Kakao Talk grabbed 95% share of the market in South Korea, it is little known overseas. While the number of monthly active user in South Korea is 39.9 million on average (the total population of South Korea is 50 million), it only has 48.46 million users abroad. LIINE, the biggest rival of Kakao, however, is not quite popular in Japan, but miraculously well received overseas, with 220 million monthly active users on average.

LOEN Entertainment, a record company in South Korea, owns Melon, the biggest stream music site in South Korea (similar to iTunes). There are in 28 million members, 3.6 million paid members and over 6.5 million music items in total on Melon. In addition, Melon owns several record brands and music starts, including IU, who rose to fame by covering a Cantonese song called Old Narrow Street. By acquiring LOEN Entertainment, Kakao is able to grab LOEN’s large crowd of stream music service users and own its bulky library of popular music.

According to Kakao, the acquisition was going to help Kaokao integrate LOEN’s music culture to itself and build a new platform of cultural contents. At the same time, Kakao vowed to shift its focus a little bit, build a music community, provide a smart music player, and user data management service, etc. It’s obvious that the ultimate goal of Kakao by acquiring LOEN is actually to go abroad.

“By integrating LOEN’s music library with Kakao’s all kinds of services and platforms, we expect to lay a solid foundation for global expansion,” Jimmy Rim, CEO of Kakao, stated.

However, global expansion is no easy thing, especially when both Melon and Kakao Talk lack a wide user base abroad. Although Kakao Talk is the dominant player in the South Korean SNS market, it only has 140 million users in the global market, less than half of LINE’s (420 million).

“In the long run, Kaokao’s decision to acquire is certainly a wise one, since Kakao falls behind Naver Corp exactly in terms of content service,” Kim Sung-eun, an analyst at LIG Investment, suggested. Naver Corp, similar to Chinese Baidu, owns the biggest portal in South Korea, and a mobile social networking app called LINE.

Three dominant Internet giants

In terms of basic functions business models, Kakao Talk is no different than LINE and WeChat: all of them are fundamentally instant message tools, but they all add social networking function, stickers, mobile games to their platforms (mobile games are actually the main source of Kakao’s revenue). In addition, Kakao Talk includes a mobile payment tool called Kaokao Pay, which is similar to WeChat Wallet. It is Kaokao’s goal that this tool will make it easier for its users to shop and order takeaways online and improve the user experience a great deal.

The main difference of these three apps is that they are widely-used in different markets. The majority of Kakao’s users are in South Korea, while the rest are in Japan, South East Asia countries and the US. In comparison, LINE is rather popular in Japan and South East Asian countries. WeChat, however, dominates the enormous Chinese market. As a matter of fact, these three companies, or rivals, have countless connections in the past. Following, let’s first have a look at the timeline of these three apps from the very beginning.

• March, 2010 Kakao was established.
• January, 2011 Tencent released WeChat.
• April, 2011 The number of registered users on Kakao reached over 10 million.
• June, 2011 Naver released LINE.
• March, 2012 The number of registered users on WeChat reached over 100 million.
• April, 2012 Tencent invested in Kakao and became its second largest shareholder.
• January, 2013 The number of registered users on LINE reached over 100 million.
• July, 2013 The number of registered users on Kakao reached over 100 million.
• October, 2014 Kakao listed together with Daum, the second biggest portal in South Korea.
• January, 2016 Kakao acquired LOEN Entertainment with 1.54 billion USD.

As you can see from this timeline, although Kakao was established first, WeChat and LINE caught up and grabbed 100 million registered users faster than Kakao. According to some estimate, WeChat already has 700 million registered users, LINE is soon to have 600 million users, globally while Kakao, the first app in the market, only has 150 million users around the world.

How did Kakao miss the opportunity again and again? How did WeChat and LINE seize the opportunity and get to where they are today?

Kakao’s and LINE’s founders are schoolmate back in college

Both Kakao Talk’s founder Kim Bum-soo and Naver’s founder Lee Hae-jin graduated from Seoul University in 1986. After they both worked for Samsung’s SDS for five years, Kim Bum-soo left and established a game company called Hangame, while Lee Hae-jin founded Naver, a company focused mainly on search service. After these two companies merged together and became NHN in 2000, they together developed paid games, emails, knowledge index service, etc and made NHN the most visited website in South Korea.

In 2007, however, Kim Bum-soo left Naver because he wanted to start a new challenge. In the meantime, Lee Hae-jin endeavored to make Naver the top one portal in South Korea, similar to Baidu in China.

Lee Hae-jin, the founder of NAVER and LINE

When Apple released iPhone, Kim Bum-soo got thrilled. He immediately set up a team to develop apps compatible with iPhone, though iPhone wasn’t released in South Korea until November, 2009. Kakao Talk, a free social networking app, was one of the first batch of apps his team developed.

At that time, South Korean mobile phone users still need to pay for texting messages. After Kaokao Talk was released in March, 2010, it soon became the top one app in South Korean app store. When it attracted 10 million registered users in April, 2011, Kim Bum-soo eyed on the Japanese market to win over more users.

Kakao missed the golden opportunity twice

However, when Kakao just entered the Japanese market, a 9.0 magnitude earthquake stroke Japan, killed around 16,000 people and forced millions of victims to live without electricity and water. When mobile phone and texting network got overloaded, many victims started to use Kakao Talk to contact with others, since Wi-Fi and 3G network still worked.

When the catastrophe stroke Japan, Kim Bum-soo happened to be in Tokyo. Mentally and physically motivated, he made up his mind to develop a social networking app as soon as possible. Within less than three months, LINE was officially released. Although LINE had many similar services compared to Kakao Talk, it had one thing that Kakao didn’t have: the huge support from an Internet giant in South Korea.

To win over Japanese users, Naver cashed in heavily in carrying out TV commercials and posting ads on outdoors advertising boards, which soon let Japanese users’ good impression towards Kakao pale into insignificance. Byy September, 2012, the download times of LINE had reached 60 million, while Naver’s stock price also roared.

The number of registered users on LINE reached 4 million as early as 2014.

“The mother company of LINE spend 10 years studying Japanese culture and people, yet Kakao never spent a penny. Kakao is well-received back in South Korea, but not attractive at all in Japan, since Japanese are accustomed to send emails and don’t need Kakao’s service very much. When LINE started to provide free call service, Kakao didn’t have any similar service at all,” Sirgoo Lee, co-CEO of Kakao, explained.

What really made LINE popular overnight in Japan is actually paid stickers released in November, 2011, which helped LINE gained 1 million users within two days. Today, over 2 billion stickers are sent on LINE every single day. Why are stickers so popular in Japan? As is well known, Japanese culture is deeply influenced by comic culture. In addition, sticker is a great substitute for Japanese, whether old or young, who are commonly reticent and quiet.

However, this wasn’t the only mistake Kakao made. In April, 2012, Kakao accepted investment from Tencent in hopes of learning its experiences in running Tencent QQ. However, Tencent, who released a similar mobile conversation app (WeChat) a year before, later invested 65 million USD in Kakao and became the second largest shareholder of Kakao.

When Kakao started to make a fortune by launching Anipang on its platform in July, 2012, Tencent followed suit and soon grabbed 10 times more active users. Later, the number of registered users on WeChat increased exponentially. By June, 2015, WeChat has already attracted 650 million users. Some analysts suggest that that figure could reach 700 million within 2016.

After missing the golden opportunity twice, Kakao fell behind, though it started early.

The journey towards global expansion

1. Allying with other giants

In October, 2014, Kakao merged with Daum, the second largest search company in South Korea, and became Daum Kakao, with a market value of over 7.4 billion USD. After these two companies merged and re-listed on the stock market, Kim Bum-soo still accounted for 39% share of the company, which was worthy of 2.9 billion USD in total.

Kakao and Daum chose to merge together due to various considerations. While Kakao wanted to complment itself through Daum’s online searching, Internet comics, post bars and BBS and banner advertisements business when revenue from mobile games gradually declined, Daum also hoped to compete with Naver on mobile platforms by allying with Kakao.

It is worth mentioning, however, that Tencent owned 13.84% share of the merged company, and enjoyed a return rate of as high as 15.4 times.

2. Providing multiple services

To retain its users, Kakao Talk offered several other kinds of Internet services, including Kakao Pay, Kakao Taxi. Up till now, Kakao Talk has already include 8 services on its platform, namely, Sticker Store, PlusFriend, Kakao Pay, Gift Store, KakaoStyle and HotDeal, Kakao TV, Kakao Page and Game Store. Its users can also download separate apps to enjoy other services. For example, Kakao Talk’s users can download an app called Kakao Story to share their recent updates to their friends, similar to WeChat friends circle.

3. Entering the Internet bank industry

In November, 2015, Kakao entered the bank industry. South Korea Finance Committee agreed to give permission to Kakao and allow it to open an Internet bank earlier in 2016. This bank was actually the first one in 23 years that won the support from the South Korean government. The Internet bank was going to not only a great step for the Internet finance industry in South Korea, but also mark the global expansion of Kakao.

From now on, South Koreans no longer need to go to a real bank to do businesses. Instead, they can just log onto Kakao’s Internet bank and do some basic activities, such as opening a new account, paying, lending money, buying things, etc. Since Kakao’s Internet bank don’t have any labor cost or expenditure on offline operation, it can charge users with a lower loan interest and procedure fees.

At the same time, Kakao is going to be able to provide services that traditional banks can’t provide, such as adding a new set of credit evaluation system, simplifying the loan procedures, and lowering procedure fees significantly.

4. Marching into the entertainment industry

Inviting pop stars to shoot for a new set of stickers, hiring pop singers to advertise for games, competing with fans on set time… Acquiring LOEN Entertainment is one of Kakao’s steps in going abroad.

Music is one the fews things that can go across language boundaries, so acquiring a record company that owns millions of popular music items must have been a brilliant idea for Kakao to expand overseas.

To wrap up, I briefly summarized in this article the development and expansion of WeChat, LINE and Kakao, three largest social networking platform in Asia. They all have their strengths, but also weakness and challenges on the way ahead. Whether Kakao can break the bottleneck and overcome the difficulties at hand, only time can tell.

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Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.