As more people choose to send messages through free apps instead of paying to use their smartphones’ standard texting services, valuations of companies that make the apps are soaring. Facebook’s (FB) $19 billion acquisition of WhatsApp came just five days after Rakuten (4755:JP), the largest e-commerce company in Japan, snapped up messaging service Viber for $900 million. SoftBank (9984:JP) is seeking to buy a stake in Japan’s top mobile messenger, Line (035420:KS). Even BlackBerry (BBRY) could cash in. With 85 million users, its BBM messaging service suddenly looks ripe for a spinoff.
Buying a messaging service is a quick way for tech companies to add tens of millions of customers. “Anybody in the technology space that has a pillar product around conversations and connecting people together could be a potential buyer,” says Brian Blau, a social media analyst at Gartner (IT).
With all the money on the table, messaging services face pressure to expand. Despite 450 million users worldwide and a dominant position in the U.S., WhatsApp is still an also-ran in Asia. WeChat, owned by Chinese Internet company Tencent (700:HK), is China’s top messaging service with 272 million users. Since Facebook is banned in China, WhatsApp probably won’t make headway there. WhatsApp didn’t respond to requests for comment. KakaoTalk is the leader in South Korea, where it’s already on 93 percent of the country’s roughly 36 million smartphones. Line, controlled by South Korea’s Naver, has 370 million users and is entrenched in Japan, Taiwan, and Thailand.
Facebook has pockets of strength in emerging markets and poses a roadblock to KakaoTalk’s and Line’s plans to expand in markets such as Brazil and Indonesia. Facebook’s popularity in both countries means other messaging services will have to offer a much better product to compete with WhatsApp. On the first day of trading after Facebook’s announcement, Naver’s stock price fell more than 8 percent. “The worst-case scenario just unfolded for Line,” Morgan Stanley (MS) analysts Sam Min and Jiana Seo wrote in a report the day after the WhatsApp deal, adding that it likely closes “user opportunities for Line in new countries.”
A solution may be in sight. On Feb. 25, Bloomberg News reported SoftBank’s interest in buying a stake in Line. Shares of Naver have since jumped 11 percent. SoftBank, which acquired Sprint (S) last year, would use Line to “get back that traffic and get revenue through gaming and other services,” says Naoshi Nema, an analyst in Hong Kong with Cantor Fitzgerald. SoftBank declined to comment. Line’s chief operating officer has said the company hasn’t received an offer from SoftBank.
On Feb. 24, WhatsApp announced it would add free voice calls for users in the next few months, as many of its rivals do. In general, though, the company has eschewed diversification. “They just want to be known as that clean, fast service that does one thing really well,” says Arvind Bhatia, an analyst at Sterne Agee. While Line, KakaoTalk, and WeChat charge for games and stickers (cartoon icons that can be sent during chats), WhatsApp makes money with a flat 99-cent annual fee that follows a free year of service. Samsung Securities (016360:KS) analyst Jay Park says Line can stay competitive as long as WhatsApp keeps denying itself easy revenue.