Messaging 2.0 Is Now Over

The second messaging revolution is now quickly coming to a close.

With the news today that Korea’s leading messenger KakaoTalk is merging with one of that country’s largest internet portals, Daum Communications, we are witnessing the end of the rise of mobile-focused independent messaging startups that started just five years ago. Only Kik Messenger remains standing independently, although there are a slew of ephemeral messengers like Snapchat that are coming in the next generation (more on that in a minute).

The First Wave of Messaging

Before we dive into the details of Messaging 2.0, it’s important to understand the context of where this market started. Given the network effects intrinsic to communications apps, it is not surprising that they arrive in waves. Internet portals ruled the first generation of messaging apps, with companies like AOL, Yahoo, and Microsoft each developing their own eponymous apps. AOL came out with its app in May 1997, while Yahoo and Microsoft followed in 1998 and 1999, respectively. In China, the popular messaging app QQ was launched in 1999 by Tencent, the large internet conglomerate.

Due to the lack of distribution channels outside the major companies, few startups managed to grow their userbase. The only exception was Mirabilis’ ICQ, which was launched in November 1996. However, the startup sold to AOL just a year and a half after it started in a deal worth $286 million at the time plus earnouts (note: AOL is the parent company of TechCrunch).

AOL Instant Messenger would dominate the market for the next decade, and never faced serious competition until the rise of Facebook. During that period, only Skype would become popular among users, after it launched its video communications product in August 2003. Like ICQ, it was quickly sold to a major internet company, this time to eBay in September 2005, in a massive $2.5 billion transaction. It was later spun out again, and sold to Microsoft in September 2011 for $8.5 billion.

The Rise and Fall of Messaging 2.0

Messaging is a deeply competitive space, and founders that miss the window of opportunity to start their companies are quickly left behind. The first crop of apps all targeted the desktop as their key platform, while the next generation focused on mobile. Among this second generation of startups, Kakao, Viber, and Kik all started within a few months of each other in 2010, with only Whatsapp launching a bit earlier in May 2009.

Compared to the 1990s, startups were mostly ahead of their large internet competitors this time around. Tencent, NHN, Facebook and Apple introduced their messaging products WeChat, Line, Facebook Messenger and iMessages during the course of 2011. Google Hangouts, which brought together a number of Google’s previously-released communications products, was launched later in May 2013.

However, if it wasn’t clear before, it is certainly clear now from this set of companies that the Valley, and the United States more generally, no longer has a monopoly over the most successful startups.

All of these products were responding to two key trends in technology: social networks and smartphones. Social networks like Facebook, LinkedIn, and Twitter demolished the power of internet portals to command users’ attention. Back in the 1990s, the fastest way to get adoption was through the massive portals, since that was where users first visited when using the web, helping AOL, Yahoo, and Microsoft to lead that generation. Today, distribution is far more open, allowing companies like Whatsapp and Viber to find a niche around incumbent players and profit handsomely from it.

In addition, smartphones – most notably Apple’s iPhone and Blackberry – upended the messaging market by allowing people to more easily send messages from mobile devices with bigger screens, better interfaces, and the elimination of triple-tap keyboards. Users already had a full social network with their phone book, allowing standard SMSs to work exceedingly well against traditional IM products like AOL’s.

The only issue was price. SMSs were (and in some cases, remain) a key profit center for mobile operators, a product which costs almost nothing for the operator yet costs consumers several dollars for tiny “buckets” of messages. The second generation mobile messengers were essentially free for end users, causing adoption to soar rapidly to combat these fees. Today, SMS revenue in much of the world is now declining.

All of these messaging startups have had tremendous growth, each picking up hundreds of millions of users in what could possibly be the fastest growing group of apps in the history of computing. Collectively, they have more than 1 billion users, not accounting for users who use multiple networks.

Just like ICQ though, these startups sold quickly to the established internet companies. This year, Viber was bought by Rakuten in January, Whatsapp by Facebook in February, and now Kakao has announced it is merging with Daum. Thus, a revolution that started just a few years ago has now mostly finished. For these platform companies, there is an obvious need to engage forcefully on mobile, where consumers have transitioned from traditional online portal sites.

International startups led the way

Perhaps the most interesting difference between the first and second generation of messaging apps is the cosmopolitan nature of the second group. Viber, Kakao, WeChat, Line, Kik, and Skype were all developed outside of the United States, from Canada and Europe to Israel and Asia, falling in the tradition of ICQ, which was an Israeli company.  Due to this geographic diversity, they have been able to engage users through more culturally-attuned designs, leading many of them to have clear regional borders in their adoption.  Whatsapp, while based in Mountain View, has consistently had a much wider userbase overseas than in the United States, although its popularity appears to expand globally.

This is a major point not to be overlooked by founders and investors obsessed with Sand Hill Road and the Creamery in SoMa. Here is a group of startups that all banked on the same underlying trends in the market, and almost every single one of them has been valued at almost a billion dollars (as mentioned before, Kik remains independent). This doesn’t mean that Silicon Valley is irrelevant – Whatsapp’s acquisition was the largest in history, of course. However, if it wasn’t clear before, it is certainly clear now from this set of companies that the Valley, and the United States more generally, no longer has a monopoly over the most successful startups.

Messaging: The Next Generation

Perhaps the ecommerce giant will purchase an ephemeral messenger so that it can disappear messages as easily as it disappears books these days

All of this talk of messaging has avoided the elephant in the room: Snapchat. The extraordinarily popular ephemeral messaging app continues to grow rapidly, and is currently ranked 11th in the Apple App Store. While there were discussions of a possible acquisition by Facebook, such plans have not materialized.

Ephemeral messengers like Snapchat, as well as anonymous apps like Whisper, Secret, and Yik Yak are two new breeds of messaging apps that are trying to respond to social networks by offering theoretically safer spaces to express thoughts by ensuring that messages are either not saved or not attached to a particular author. While I have at times expressed caution around the enthusiasm of these apps, it seems clear that there are many users who want this openness to express their feelings.

Is ephemeral going to be Messaging 3.0? What about anonymous? It is too early to tell, but one thing is certain: we are primed to witness the next war in Messaging 2.0. The top internet companies in the United States now have their own messaging services, and many in East Asia do as well. The sole exception is Amazon, which despite its range of devices and tablets, has tended to focus more on media consumption than on social networking (shared highlights and recommendations from Goodreads aside). Perhaps the ecommerce giant will purchase an ephemeral messenger so that it can disappear messages as easily as it disappears books these days. Regardless, for startups, this messaging revolution has now been broadcast.

Photo illustration by author based on image by Flickr user Quinn Dombrowski used under a Creative Commons 2.0 license.