Exploring the next phase of OTT messaging



Mobile messaging has already hit a transitional stage. While standard SMS remains immensely popular, over-the-top (OTT) messaging services are gnawing away at a larger and larger chunk of the messaging market. According to a recent report from Informa Telecoms & Media, the daily volume of OTT messages has reached 19.1 billion worldwide, just above the 17.6 billion SMS messages. Informa predicts that by the end of 2013, OTT messaging volumes will be twice that of SMS. In a similar vein, Acision, in a recent report, found that 72 percent of U.S. users access multiple messaging systems, including OTT services.

"SMS is very popular, so we shouldn't ignore that SMS is still going to be a key messaging platform for mobile users. Having said that, there are a number of messaging applications that are popular and will continue to be popular for the next 12 months or so," said Pamela Clark-Dickson a senior analyst for mobile content and applications with Informa.

It's almost certain that OTT apps will continue to grow in the next year or so, but these apps, despite their popularity, do face issues. For one, the space is getting increasingly crowded as larger players introduce their own in-house texting apps. In addition, most of these apps are offered for free, making monetization a tricky endeavor. As competition heats up for these apps, will the current popular services continue to thrive or is there room for a new player to sweep the market?

Google Hangouts highlights opportunities and challenges
The OTT app market consists of two basic types of companies: those that primarily concentrate on messaging (WhatsApp, Viber and Kik Messenger) and companies that feature messaging as part of an array of services (Facebook (NASDAQ:FB) Messenger, Apple's (NASDAQ:AAPL) iMessage). To make the competition even fiercer there are also companies that are entering the market with new or revamped products.

For example, in May Google (NASDAQ:GOOGrepackaged its Google Talk app and G+ Messenger as Hangouts, a free, cross-platform messaging client. Of note, Hangouts is available for both iOS and Android, beating rival BlackBerry (NASDAQ:BBRY), which plans to release a cross-platform version of its BlackBerry Messenger sometime this summer. Hangouts, which allows users to exchange text, photo and video messages, has been received differently on the different app stores.

"Especially within the Apple App Store, the introduction of Hangouts in mid-May was quite successful, as the ratio reached about 40 percent (relatively to the download volumes of the other chosen applications). This huge proportion definitely went down after a couple days, but it had an actual influence on other common messenger applications chosen," explained Christel Schoger, an analyst at Distimo, a research firm which obtains its data from a daily sampling of transactional app data (of around 3 billion downloads per quarter) and publicly available information.

Click above to enlarge the chart.

This shift shows that iOS users are open to new OTT apps, and that despite the number of options currently on the market, there is room for additional players. Distimo compared Hangouts to WhatsApp Messenger, Kik Messenger, Viber and Facebook Messenger.

However, the situation is very different on Google's home turf of Android.

"The introduction of Hangouts did not have such a strong impact in Google Play (even though Hangouts is a Google product). Here, the Facebook Messenger app has a pretty constant portion of about 50 percent in terms of download volumes, and also the volumes of the other applications that we included, haven't changed significantly, so far," added Schoger.

Click above to enlarge the chart.

Hangouts is still in its early stages, so it's too soon to draw any strong conclusions about what long-term effects it may have on the market, especially given the differences in popularity between app markets themselves.

Where is messaging headed?
In a market filled with so many different options, differentiation is the key to acquiring new users. A few dozen apps are all capable of sending messages within their own userbase, so apps that expand their offerings to include other utilities are more likely to stand out. Sharing photos and video is becoming increasingly popular, and as more consumers make use of this, it will become an expected part of messaging apps.

"In the real world we share photos with one another...it's a natural fit for the conversation, as we move more and more into the virtual world, the ability to combine text-based conversations with other media is integral," said Heather Galt, VP of marketing for Kik Interactive.

Voice is also increasingly becoming a popular part of OTT messaging. Facebook Messenger, for example, now allows users to speak to one another using mobile VoIP or send voice messages. Similarly, WhatsApp sets itself apart by allowing users to send their location to their contacts.

There's also Tango, an OTT app that allows VoIP calls, videochats and texting. Tango recently announced that it would be branching into the third-party apps and games business with its new games platform. The platform will allow game publishers and developers to incorporate the social aspects of Tango into their games, while Tango takes a share of the revenues. The initiative mirrors Facebook, which has its own gaming platform and similar system on the Web.

Is it monetizable?
Monetization in the OTT mobile messaging space is tricky. Users will not be willing to pay per message like with select SMS plans. Instead, these services will need to be creative to make a profit.

Kik may monetize through Cards.

"In terms of monetization, as long as the core services are kept free I don't think that's going to harm companies in terms of subscribers," said Informa's Clark-Dickson.

WhatsApp is one of the few services that charges users upfront to use its messaging service, rather than using mobile advertising. Current iOS users pay a one-time download fee of 99 cents, while Android, BlackBerry and Windows Phone users are billed 99 cents a year. WhatsApp CEO Jan Koum has said that its iOS business will move to the subscription model as well later this year. WhatsApp did not respond to a request for comment.

"In the future, I guess what I could happen is more of a focus on paying for the additional services, as long as the core services remain free. It'll be their choice; it'll be the subscriber's choice. They don't have to pay for the additional services if they don't want to," said Clark-Dickson.

As these apps continue to differentiate themselves from one another, however, more and more add-on services will become part of the standard core services. For example, photo and video sharing has quickly become an expected part of these messaging apps. If a user is interested in messaging photos and his current app begins charging for this service, that user can easily switch to another service that allows free photo sharing.

Both Facebook and Google declined to comment on how they plan to monetize their messaging apps. Kik's Galt said that Kik is looking for revenue opportunities through its Cards--HTML5 apps within the Kik client that let users draw, share video and do other activities. Similarly Tango makes money through the sale of premium animations, greeting cards, games and avatars, rather than charging for core services. Users who want to use these upgrades (like special themed emoticons or animations) can pay via an in-app purchase.

"The interesting thing about mobile messaging is that it's extremely viral, but impossible to monetize directly. If you try to sell something, users get cynical and go somewhere else. What you can do is take that killer app and leverage it into a platform, and monetize things around that platform," said Kik Interactive CEO Ted Livingston in an interview with FierceDeveloper earlier this year.

TextPlus, a free OTT app, incorporates mobile advertising as one of its sources of revenue. In May, the company told FierceMobileContent that it generates a "solid seven-figure monthly revenue," with roughly half of its revenue coming from advertising and half coming from off-network calls, which it also charges users for. TextPlus also offers users a premium app textPlus Gold, which costs $1.99 and is ad-free. 

Interoperability and consolidation
Presently, the key advantage of SMS over OTT messaging apps is that it can let you message any other mobile number, whereas most OTT apps are limited to messaging within their userbase.

Facebook Messenger allows users to contact non-app users.

There are some ways around this, though. A Facebook spokesperson explained that with its Messenger users without smartphones can still reply to messages sent through Messenger by confirming their phone number.

From a user perspective, interoperability among various messaging apps would be a boon, however from an app standpoint this is unlikely to happen. Clark-Dickson explained that she sees the OTT market progressing similarly to the instant messaging market. There, chat clients operate independently of one another. OTT messaging services will be reluctant to work with one another because the benefit for them is in having their own users.

"Once you have connections between the different messaging communities, I think it starts to lose some of that value. So, no I don't think that will happen," she said.

"Regarding interoperability, over the past several years, we've worked to bring the world an open messaging system, but no company has been willing to join our efforts," said a Google spokesperson over email.

What is more likely to happen is consolidation of services as the space gets more crowded. "I think it (consolidation) is very possible. Within 18 months to two years it will become a grab for subscribers. Right now it's a very new market so there are still a lot of people who are not using one of these products but might in the future," said Clark-Dickson.

Consolidation, however, is already happening. In 2011, Facebook acquired group messaging solution Beluga. That same year Skype, which touts its own messaging and chatting apps, acquired GroupMe, another group messaging solution. There have also been rumors in recent months that both Facebook and Google have made moves to acquire WhatsApp for upwards of $1 billion.

Even if WhatsApp isn't acquired (WhatsApp has denied entering talks with Google and Facebook), the hefty price tag shows that the OTT space is one to watch. WhatsApp alone reported handling 20 billion messages a day, This kind of user engagement and the hefty price tag show the importance of OTT players across the industry--from mobile advertisers to wireless carriers,