Israeli-invented Instant Messaging Is Big Business but Not Big Profits

Israelis invented the basic technology in the 1990s and remain medium-sized players in the market, but nobody – not even Facebook, which paid $22 bilion for WhatsApp – can figure out how to make money from it.

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A historic event in the technology world occurred on February 6, 2014: Facebook announced the acquisition of WhatsApp, the instant messaging text, voice and photo application, for the astronomical sum of $22 billion.

WhatsApp was certainly a successful startup at the time – a company with just a few dozen on the payroll and a product that was being used by 400 million people worldwide. WhatsApp was even generating a little revenue, since at the time it was collecting $2 a year in fees from each user (after offering the first year free). Even so, it was hard to see how any of the company’s numbers justified the price Facebook paid for it.

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WhatsApp was generating annual revenues of just $10.2 million and even if it might have been turning a profit, it’s hard to explain it being worth $22 billion as it also had the huge costs of maintaining its servers and data storage facilities for all the photos, videos and voice messages it was carrying.

Nonetheless, instant messaging is the biggest thing in the digital world in recent years, and it seems it will remain that way for the next few. A study published last month by Business Insider Intelligence found that the world’s four largest instant messenger services collectively had 2.9 billion users, which puts them ahead of the 2.3 billion users of the world’s four largest social networking sites (Facebook, Twitter, Instagram and LinkedIn).

WhatsApp wasn’t the first on the market. It has a lot of competition, including Facebook’s own Facebook Messenger, Israel’s Viber, as well as Telegram and Snapchat – and those are the most popular services in Western countries. Also, a parallel universe of instant messaging has emerged in Asian markets over the past year, with the leading instant messaging apps unknown to Americans and Europeans, with names like QQ Mobile, WeChat and KakaoTalk.

In top spot, WhatsApp alone has 900 million users around the world, followed by Facebook Messenger’s 800 million; China’s WeChat at 660 million; and Viber, which is now Japanese-owned, at 520 million users.

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Israel is at least a semi-powerhouse in the instant messaging field, and not just because the original technology was developed in Israel. The Israeli startup Mirabilis invented ICQ instant messaging (for desktop computers) in 1996, and at its peak could claim 100 million users. In 1998, it was sold to U.S.-based AOL for a then-record price of $400 million.

Since then, the digital world has undergone a series of changes. Instant messaging services are now typically smartphone apps rather than being desktop-based. Facebook’s acquisition of WhatsApp inspired the entire industry, spurring more capital investment and a lot of exits – even though most of the companies have yet to find a successful business model.

Viber, which provides free Internet-based telephone calls along with instant messaging, remains the big Israeli success story in the sector. Founded in Israel five years ago, it was sold to Rakuten of Japan for $900 million in 2014 and is now the world’s fourth-largest instant messaging platform. It also has a business model based on the sale of stickers via its app.

In another Israeli-related venture, Business Insider Intelligence website ranks the app developed by Tango – a U.S. company founded by Israelis Uri Raz and Eric Setton in 2009 – at seventh in the world. The company raised a whopping $280 million last year at a company market value of $1.1 billion, but was recently forced to lay off 80 employees.

There is a long line of companies looking for a niche lower down in the rankings. These include Tel Aviv-based Nuro, which has developed a chat app for businesses, emphasizing the secure, encoded nature of its service; also based in Tel Aviv is Rounds, which specializes in video calling and secured an infusion of $12 million in funding earlier this year; and then there’s Jerusalem-headquartered Glide, which is focused on short video messages. It raised $20 million last December.

When it comes to Israeli consumers of instant messaging services, WhatsApp is king. Fully 80% of Israelis use the service, Bezeq telecommunication company reports, even though 58% say group chat on the app has almost become a nuisance. On the other hand, 70% said they wouldn’t be willing to part with WhatsApp – the highest percentage of any app, even besting the 57% attained by Waze, the Israeli traffic and navigation app now owned by Google.

Hod Hasharon-based bandwidth management technology company Allot Communications says group chat is a cultural thing, which varies from country to country and is high, for example, in Greece, but higher still in Israel, India and South America.

Germany is the instant messaging market most similar to Israel, Business Insider says. Some 77% of German smartphone users have WhatsApp, followed in popularity by Facebook Messenger (49%) and with Microsoft’s Skype in third. The usage figures for Britain are a little different, with Facebook Messenger top and WhatsApp second.

Surprising entry

Curiously, in the United States – where WhatsApp is based – the app is barely on the radar. Facebook Messenger is ranked first with 60% of users, followed by Skype (29%). A rather surprising entry is third in the U.S. market: Twitter’s direct messaging service, with 25%.

The first quarter of 2015 is thought to have seen a turning point in the global use of instant messaging services. As of January, WhatsApp was transmitting a barely conceivable 30 billion messages a day, at a time when it still had “only” 700 million users (a figure that has since risen to 900 million).

Although the social networks figured out ways of generating revenues, how that will happen in the instant messaging sector remains a billion dollar question.

Any effort to understand the sector and what investors find attractive in it requires going beyond the immediacy of the instant messaging that it provides. Instead, it should be seen as a collection of communications platforms that are already eating away at other digital businesses.

The first business segment that WhatsApp wiped out was cellular service providers’ text messaging services for a fee. And now, instant messaging is, to some extent, also supplanting email communications. Businesses are beginning to embrace the technology as a way of limiting emails, which have become a nuisance.

Instant messaging services have smartphone users’ attention throughout the day. Business Insider found that although the average app is opened twice a day, instant messaging applications are opened nine times a day on average. And users are more loyal to instant messaging apps, with 62% likely to still be using the same one after a year, compared to 11% on average for other apps.

Omri Argaman is in charge of business development at Moblin, a cellular marketing and advertising firm. He says that when it comes to business revenue from the instant messaging sector, the secret lies in providing value-added services that instant messaging platforms can provide their users. “Everyone understands that they will no longer make money from banner ads and the ads that appear on the browser between articles and content on a mobile device,” he says.

Argaman highlights a number of features that already exist on some messaging apps based on features provided by third parties exclusively for a specific platform. “There are already taxi-ordering services from Uber on Facebook Messenger. There are game apps that, although they can be downloaded for free, have purchase options inside the game. But the Holy Grail is commercial services within the app itself, commercial firms that also contact the consumer on the platform and make a purchase through one click of a button possible,” Argaman notes. Countries in the Far East are way ahead of the West in developing such services, he adds.

A woman checks her cell phone at a coffee shop in Brazil, Thursday, December 17, 2015.
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The most immediate and familiar business model involves generating revenue from value-added services on chat itself through digital stickers, which have expanded to banks of emojis (the popular symbols used to express specific emotions). Japan’s Line app reports generating about $75 million in a year from the sale of stickers. Line is also the global leader in game sales within the app itself, selling $100-million-worth in the third quarter of this year alone.

Interestingly, whatever direction the sector takes, there are major generational differences among users. For example, the GlobalWebIndex digital research firm found that Snapchat is popular mostly among young people (fully 84% of Snapchat’s users are under 35). On the other hand, Skype, whose main product is live video chat, is popular among an older crowd – in part because it has been on the market a lot longer, but also because families are more accustomed to using the service.

It is not only Skype that has distinguished itself with a particular service. Viber, for instance, gained popularity because it offered free Internet-based voice calling long before WhatsApp did. Snapchat gained popularity among young people for the built-in feature that automatically erases messages on both the sending and receiving end. And then there’s the entire field of message services geared specifically to business users.

Elihay Vidal contributed to this report.