How do messaging apps make money? They’re gaming platforms in disguise

The dance of the messaging apps.
The dance of the messaging apps.
Image: Reuters/Philippe Wojazer
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It is not uncommon for smartphone users to have WhatsApp, WeChat, Viber, Facebook Messenger, and other competitors all installed on their phones, using different apps to talk to different groups of friends and choosing from a rich and diverse ecosystem to best fit their needs and social circles.

But as a business, messaging apps are less about messaging, and much more about owning what Facebook likes to call the social graph—the network of people who live in your phone’s contacts, for example. Yet as Facebook’s predecessors have learned all too well, social graphs are tricky things to control. All the rage one day, a social network can fall out of favor the next, leaving a desolate network of connections between long-forgotten “friends.”

The world’s mobile software makers know this. That is the why most of the successful ones are throwing everything they’ve got at transforming their apps into platforms for shopping, financial services, payments, stickers, celebrity cameos, and much more. It is the exact opposite of the other big trend in mobile apps, which is to strip down and “unbundle” apps into their component parts.

The latest app to join the platform wars is Tango, a relative minnow in the messaging app crowd with 70 million monthly unique users (compared to WhatsApp’s 500 million), which announced today that it is investing $25 million in a ”Global Games Fund.” That’s a way of saying that Tango will help games developers to make, distribute and promote games that live within (and outside) the Tango app, in the hopes that the content will induce its users to stick around.

Games are the easiest way for messaging apps to thrive. Just look at Line, a Japanese messaging app which last week said it would file for an IPO that would value the company at between $10 billion and $20 billion. The app pulled in ¥34.3 billion ($340 million) in revenue in 2013, making it the highest-grossing non-game app of the year. Except of course that’s utter nonsense: The bulk of Line’s revenues came from the games on its platform. KakaoTalk, a South Korean messaging app, also rakes in big revenues from games, as does China’s WeChat.

Tango’s co-founder Eric Setton is honest about Line and KakaoTalk’s influence on Tango: “The platform approach I believe is the winning strategy. We’ve now seen it in a number of key markets, with Kakao in Korea or Line in Japan,” he told Reuters earlier this year.

Tango, which recently received $215 million in investment from Chinese e-commerce giant Alibaba, is following the same model—and it’s worth noting that Alibaba is the arch-rival of Tencent, which owns WeChat. All of Tango’s apps will be free to play, with in-app purchases providing the revenue. (Regulators are catching up to this gambit: The European Commission this month said that games with in-app purchases can no longer be labelled “free.”) Considering “freemium” games made up 93% of app game revenue in 2013, this seems like a wise strategy.