Mobile messaging markets: January 2014

Transcription

1

2 Mobile messaging markets: January , Portio Research. All Rights Reserved 1

3 Portio Research Limited. Published March 2014 by Portio Research Limited Copyright Disclaimer and Legal Notices Disclaimer Every care has been taken in the preparation of this study to ensure that the information contained herein is accurate, factual and correct to the best of our knowledge, at time of publishing. All opinions, suppositions, estimates and recommendations included in this document are solely the opinions of the authors unless otherwise stated. Portio Research Limited accepts no liability for any loss or damage or unforeseen consequential loss or damage arising from the use of the information contained within this document. The opinions, suppositions, estimates and recommendations within this document cannot be guaranteed, and readers use this information at their own risk. The information published in this document is subject to change without notice at any time, and Portio Research Limited accepts no liability or obligation to inform the reader of such changes. Portio Research Limited do not promote or endorse any specific companies or products, the views and opinions we express in this document are wholly our own assessments, and independent from any external interest or influence. Many terms and phrases and trade names used in this document are proprietary and Portio Research Limited recognises and acknowledges that all trademarks are copyright, belonging to their respective owners. Where possible, this document accords such terms and phrases and trade names to their respective owners. All Rights Reserved. No part of this document can be copied, shared, redistributed, transmitted, displayed in the public domain, stored or displayed on any internal or external company or private network or electronic retrieval system, nor reprinted, republished or reconstituted in any way without the express written permission of the publisher. Forwarding of this electronic document without the correct legal licence is theft. It s unethical, immoral and against the law. If you have any questions about the legal licence conditions under which this document has been distributed, please contact Portio Research on info@portioresearch.com If you did not buy this document and a colleague or associate has sent it to you, do not assume you are legally entitled to read it, it is your responsibility to ensure you have the correct legal licence to read this document , Portio Research. All Rights Reserved

4 Contents Facebook Acquisition of WhatsApp... 6 Key market activity in February 2014: Facebook acquires WhatsApp and Rakuten acquires Viber... 6 BIG money is on the move in mobile messaging and social networks... 6 How consumer retail has evolved... 6 OTT chat apps are not SMS killers, they are closer to social networks... 7 Monetization... 8 Ad platforms... 9 Reach... 9 Digital footfall Ownership of OTT social chat apps the big players are lining up How they stack up What about SMS? SMS and OTT mobile messaging markets...14 Where the mobile industry is today OTT Messaging Apps are NOT Cannibalising SMS in the Vast Majority of Markets SMS Traffic Worldwide Let s take a look at a number of key mobile messaging markets: North America Canada and the US Japan and South Korea Europe: The Netherlands Spain Greece The EU Big The Asian Giants Asian growth and the bottom-of-the-pyramid Latin America Africa and the Middle East: Summary Messaging Revenues...32 SMS Revenues Worldwide Have MNOs really LOST billions of SMS dollars to OTT messaging apps? Who thought SMS would just keep growing forever? Smart device sales are driving apps and social networks OTT messaging apps are helping to drive rising mobile data revenues Further information contact the author: Also available from Portio Research Limited , Portio Research. All Rights Reserved 3

5 List of Figures Mobile messaging markets January 2014 Figure 1: Mobile Cellular Subscriptions & Fixed Telephone Worldwide (In Million, F) Figure 2: Mobile & Fixed Broadband Subscriptions Worldwide (In Million, F) Figure 3: SMS Traffic Worldwide (In Billion, F) Figure 4: SMS Traffic North America (In Billion, F) Figure 5: SMS Traffic and SMS Use per Subscriber per Month The US ( ) Figure 6: SMS Revenue North America (In USD Billion, F) Figure 7: SMS Vs. OTT Revenue Comparison for Figure 8: SMS Vs. OTT Traffic Comparison (2013 estimates) Figure 9: SMS Conversation Thread vs. OTT Messaging Figure 10: SMS Revenue Worldwide (In USD Billion, F) Figure 11: SMS Revenue Worldwide (In USD Billion, F) Figure 12: SMS Traffic Growth (In Billion, F) Figure 13: Smartphone Shipments Worldwide (In Million, F) Figure 14: Tablet Shipments Worldwide (In Million, F) List of Tables Table 1: OTT Social Chat App - Owners Table 2: SMS Vs. OTT Comparative Statistics , Portio Research. All Rights Reserved

6 Part 1 Facebook Acquisition of WhatsApp 2014, Portio Research. All Rights Reserved 5

7 Facebook Acquisition of WhatsApp Key market activity in February 2014: Facebook acquires WhatsApp and Rakuten acquires Viber BIG money is on the move in mobile messaging and social networks This is the consolidation we expected to see in OTT apps. WhatsApp and Viber acquired in the same week. We wrote in our Mobile Messaging Futures report in July 2013: As the markets grow, it is entirely likely that major players such as WhatsApp, Viber and others, could very likely be acquired by big names such as Google, Facebook, Microsoft, Apple or Amazon, and then the messaging service can be integrated into the broader sphere of social networks and search advertising. The Facebook-WhatsApp deal has generated an excessive amount of press commentary, as expected. This is how we see it here at Portio Research. Facebook has made this substantial investment for three reasons: It s about making money, it s about selling things to people physical and virtual things; it s never been about anything else. Facebook is investing in consumer eyeballs and clicks, routes to retail markets To capture users in emerging markets To drive it s user base back down into younger demographics, where the social networking platform once reigned supreme How consumer retail has evolved Over the last 2 decades, the Internet has come along and changed the way almost everything happens. In the space of just 10 or 15 years, suddenly we no longer need to go to a physical location to view a shop window, or join a mailing list to view a catalogue. Now, thanks to the net, every shop window on Earth and every catalogue out there, can come to us, any time, any place. This fundamental change is still in mid-process, as Internet penetration permeates every nation on Earth. Then over the last 7 or 8 years, smartphones with big screens have further evolved this change we no longer need to be sat at home or in the office using a fixed desktop PC hard-wired into a phone line now we can truly see those shop window displays ANY time ANY place, using the device in our pockets. Over the last few years we have evolved consumer retail thus: Desire > search online > online shopping > now mobile online shopping > Internet advertising > swamped market > fighting for eyeballs and clicks , Portio Research. All Rights Reserved

8 The secret to success in online retail now, is getting the attention of the consumer. We, the connected peoples, are drowning in communication info glut. Too many web pages, too many billboards, too many TV channels, too many s, too many messages. Getting consumer attention long enough to capture their interest in an advert has never been a harder task. So much of marketing now is down to creating something perceived as cool and promoting it in ways to make the message spread virally. Now add in the Long Tail effect of the Internet, and the advent of social networks, aiding viral sharing and truly global reach, and we can see how the build first, monetize later business model has evolved. Scale is everything, there are far more pages on the Internet than people on the planet, and everyone with an inbox is drowning in too many s, and in that environment, social networks and social chat apps offer consumers the convenience and security of limited use closed groups. Your 900 Facebook friends are your product review panel, they are your recommendation engine, and your peer review board. Should I purchase product X? I ll ask my Twitter friends if they have had any good or bad experiences. I ll check the Amazon reviews. this is the new paradigm in retail, and it s all about attracting consumer eyeballs online, bringing clicks to your site, and trying to a) close sales and b) add names and contacts to your database for future sales. Capturing targeted leads, and building community, is where retail marketing IS in the early decades of the 21st Century. So what Facebook is investing in with WhatsApp is the fact that WhatsApp has 450 million consumers using WhatsApp as one of their primary communication channels with friends, and using their device as a route to consumer markets. Now, the prize that Facebook is paying for here is to have access to 450 million consumer eyeballs looking at the web. And WhatsApp is an incredibly powerful channel to market. These services have been exploding in growth in recent years Facebook, Twitter, Instagram, Pinterest, WhatsApp, LINE, WeChat, KakaoTalk, Viber and many more, may appear to the end users as chat apps or online places to hang out with friends, but to retailers, these are channels-to-market, these are direct routes to find, and communicate with, people who no longer wander shopping malls looking in the window for inspiration. These people now find their inspiration for new purchases online. As you surely know, the way companies [in tech] evolve now, is to build first, then monetize later. It s all about building a great desirable service attracting millions of customers for free, then finding ways to monetize that customer base. Google, YouTube, Facebook, Twitter, WhatsApp and a thousand more apps/services have been built this way. OTT chat apps are not SMS killers, they are closer to social networks Here at Portio Research, we have been saying for the last two years that OTT messaging apps are not just a direct threat to SMS, they are an all-new class of services, combining mobile messaging with social networking. These OTT apps are building communities, and then leveraging memberships to 2014, Portio Research. All Rights Reserved 7

9 promote content discovery and generate revenues from content sales. It may be the sales of stickers and emoticons, it may be sales of premium games or game upgrades and in-game content. It may be promoting music sales, and it may be direct-to-consumer retail of fashion, home wares, electronics or more. But equally, these channels to market are now incorporating social communications, gaming and chat with more access to financial services and full integration with retail e-commerce channels. SMS remains what it has always been: a simple, cheap, easy, ubiquitous, discreet way to communicate a short message between almost any two mobile phones on the planet. OTT messaging apps are evolving into social networks, they present a new channel-to-market for content owners, advertisers and MNOs. MNOs need not fear these OTT players, they should embrace them, build partnerships, and exploit these channels to drive the rapid growth of non-voice services. Mobile data use is booming, and much of the growth is being driven by the exploding popularity of social networks, image sharing apps and OTT IM chat apps. MNO's should embrace this growth, partner with OTT players and drive the growth faster and higher. Mobile and wireless is the future of global Internet access, and content owners and MNOs should value each other in driving consumer behavior, and share the spoils. Facebook acquiring WhatsApp demonstrates exactly the points above. Monetization Facebook clearly understands that WhatsApp is a channel to market, and the combined power of Facebook and WhatsApp gives Facebook the kind of advertising/marketing leverage that other big players (Google, Amazon, Microsoft) should be extremely concerned about. At Portio Research, we now expect to see further M&A activity in these OTT markets. Other players (TextPlus, Kik, BBM, etc.) are to be watched carefully. More on this later. In the short term, Facebook should be looking at LINE and WeChat and KakaoTalk to see how the Asian players are monetizing these OTT IM apps. In Asia, these services are used by consumers more like social networks and content marketing channels combined. Premium apps, virtual goods such as stickers and emoticons, online games and numerous services are sold through these channels generating significant revenues. LINE owner Naver Corp, is seeing revenues in excess of $100 m USD per quarter just from the sale of virtual stickers and emoticons in the LINE app. In Q4 2012, LINE generated $58 million in revenue for Naver, but by the end of 2013, the service was generating double that. This is a rapid growth business. The Chinese virtual goods market is reported worth tens of billions of dollars annually , Portio Research. All Rights Reserved

10 As the industry giants consolidate, such as we see now with Viber and WhatsApp, other new players will rise in the market. Expect new entrants to emerge in 2014, 2015 and 2016, expect to see further service innovation, new ways for people to interact and communicate - fun and simplicity and innovation should be the key drivers. The focus remains on innovation, novelty and engagement. Monetization comes later. The key demographic groups driving all these services are the youth and young professional segments of the market, they like disruption, they like innovation, they flock to what is perceived as new and cool and different. Ad platforms At some point Facebook will have to monetize WhatsApp, and monetization is going to involve advertising or the sale of goods (virtual or physical) or premium services. We expect almost without a doubt that Facebook will extend its ad platform into WhatsApp eventually, but it will likely take some time. In the acquisition, both parties, Facebook and WhatsApp, stated clearly that the WhatsApp user interface is not about to start carrying advertising, and so they have to honor that for at least the next two or three years or they risk upsetting a lot of customers. Rather than putting the advertising directly on the WhatsApp messaging interface, it s perhaps more likely that they will use the software algorithms to read what people are saying in WhatsApp chat sessions and then tie that WhatsApp activity to their Facebook account, and then the advertising will appear in Facebook. So WhatsApp chat just becomes an extended search tool, for the ad platform. Eventually, the WhatsApp customer base will roll into Facebook and in a few years this vast single customer base will likely be 2.5Bn or even 3Bn strong, and it will generate vast revenues through advertising. Facebook, like Google before it, because a network within a network, the Internet within the Internet. But it s more than just advertising it s about finding new routes to market for goods and services through many forms of modern marketing viral sharing, building the raving fan customer base, social sharing and the new age online world word-of-mouth marketing. Your best advert is a happy customer, and your worst advert is a customer who has received bad customer service. Social networks can give a product the thumbs-up, or the thumbs-down, at lightning speed. Reach Ultimately, more people see Twitter and Facebook every day than read any newspaper or magazine, or watch any TV advert, or listen to radio. It s the new way to share what you are doing with a billion or two of the most upwardly mobile, high-spending consumers on the planet. Facebook is spending some money ($4 Bn cash) but much of the acquisition is financed in stock. Facebook is spending a chunk of its own value (roughly 10% to 11% of current market cap), in order to grow organically into new markets. It s acquired more customers (especially young customers), in more 2014, Portio Research. All Rights Reserved 9

11 territories (especially in developing markets), which it can use to leverage as a route to market for millions of advertisers, marketers, small businesses and individuals. The value is in the long term, it s in building Facebook up to be the largest single community on the planet. Mark Zuckerberg s stated goal is to connect everyone. Digital footfall Rakuten is acquiring Viber for the same reason. In the East, the big players are fighting for market share - LINE (Naver), WeChat (Tencent) and KakaoTalk dominate. With the Viber purchase, Rakuten makes a major play in the booming Asian markets. Further consolidation should be expected in the West too. The big brands are fighting to control retail channels: Apple has massive reach in devices, and it has imessage, its own very cleverly integrated messaging solution. Microsoft has hundreds of millions of Skype users, and Facebook now has WhatsApp. Google must now be feeling intense pressure to play bigger in chat apps, the future of BBM looks interesting, and where is Amazon in all of this? The OTT IM chat market will remain fragmented, and fiercely competitive for some time to come. New entrants, new innovations, further M&A activity and further consolidation should all be expected, as services evolve over the next 2 or 3 years. Companies that operate retail premises talk about footfall. Major media companies and major consumer electronics companies are using these social chat messaging apps as a driver of digital footfall. If you have footfall, that means lots of people coming in your store, and there s going to be a direct relationship between footfall and the sale of goods. Social chat apps have become a strategic play for digital footfall. Global media corporations know that having some control over the relationship between consumers and their mobile devices, is digital footfall. At some point, you re going to start being able to exert some influence over how those consumers interact with their connection to the online world. Ownership of OTT social chat apps the big players are lining up It s becoming clear that all the major social chat apps are becoming tools in the war chest of major companies. Obviously Facebook now owns WhatsApp, and Facebook s vast market influence is well understood. In the Asian market, WeChat is owned by Tencent. Tencent also runs QQ, which has some 800 million customers, and WeChat as the mobile option has around 400 million customers. This gives Tencent access to over a billion consumers, mostly Asians, but some are all over the world. A billion consumers that s a phenomena amount of digital footfall, an enormous amount of consumer power. Rakuten has now acquired Viber, with more than 300 million users. Rakuten s stated goal as a company, recently announced in a statement, is The company aims to be the global number one Internet services company. Rakuten has a large portfolio of online media interests, it is the largest online retailer in Japan, it owns a $100 million dollar chunk of Pinterest, and it owns online retail , Portio Research. All Rights Reserved

12 operations in Europe, such as Play.com and former Buy.com in the US, as well as further operations all over Asia, Brazil, the US and more. LINE is part of Naver Corporation. The LINE app itself, as noted above, is generating over USD $100 million per quarter in sales of virtual goods, mostly stickers and emoticons through the 300 million plus users. Naver also operates numerous other online interests, predominantly in gaming. KakaoTalk in Korea is owned by Kakao Corporation, which also has other online media investments. There are other social chat apps, such as ChatON owned by Samsung and embedded in many Samsung devices. That has 100 million users. And then Microsoft owns Skype with 300 million regular users. There is imessage, which clearly operates slightly differently to the others, with its deep native integration in ios - all the other apps have to be downloaded optionally but imessage comes preinstalled on all iphones and operates at such an integrated level, many people are using it and they probably don t even know they re using it, but regardless there are several hundred million users. How they stack up Our in-house data shows that there are 11 well known, major OTT social chat apps claiming in excess of 100 million users. We are including BBM in this list, which last reported 80 million users in late If we draw up a table, to show which companies now own which apps, we can see that of the 11 biggest apps, 8 of the most popular chat apps are owned either by large mixed-interest media companies or major global consumer electronics brands. This is shown in the table below. Table 1: OTT Social Chat App - Owners OTT Social Chat App Owner Major Media Corporation Major Consumer Electronics Corporation Still up for grabs? BBM Blackberry imessage Apple KakaoTalk Kakao Corp Kik Messenger Independent LINE Naver Corp ChatON Samsung Skype Microsoft WhatsApp Facebook TextPlus Independent Viber Rakuten WeChat Tencent Source: Portio Research Ltd. 2014, Portio Research. All Rights Reserved 11

13 There seem to be 3 substantial opportunities still left on the table. Everybody knows about BBM, BlackBerry Messenger it s obviously very high profile, currently has about 80 million users, stated last December (2013). Since then they have released BBM for iphone, BBM for Android, and they have just recently announced in late February 2014 that they re going to be releasing BBM for Windows Mobile and other platforms. It seems entirely realistic that BBM might be approaching 100 million users in Clearly, BlackBerry has been going through turbulent times of late, so there s an enormous opportunity here that BBM could be a tool to help BlackBerry find a new owner, or perhaps BlackBerry could sell off the BBM business to generate cash and help BlackBerry remained focused on its core activities in the enterprise sector. It s important to understand that BBM is not likely to fetch anything like the kind of money that WhatsApp made, but nonetheless it s a valuable asset. Finally, there are two other players of great interest. Kik Messenger is quite well known, particularly in North America and Europe. The service has around 100 million users, so it s a major player, and the company is still independent and investor-funded, making for a strong potential acquisition target. In a similar position, is textplus, a U.S.-based, independently owned venture-funded business. It had about 110 million users as of July 2013, and again could be a strong potential acquisition target. And the story doesn t end there. There are dozens more social chat apps available, and new players rising all the time. This is still a young market, and there will be many more opportunities to come. What about SMS? OTT messaging apps, as we at Portio Research have been saying for the last 18 months, are not the death of SMS as many in the media have wrongly written over the last three years. Clearly, as we have said for a long time, and as surely now everyone can see, OTT services like WhatsApp, LINE and WeChat are closer to social networks than to SMS we published this opinion in blogs (see online) and in our reports (see here) repeatedly. Sure, OTT chat apps offer a free alternative to SMS, and there is no doubt that it has taken the wind from her sails in terms of arresting what once seemed like relentless growth in SMS traffic. However, SMS remains a simple and effective messaging service now in the hands of almost 6 billion human beings. That dwarves even the reach of mighty Facebook, and for a long time, SMS will remain a profitable, essential element in the messaging mix. Media reports of the end of SMS continue to reach print seemingly almost every day. SMS certainly peaked, in 2011 in North America, but elsewhere, 2014 or 2015 represent the peak of SMS in terms of overall usage. Over the next few pages, let s now explore how SMS is doing, and how SMS and OTT messaging apps are actually co-existing quite happily in many markets , Portio Research. All Rights Reserved

14 Part 2 SMS and OTT mobile messaging markets 2014, Portio Research. All Rights Reserved 13

15 SMS and OTT mobile messaging markets Where the mobile industry is today Mobile communications markets have moved forward in such phenomenal leaps and bounds over the last two decades, it s hard to remember how we ever lived before smartphones, constant messaging, and the Internet. Remember when a fax was the coolest thing? The world, particularly the world of consumer services and retail shopping, is shifting very much towards the mobile platform. Here and now, we re living in a world with 6.6 billion active mobile subscriptions among a population of 7.2 billion human beings. We are going to pass the point, probably around the end of 2014, where we are living on a planet where there are more active mobile phones than living people. Clearly, everything is moving towards the mobile platform. We now have 6.6 billion mobile subscriptions versus only 1.2 billion fixed telephone lines. And between 2011 and 2013, the world gained 616 million more mobile subscriptions, but the world lost 33 million fixed-line subscriptions. So clearly, we can see a world where fixed-line technology is becoming, not obsolete yet, but certainly less popular, and everything is shifting to mobile. Figure 1: Mobile Cellular Subscriptions & Fixed Telephone Worldwide (In Million, F) Subscriber Base (In Million) 8,000 6,000 4,000 2,000 Snapshot Mobile Subscriptions: +616 Million Fixed Telephone Subscriptions: -33 Million 6,632 6,411 6,016 1,204 1,186 1, Year Mobile Cellular Subscriptions Fixed Telephone Subscriptions Source: Portio Research Ltd., ITU But obviously what s of particular interest is mobile Internet access, and mobile broadband subscriptions. At the beginning of 2014, there were 2.1 billion active mobile broadband subscriptions, versus only 700 million fixed-line broadband subscriptions. Some of these mobile broadband subscriptions will be for tablets, but most of them are for smartphones. We are now seeing worldwide shipments of around 1.3 billion smartphones per year globally , Portio Research. All Rights Reserved

16 Figure 2: Mobile & Fixed Broadband Subscriptions Worldwide (In Million, F) User Base (In Million) 2,500 2,000 1,500 1, ,155 Compounded Annual Growth Rate Mobile Broadband: 35% Fixed Broadband: 9% 1,556 2, Active Mobile Broadband Subscriptions Year Fixed Broadband Subscriptions Source: Portio Research Ltd., ITU In 2014, 30% of the human race has access to a smartphone. And for many people this is their only connection to the Internet, they don t have access over a fixed line. What people do with a mobile phone has changed almost beyond recognition. Ten years ago the primary purpose of a mobile phone was for voice and a little bit of messaging, now smartphones are being used increasingly for many more non-voice functions music, games, messaging, Internet access, search, maps, particularly social networking, social messaging, and increasingly we re seeing shopping, retail and payments shifting to the mobile platform. Social networks and these messaging apps are becoming strategic platforms and very key mobile relationships with consumers. Social chat apps are booming in use, but they are not a direct replacement for SMS as a chat platform. OTT Messaging Apps are NOT Cannibalising SMS in the Vast Majority of Markets Despite press reports throughout 2011, 2012 and 2013 that the end of SMS is upon us, SMS in fact remains strong, and in several key mobile messaging markets, SMS and OTT messaging apps are working quite nicely alongside each other. Many media reports over the last few years have presented a picture that OTT messaging apps are cannibalising SMS use and that carriers are losing billions in SMS revenue. We will look at the revenue picture further below. First let s look at traffic and usage. SMS has not fallen off a cliff; imessage didn t turn out to be the SMS-killer it was threatening to be. 2014, Portio Research. All Rights Reserved 15

17 It is true that that some SMS markets have peaked and shifted into a decline phase, and this includes the US market, which was in something of a bubble at its peak, and growth in some other markets has levelled off, but many other SMS markets around the world are still enjoying solid growth. Worldwide, SMS generated $254,664 US Dollars every MINUTE of 2013, day and night, 365 days of the year, in messaging revenue for carriers SMS traffic worldwide will peak at 8.3 trillion messages annually, reaching that peak in 2015 In 2013, around the world, carriers generated revenues of $133.9 billion US Dollars from SMS. That s more money than the GDP of Vietnam SMS Traffic Worldwide As shown in the forecasts below, SMS traffic topped more than eight trillion messages in Worldwide SMS traffic will remain at around 8.2 to 8.3 trillion messages per annum during 2014 and 2015, then after that it will start slowly declining. The key drivers maintaining traffic from 2011 through 2015 is the continuing growth of the global mobile subscriber base, primarily driven by developing economies in Asia, Africa, Latin America and The Middle East. The key driver behind the decline from 2015 through 2017 is the shift away from SMS in mature markets (North America, Europe, parts of Asia Pacific) as smartphone penetration increases and more users shift their communications to OTT social chat apps and popular social networks. The figure below depicts year-on-year SMS traffic for the period Figure 3: SMS Traffic Worldwide (In Billion, F) 9000 SMS Traffic (In Billion) ,735 7,719 7,945 8,161 8,262 8,294 8,198 7, F 2014F 2015F 2016F 2017F Year Source: Portio Research Ltd. F Forecasted , Portio Research. All Rights Reserved

18 Let s take a look at a number of key mobile messaging markets: North America Canada and the US Total SMS traffic in North America declined in 2012 and again in The total number of messages sent declined by 10 billion during 2012 to reach trillion, from the market peak of trillion in This represents a drop of one half of a percent (0.5 percent) in total traffic decline. This really is not at all the disastrous scenario of doom and gloom that many industry pundits were predicting two or three years ago. The figure below shows the historic and forecast SMS traffic in North America from 2010 to Figure 4: SMS Traffic North America (In Billion, F) 2500 SMS Traffic (In Billion) ,108 2,385 2,375 2,367 2,325 2,276 2,198 2, F 2014F 2015F 2016F 2017F Year Source: Portio Research Ltd. F Forecasted Canada is a very healthy market, growing fast every year and looking good, both organic growth and usage-per-month are up, showing very strong growth. In fact, Canada has just edged into 2nd place behind the US, as one of the world s highest-usage (Per-Person-Per-Month, or PPPM) SMS markets. Canadians now send roughly the same number of texts per month as mobile subscribers in The Philippines (for years, The Philippines has been known as the SMS capital of the world until the US took over that title more recently, in 2011). The major difference is; usage in Canada is still trending up, while usage in The Philippines is trending down. The US contributes around 96 percent to the regional SMS traffic, so obviously, SMS trends in North America are broadly governed by SMS trends in the US market. Total SMS traffic in the US has finally stopped growing, and 2011 represented the peak of the market. Total SMS traffic and average SMS use PPPM both slightly declined in 2012, signalling the beginning of the decline in the US market. 2014, Portio Research. All Rights Reserved 17

19 The US saw peak year for SMS in 2011, when texting reached an unsustainable high. We have now seen that both The US and The Philippines, the only 2 markets in the world to ever reach such high levels of average monthly usage, have been unable to sustain that high use for the long haul. IN both those markets, the principal driver that pushed average usage to unsustainable highs, was carriers giving consumers unlimited all-you-can-eat tariffs. Average-subscriber SMS use-per-month peaked in the US market in 2011, at over 600 messages PPPM, and then declined marginally in Similarly, total SMS traffic declined by 1.5 percent to reach 2.27 trillion in 2012, down from 2.3 trillion during the full year This is shown in the figure below. Figure 5: SMS Traffic and SMS Use per Subscriber per Month The US ( ) SMS Traffic (In Billion) 2,500 2,000 1,500 1, ,052 2,304 2, Year SMS Traffic SMS Per Subscriber Per Month SMS use per Subscriber per Month Source: Portio Research Ltd. But so far, these drops are very small, with total 2012 traffic remaining comfortably higher than 2010 traffic, and with 2012 usage per-person remaining higher than 2010 usage per-person. As we look at 2013 trends, all indications show that the US market again only saw a similar small drop in SMS traffic from 2012 totals to year-end 2013 totals. We estimate US total SMS traffic for full-year 2013 to be a little over 2.1 trillion messages, only a modest decline from 2.27 trillion in Do you remember those predicted 'drop off a cliff' scare stories in the press? That didn t come true, at least not yet. The attention seeking headlines in the media over the last two years, claiming that imessage would destroy SMS - that didn't happen. When studying the US market, which remains the largest SMS market in the world by a very large margin, it is important to remember how inflated the market became. Even if the US market (total traffic) declined 30 percent from its 2011 peak, it would still remain above its own 2009 traffic figure, and it would still be the world s largest SMS market by a factor of about 80 or 90 percent. If average SMS , Portio Research. All Rights Reserved

20 usage per-person declined the same 30 percent from its 2011 peak, the US would still remain by far the most intense, high-usage SMS market in the world and again still ahead of its own 2009 figure. So we must accept that over 2009-to-2011, the market became unsustainably inflated and this drop off was always going to happen. Average per-person SMS usage in the US was in a bubble in 2011, and that was never going to last forever, at some point that bubble had to burst. This is a market correction, not the end of the SMS world as we know it. At Portio Research, we believe that this declining traffic trend in North America will continue for the next few years and SMS traffic will gradually decline to approximately 2.0 trillion by the end of 2017, still above 2009 levels. US SMS has not and will not drop off a cliff, but it is now slowly rolling down a hill. As with traffic, SMS revenue peaked in North America in 2011, at $24.5 Bn USD. This revenue is forecast to ultimately decline from USD 23.9 billion in 2012 to USD 18 billion in 2017, falling at a CAGR of 5.4 percent over that time period. The figure below illustrates SMS revenue in North America from 2010 to SMS revenue in North America was USD 20.9 billion in 2009, and the figure below shows that the market will return to this level at the end of 2015, again accentuating that the period from 2009 to 2011 was a bubble, that was never going to keep on going growing. Figure 6: SMS Revenue North America (In USD Billion, F) SMS Revenue (In USD Billion) F 2014F 2015F 2016F 2017F Year F Forecasted Source: Portio Research Ltd. So we can see the OTT didn t kill SMS in North America. Now let us see how SMS and OTT messaging services are performing elsewhere in the world. We will look at certain hot spot markets around the world either key regional markets or selected markets that have been discussed the most in the press over the last two or three years. 2014, Portio Research. All Rights Reserved 19

21 Japan and South Korea Looking at full-year 2012 SMS traffic, the advanced markets of Japan and South Korea have, somewhat surprisingly, held steady. Japan is home to LINE and South Korea is home to KakaoTalk, both huge players in the OTT space, yet the SMS markets have held up. Japan has witnessed a few percent drop in average per-person usage, but in truth this is nothing unusual for a fully mature market now that SMS is a 20-year-old technology. Overall total-market size, in traffic terms, is still showing slight annual growth (2010 to 2011 to 2012, each year registered slight growth). South Korea tells a similar story, with the overall market still showing slow growth, and average usage per-person has just levelled-off and dropped by about one or two percent at most. Remarkably, these markets act as the perfect example to demonstrate that OTT messaging apps are not the massive 'SMS killers' that many industry pundits imagine. LINE and KakaoTalk in Japan and South Korea respectively, have both been massively successful in their respective domestic markets, yet SMS traffic has not suffered AT ALL as these OTT services have risen in popularity. Indeed, average SMS usage per-person-per-month in these two markets remains high, very high (South Korea remains the 3rd highest in the entire AsPac region), right alongside the rise of the OTT players. Average SMS usage per-person-per-month in Japan and South Korea is still high by Asian standards (most Asian countries see higher usage than most European countries) and usage in these 2 markets remains higher than in almost any single country in all of Europe. In Japan, LINE has gone from launch in mid-2011, to 150 million (greater than the entire population of Japan) users in the first half of 2013, yet over the same time period, the overall Japanese SMS market still grew, and average use perperson only declined a few percentage points. At the same time, in South Korea, KakaoTalk launched in March 2010, and by December 2012 the company reported 70 million users (greater than the entire population of South Korea), yet over the time period, the overall SMS market in Korea grew each year, and average use per-person barely dropped more than two percent. These markets are the perfect examples of how OTT messaging apps are not taking [much] market share from SMS, at least not at any great speed, but instead they are complimentary services, adding to the messaging mix, simply giving mobile consumers more ways to message. Europe: The Netherlands Much has been written about the Dutch SMS market over the last three or four years. It IS contracting. WhatsApp and other OTT messengers are massively popular in The Netherlands, and so it is easy to see SMS in decline, OTT apps in high use, and conclude that OTT messaging apps kill SMS use, but there is actually more to it than that. According to a report from the European Commission, The Netherlands is the second most expensive mobile market in Europe. Mobile services in general are under pressure in Holland because it is an expensive market, and when we look historically at that , Portio Research. All Rights Reserved

22 market, over the last 3 years, the whole market has contracted subscriber numbers have declined, voice revenues are declining, non-voice revenues are under pressure, SMS revenue has declined; the entire national economy has been under pressure. Set against an economy under pressure, and a declining overall mobile market, the decline in SMS traffic and revenue is IN KEEPING with other economic conditions prevalent in the Dutch market. It is hardly surprising that OTT messaging apps have been successful in an economy where mobile services are the second most expensive in all of Europe, and then entire economy is under pressure. Viewed in that light, the drop in SMS and the reasons behind it are not so alarming or clear cut. Spain Spain, characteristically and unsurprisingly, shows a miserable picture for SMS use, with heavy declines in traffic year-on-year for the last few years, including 2012 and The problems in the Spanish economy are widespread, and the market has witnessed declining subscriber numbers, declining revenues and declining SMS use for several years. This is a market in serious trouble, and at this stage it is hard to say if the decline in SMS use is down to OTT cannibalisation, or if it is simply a result of the economic conditions in the country. MMS traffic and usage figures for Spain also show a similar disastrous decline, suggesting it is both factors at work - a country with economic problems, and those problems exacerbated in mobile messaging as consumers flock to cheaper alternative services. Greece As with The Netherlands and Spain, SMS is in decline in Greece, another major European economy that has struggled over the last couple of years. Measuring the global effects of OTT cannibalisation of SMS use by looking at The Netherlands, Spain or Greece, all markets where price sensitivity is a serious issue, cannot give us an effective gauge of how OTT messaging apps will affect SMS in the rest of the world. The EU Big 5 The EU Big 5 show a mixed picture - healthy strong growth continues in France and Germany, with overall SMS traffic growing consistently year on year, and usage-per-person-per-month also growing. France and Germany both saw good growth in 2012, and although that growth slowed a little in 2013, it was still a picture of growth. The UK was growing from 2010 through 2011, but seems to have levelled off in 2012 and 2013, possibly suggesting the start of 'the WhatsApp effect' as OTT services arrest what 2014, Portio Research. All Rights Reserved 21

23 was growth in SMS use. Preliminary data suggests that traffic in the UK dropped again in Italy continues to grow, but slowly, suggesting saturation and levelling off. While SMS declines in The Netherlands neighbouring Belgium levelled off in 2013, and Germany is enjoying healthy growth in SMS traffic. As Spain is in decline Portugal is growing. Most of Western Europe is level or still growing, but more of Eastern and Southern Europe is showing SMS in decline or stable. Overall, Europe is a complete mixed bag, with a third of countries growing, a third of countries flat, and a third in decline. Measured as a whole, SMS traffic and usage across the whole continent is flat, with usage-per-person just showing a very slight decline in Of the giant SMS markets - France, Germany, Italy, The UK and Turkey, which between them make up well over half of all the SMS traffic in Europe - the only one to worry about right now is The UK, showing a slight drop in usage in 2012 and again in The others are still growing. Of all the European markets, SMS usage-per-person-per-month is highest in Belgium, Ireland, Turkey and France. So far, of these four 'SMS-crazy' nations, only Belgium has started to level off, and none of these markets are showing any serious decline. Ireland has levelled off but is holding steady. In Eastern Europe, clearly SMS is in decline, though many large markets like Russia are managing to hold steady, but generally the picture in the East is not good. The Asian Giants The Asian giants, China and India, show a very visible levelling off in SMS usage. Overall traffic in China continues to grow every year, and China remains the 2nd largest SMS market in the world, after The US. However, average SMS use per-person-per-month shows quite a drop over the last few years, slowing growth dramatically. This observed pattern suggests that organic market growth (new mobile subscribers) is 'keeping China afloat' as a growing SMS market, but the declining average usage suggests that either a) those new users coming into the market are low-demand SMS users, dragging down the national average level of use; or more worryingly b) the bulk of the existing market are using SMS less, as they migrate to higher-end devices (smartphones) and make use of a wider variety of more advanced ways to communicate (social networks, OTT messaging apps such as WeChat, VoIP apps, etc.) With 300 million registered WeChat users in China, traffic shifting from SMS to OTT looks likely to be a serious factor in the China story. Again, as with the analysis of European SMS markets, we would expect that a market such as China is subject to price sensitivity where cheaper/free services are available, more people will use them , Portio Research. All Rights Reserved

24 Also, a market like China is still enjoying organic growth. Where mobile users in Europe have had SMS in their hands for over ten years, establishing set patterns of use, many millions of subscribers in China and other Asian markets are newer to the entire mobile world, and hence adopting OTT messaging apps is less of a cultural shift. The picture in India is not yet clear, and it will not be clear until we see official full-year 2013 data. Our preliminary 2013 data suggests SMS traffic in India declined slightly, but so did other metrics of the Indian mobile market. There was some restructuring in the Indian mobile market in 2013, and several Indian networks, including incumbent players (Reliance & Tata) and new players (Telenor, MTS and Videocon) saw their subscriber base decline from 2012 to Although the Indian SMS market has grown well for several years, and it is by any measure a huge market for SMS, considerably bigger than even the largest European SMS market (France), this market restructuring cut SMS traffic in For now, per-person SMS usage and traffic in India seem to have levelled off in 2012/2013, and the future remains uncertain, and worthy of watching closely. Average use per person was up from 2010 to 2011, but down again in 2012, suggesting the market has reached a certain level of maturity and is settling. Organic subscriber growth should help keep overall traffic trending slowly upwards for some years to come, but with average usage flat or in decline, the days of rapid growth would seem to be over. OTT messaging apps are gaining popularity in India, as is to be expected in any price-sensitive market, where both BBM and WhatsApp, among others, seem to be very popular. It is worth noting that India is currently a booming smartphone market, dominated by low cost Chinese made smartphones. As smartphone penetration increases, in price sensitive markets, we expect to see rapid growth in OTT messaging, and stagnation in SMS usage per-person. Asian growth and the bottom-of-the-pyramid Overall, the SMS markets in Asia are split, half the markets are still growing, half are flat or in decline. Looking across the entire region, average SMS usage per-person-per-month is generally levelling off, while the overall SMS traffic market is still growing. Total SMS traffic in Asia will surpass 4 trillion in fullyear 2014, a massive number. This suggests that organic subscriber growth and A2P/P2A services are keeping the market alive, while P2P usage has reached saturation in many markets, but continues to grow organically. 2014, Portio Research. All Rights Reserved 23

25 It is likely that 'bottom-of-the-pyramid' users joining the market are low-level SMS users, while higherend users are finding alternative services using advanced smartphones. Several markets show worryingly steep drops in average SMS usage. The Philippines, known for years as 'the SMS capital of the world' has seen average monthly usage drop by more than fifty percent over the last few years, while similar huge drops have been witnessed in Hong Kong, Malaysia and Singapore. Pakistan is the high-usage stand-out star performer of the entire region. Although still not the highest per capita usage overall, Pakistan has shown massive growth in SMS usage over the last 3 or 4 years, driving massive healthy growth in total traffic. Indonesia too, is another rapid growth market. Unlike Pakistan, Indonesia has seen average usage per-person level off, but organic growth is strong and the overall SMS market has doubled in size in the last 3 or 4 years to Latin America Happy days in Latin America, SMS is growing nicely in all the major markets that we track and only one market shows growth flattening out, that is El Salvador. Two markets, Chile and Uruguay, show overall market growth, but a decline in average usage. All other markets exhibit healthy growth in average use per-person-per-month, and in total market traffic. Argentina, Venezuela, Mexico, Brazil, Colombia and Peru all exhibit robust year-on-year growth and Venezuela continues to be 'the SMS capital of Latin America' showing excellent high usage per-person, higher than anywhere in Europe, and claiming 4th place in the world in terms of SMS usage PPPM. Average usage in Argentina is showing strong growth too. So far, OTT messaging services do not seem to have any significant negative impact on Latin American SMS markets. Africa and the Middle East: SMS traffic per-country is growing in all the major African markets that we regularly track. Usage-perperson-per-month is pretty steady, and not sky-rocket high, but all markets are still growing for now. As smartphone penetration increases across the continent, give the above-observed trends in price sensitivity, we would expect to see some cannibalisation of SMS in favour of OTT messaging services. We see a bit of a mixed picture in the Middle East. The giant of the region, Iran, continues to exhibit overall traffic growth, but usage has peaked and declined slightly, suggesting a levelling off, and organic subscriber growth is likely the only driver left pushing traffic up. Bahrain and The UAE show steep declines in traffic and usage, suggesting a switch to alternatives, such as social networking and OTT messaging apps in these more mature markets where smartphone penetration is higher than other countries across the region , Portio Research. All Rights Reserved

26 Summary Two or three years ago, the press was awash with stories running under headlines such as imessage is here: SMS is dead Quite simply, they were completely wrong. The drop in SMS use in the US market must be seen as a market correction back to 2009 levels, and then looked at in that light we see SMS decline now very slow and controlled. The growth in use of OTT messaging apps is dependent on a number of factors: 3G penetration, smartphone ownership and price sensitivity. In markets where price sensitivity and economic pressure are forcing consumers to scrimp and save, OTT services are an appealing alternative to SMS. However, in markets where price sensitivity is less of an issue, such as in Japan and South Korea, and in France and Germany, we see SMS and OTT co-existing quite happily side-by-side. It is likely that the European markets under pressure, such as The Netherlands, Spain and Greece, have seen drops in SMS use because the new OTT services came along at a time when economic conditions were placing enormous financial pressures on Europeans, and so many have shifted SMS use to OTT apps simply to save money. We have looked in depth at how OTT apps such as WeChat, LINE and KakaoTalk are being used, and they compete as much with social networks as they do with SMS. Asian users engage with LINE and WeChat the way Europeans engage with Facebook sharing images and icons, playing games, buying premium content and engaging in group chat. We know that young people abandoned Facebook in their millions when their parents started using the network. They flocked to WhatsApp to find a new, cool place to hang out. Now Facebook has tried to buy them back but we are not convinced this strategy will work. The major problem with all social networks and OTT social chat apps, is that they are broadly free to use, and fickle young consumers will continue to jump from one service to the next whenever something ceases to be cool and new and trendy. 2014, Portio Research. All Rights Reserved 25

27 The lines between OTT messaging apps and social networks are blurring, but SMS remains just SMS Throughout 2013, all day every day, SMS generated worldwide revenues of $15.3 million US Dollars per HOUR. By comparison, OTT messaging apps, such as imessage, WhatsApp, LINE and BBM generated $2.6 million US Dollars per hour Figure 7: SMS Vs. OTT Revenue Comparison for 2013 Source: Portio Research Ltd. By the end of 2017, there will be over 2.5 billion OTT messaging apps users, and there will also be more than 6.7 billion SMS users OTT messaging apps will generate over $45 billion US Dollars in worldwide revenues in fullyear In the same year, SMS will generate over $117 billion USD In North America, every single day in 2013, mobile phone users sent 6.5 billion SMS messages and 14.4 billion OTT messages , Portio Research. All Rights Reserved