Kakao's game revenue forecast shows the future growth of WeChat games

Let's first look at the latest data of Kakao Talk: As of now, the number of registered users has been refreshed to 86 million, of which 70% are Korean local users, the number of daily active users has reached 29 million, and the daily number of messages sent is 4.8 billion.

Kakao Talk was officially launched in March 2010. The following table lists the user growth history of Kakao Talk.

Before the launch of Kakao Talk, Kakao had already been established and had been operating for three years. At the B Dash Camp industry conference held in Japan in April this year, Kakao's co-CEO Sirgoo Lee announced some Kakao operating data on site. These revenue and profit data help us understand Kakao's business logic. The data disclosed this time may be the most complete disclosure of operating data so far. Therefore, this article also attempts to interpret these data, so as to quantitatively depict some of Kakao's current and future operating strategies, and then make some guesses about China's WeChat based on these data.

Rapid growth and profitability

First, let's look at the revenue and profit graph from 2009 to 2012:

From the chart, we can see that from 2009 to 2012, the total cost of four years reached about 543 million US dollars. If we calculate it based on the number of 70 million users at the end of December 2012, the average cost of acquiring a single user is 1.3 US dollars. Moreover, from 2009 to 2011, due to the rapid increase in the number of users of Kakao Talk, the losses in the three years also increased year by year. From 2009 to 2010, the losses increased by 1 times, and from 2010 to 2011, the losses increased by more than 4 times. In April 2012, relying on cash transfusions from Tencent and Korean online game company Joymade, it completed its continuous market expansion.

In September 2012, with the launch of Kakao's gaming platform, its revenue changed dramatically in a short period of time. At the end of 2012, according to the latest data released, the company turned from a loss to a profit for the entire fiscal year, with a profit of 6.5 million US dollars. Looking at the revenue, it grew from 1.6 million US dollars in 2011 to 45 million US dollars in 2012, a nearly 30-fold surge. The hero behind this was the launch of the gaming platform.

Profit structure analysis

To analyze the role of the gaming platform, let’s first look at the profit structure table released by Kakao (unit: million US dollars).

From the above, we can see that games account for more than half of the revenue structure, accounting for more than 60% of the total revenue. Considering that Kakao Talk's game platform was only released in September 2012, it took only 4 months to achieve the above growth rate and turn losses into profits by the end of 2012. The strong money-making ability of games has once again been verified.

Since the performance of games is so eye-catching, let's take a look at the profit structure of the "platform" category separately, so that we can take a closer look at the source of its growing profits. The platform's profits mainly come from two parts, one is the "coin" transaction in the game, and the other is the sale of emoticons and virtual items. Due to public data, it is impossible to directly obtain the income ratio of these two parts, but through last year's performance income and user scale, we can make some inferences. In order to estimate the ratio of the two.

Because the game business was not launched in 2011, we can include the revenue of 1.33 million US dollars in the sales of emoticons and virtual items. Combining the number of users in 2011 and 2012, we can calculate the revenue of this item in 2012 according to the same proportion. Therefore, in the platform revenue in 2012, the two business revenues were: 25.2 million US dollars from games and 3.07 million US dollars from virtual items.

After we have the full-year revenue of games, we will further analyze the game business revenue of 25.2M from September to December to find out. In previous reports, Kakao has disclosed the game platform data from August to October.

Kakao announced that its data from August to October was:

• August 2012 4.1M
• September 2012 12.2M
• October 2012 35.3M

In the entire transaction process, the App Store platform takes 30% of the commission first, Kakao takes the remaining 30%, and the rest is the profit of the game developer. In other words, the commission ratio of the three parties is: 30% (App Store): 21% (Kakao): 49% (game developer), such a structure.

According to the whole structure, we can calculate that the actual revenue that Kakao received in August, September and October was $0.8M, $2.44M and $7.6M. With the data of these three months and the total revenue of the game, we can make a rough estimate of the data of November and December, as shown in the figure below.

*Note: November (E) and December (E) are the author’s forecast data

From the analysis of the revenue structure of this game platform, it can be seen that the business model of games combined with the chat app has a strong monetization ability. Based on the user base of 70 million, it took only 3 months to increase the revenue scale from 0 to 7 million. However, from the data estimation of November and December, it seems that the revenue growth scale of the game has encountered a certain bottleneck. The revenue from October to December has basically maintained at a revenue scale of about 7 million US dollars, and the growth trend has encountered a bottleneck.

The reasons for the bottleneck are mainly related to the total number of users and the limited number of games that the platform can support. The number of game users depends on the size of the total number of users, and currently Kakao has 80 million users. As the user base continues to expand, the growth rate will slow down.

The second factor is that the number of games that Kakao Talk can carry at the same time is also limited. Since it is impossible to make a fuss about quantity like PC, it is necessary to consider increasing the ARPU value with limited resources. It can be expected that the frequency of game replacement on Kakao Talk will be greatly accelerated in the future. This business model may contribute a considerable amount of cash flow every month, but its contribution to growth will soon bottom out. Kakao is expected to explore more business models in the future.

The future of Kakao

Based on Kakao's profit model in 2011 and 2012, we try to predict Kakao's future operating data. From the current revenue sources, the largest proportion comes from game and public account advertising revenue, and the growth rate of these two revenues directly determines Kakao's achievements in commercial success.

First of all, the overall revenue is fundamentally dependent on the growth of the number of users. At present, the domestic market in South Korea is already saturated. In the process of developing abroad, each major battlefield faces fierce competition from Line, WeChat, Whatsapp, and Facebook. Whether Kakao's number of users can continue to grow rapidly in the future will take time to prove.

Second, the game business relies on the base effect of the number of users. If the number of users cannot be developed on a large scale, the growth of this business model will soon bottom out. According to our previous calculations, the subsequent lack of growth has been shown in the last two months of 2012. In addition to increasing the number of games, the improvement of ARPU value will also be a key consideration. Therefore, in the coming period, games need to gain the attention of the market in a shorter time, the competition will become more intense, and the time to be replaced will be compressed even shorter.

Third, in terms of advertising business, Kakao has developed 200 Plus Friend public accounts, with an average monthly revenue of US$1 million. The future growth of this part is relatively easy to estimate, and can be mainly speculated based on the number of public accounts in the future.

Tencent and WeChat

As mentioned at the beginning of the article, Tencent invested RMB 403 million in Kakao in 2012, acquiring a 13.84% stake. In other words, Tencent's valuation of Kakao is RMB 2.9 billion (RMB 403 million / 13.84%), which is about USD 500 million, or 550 billion Korean won.

Is this a good deal?

If we simply measure the current valuation, we can see that the profit in 2012 was 6.5 million US dollars, calculated at a price-earnings ratio of 25 times. This means that the valuation is about 163 million US dollars. Looking at 2013, if we assume that the game revenue is 10 million US dollars/month (at the end of 2012, the revenue level has reached 7 million US dollars/month, and the data here assumes a growth of 40%), the annual revenue will reach 120 million US dollars. Calculated at a profit margin of 50%, it will reach 60 million. Multiplying it by a price-earnings ratio of 25 times, the valuation of game revenue alone has reached 1.5 billion US dollars, and Tencent's investment is 3 times the "floating profit". This does not include the contribution of other revenues to the valuation.

In addition, Tencent's WeChat is in competition with Kakao. According to current news reports, WeChat's game platform will be launched this year. If we simply use Kakao's profit model - Kakao's 70 million users, monthly game revenue of about 7 million US dollars - to speculate WeChat's game revenue, based on Tencent's 300 million users, it is estimated that after a period of development, the monthly game revenue may stabilize at around 30 million US dollars. Taking one year as a cycle, it is 360 million US dollars, or 2 billion RMB. This data can be compared with the 6 billion online game revenue for the whole year of 2012 disclosed in Tencent's financial report. The game revenue contributed by WeChat may account for 1/3 of the current mature game business revenue.

Of course, the above estimates are only based on the simplest model and are only used as a reference for possible future development paths, and cannot be used as a real valuation basis. However, through these analyses, we can also understand to a certain extent some of the directions that various parties are thinking about in the future and the effects they want to achieve.

Article from: iFanr