In a sign that the battle for control of mobile messaging is heating up, the operator of South Korea’s dominant messaging app said Friday that it would acquire two of San Francisco-based Path Inc.’s services for an undisclosed amount.
The move by Jeju, South Korea-based Daum Kakao Corp., which itself was formed through a merger of Daum Communications Corp. and Kakao Corp. last year, marks the company’s boldest move yet to expand beyond its home market.
The service wants to compete with the likes of Facebook Inc.’s WhatsApp, which the social networking giant bought for $19 billion last year, and Rakuten Inc.’s Viber, which the Japanese e-commerce company last year bought for $900 million. It comes as global Internet companies vie for control of messaging apps, which offer the ability to attract mobile users and keep them online to sell them ads, virtual goods and other types of services.
The deal, which includes Path’s eponymous social network and its mobile messaging app Path Talk, will add 10 million monthly active users to Daum Kakao’s existing roster of 48 million users—four-fifths of which are in South Korea.
Path was founded in 2010 by former Facebook Inc. executive Dave Morin as a way to share photos and messages with close friends and families. The app pioneered a sleek user interface for smartphones and gained early hype but it struggled to break out in the shadow of Facebook, Twitter, Instagram and other social networking apps.
By 2013, amid design and feature changes, it caught the attention of users in Latin America and later in Southeast Asia where most of its users are today. Last year, in an attempt to make the company more appealing and capitalize on the messaging craze, Path split its app into two, creating Path Talk. Its investors, which include Silicon Valley venture-capital firms such as Kleiner Perkins Caufield & Byers, have had a lot at stake, betting at least $77 million on the company.
Of particular interest to Daum Kakao is Path’s stronghold in Indonesia, a country of about 250 million people where Path has a loyal following. More than half of Path’s 10 million active users are based in Indonesia, according to a company spokeswoman. Daum Kakao has been trying to make inroads in Southeast Asia for several years, with limited success.
In a statement, the company said that the Path deal is “the first of many global business approaches Daum Kakao will take in the coming years,” adding that it would also “explore investment and partnership opportunities around the world.”
A Daum Kakao spokeswoman said that the company sees Indonesia “as a steppingstone into other countries in Southeast Asia.”
Daum Kakao’s thirst for expansion comes as the company has struggled to find new profit drivers. Kakao Inc. launched the messaging app KakaoTalk in 2010, and the service came to dominate the South Korean market, where it is installed on about 93% of the country’s smartphones, according to the company.
However, KakaoTalk’s efforts to grow outside South Korea were stymied by dominant players in neighboring Japan and China–Line Corp.’s Line and Tencent Holdings Ltd.’s WeChat, respectively. KakaoTalk’s attempts to build a following in fast-growing Southeast Asian countries like Malaysia, the Philippines and Indonesia, also stalled.
So the company used its ubiquity back home to push into a wide range of services, including music, media and games, which helped Kakao turn its first annual profit in 2012.
After an initial surge in the stock price following its merger, investors soured on Daum Kakao as profit growth slowed amid heightened competition in mobile gaming.
In the first three months of 2015, Daum Kakao net profit fell 23% from a year earlier, as the company was forced to spend heavily on advertising to maintain growth and launch new taxi-hailing and banking services that have yet to generate significant revenue for the company. Shares in Daum Kakao tumbled 36% from late January through mid-May.
It is unclear whether Path’s new services will be able to revive Daum Kakao’s ambitions in Southeast Asia.
“Indonesia is a highly populated country and a place where it has yet to see a single-dominant player in the messaging-service market,” said Joshua Kong, an analyst with Shinhan Investment Corp. Mr. Kong said that, if Daum Kakao integrates Path’s chat services into its existing operations, it would serve as a new profit driver for the South Korean company.
But Mr. Kong also cautioned that it would remain challenging for Daum Kakao to find other manageable and efficient acquisition targets in other overseas markets.
Shares in Daum Kakao soared by as much as 13% in Friday morning trading in Seoul, following the announcement of the deal. However, the stock remains in negative territory for the year.
For Path, the sale of the company’s two prime assets leaves the once-hot startup with just two services: a service called Kong that turns selfies into quirky animated images, and Path Places, which connects users with local businesses.
The Path spokeswoman said it would continue to build Kong, but that it would “no longer have a home for Path Places.” She added that the company may reassess the decision in the future.