PANGYO, South Korea—Tech startups venturing into the world of mobile apps have found that popularity doesn’t necessarily mean profits. But South Korea’s Kakao Corp. seems to have cracked the code.
The company behind the Kakao Talk messaging app was bleeding money two years ago, though its app was a smash hit in its native market, and it was reluctant to place advertisements alongside its users’ chat screens to generate revenue. It owes its turnaround to mobile games like Anipang for Kakao, a color-matching game from a Korean developer that became popular on the chat platform last year. Thanks to sales of game boosters that help users advance in the game, Kakao recorded its first-ever annual net profit last year, earning seven billion Korean won ($ 6.5 million).
Kakao’s early travails are common among startups that have struggled to cash in on the popularity of their services, which are often offered free. Since Kakao’s foray into mobile gaming, regional mobile chat rivals—including Chinese media giant Tencent Holdings Ltd.’s WeChat app, and Japan’s Line application, run by an affiliate of Korea’s Naver Corp. —have launched similar offerings on their platforms.
“Kakao Talk had a lot of traffic. But finding a profit source was a big assignment for the company,” Toby Van, the head of Kakao’s game business division, said in an interview. “We wanted a free-to-download game that comes with paid items and it wasn’t easy finding a developer that fit those criteria.”
Following its revival with Anipang, Kakao has partnered with game developers locally and abroad to offer more than 250 games. DragonFlight, created by another small Korean developer called Next Floor Corp., has been another success and this month Kakao added global hit Candy Crush Saga to its lineup.
Kakao’s success making money off mobile games allowed the seven-year-old company, based in the suburbs of Seoul, to double its staff over the past year, to 470 employees.
By 2011, Kakao’s main chat app had attracted tens of millions of registered users, most of them in Korea, dominating the market in one of the most wired countries in the world. But its net loss had also ballooned to 15.259 billion won ($ 14.2 million) from 1.708 billion won ($ 1.6 million) in 2009.
Desperate to reverse losses, Kakao scrambled to team up with a handful of mobile game developers, including SundayToz, the Korean company that created Anipang.
The key to Anipang’s success, Mr. Van said, was the game’s ability to fuse casual gaming with Kakao’s mobile chat platform. Users who log in through Kakao’s app can compete against real-world friends on their messenger contact list. The game’s massive popularity, in turn, brought in flocks of new Kakao users, many of whom were willing to pay for boosters—items like hearts that would allow players to go for extra rounds, lifting their score rankings.
“Competing with people you know was a refreshing change for users,” Mr. Van said.
While Kakao has made itself profitable and its subscriber base has grown to surpass 110 million, other companies continue to struggle to make profits.
Instagram, the popular photo-sharing app that Facebook Inc. acquired in a $ 1 billion deal last year, has over 100 million active users—and, to date, no sources of revenue. The Menlo Park, Calif.-based company, founded in 2010, said last month that it is considering whether to start selling ads.
San Francisco-based social game developer Zynga Inc. has struggled to follow up with new hits as user engagement with its games flags. Over the past year, Zynga has laid off workers, closed offices and shuttered games amid a falling stock price and a wave of executive departures.
Mr. Van said he is confident that Kakao’s path will be different from that of its predecessors. Kakao has a loyal base of users in its core messaging application, and has bolstered other revenue streams, including a service that connects users to their favorite brands, called “Plus Friend.”
The company also continues to partner with more game developers and is looking for ways to expand the pool of game players on the Kakao platform. Kakao splits gaming revenues with the developer as well as media stores, including Apple Inc.’s iTunes Store and Google Inc.’s Google Play.
Write to Min-Jeong Lee at min-jeong.lee@wsj.com and Jonathan Cheng at jonathan.cheng@wsj.com
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