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Line built its empire with surprising speed

by Grace Huang, Jungah Lee, and Lulu Yilun Chen

Bloomberg

How do you create a ¥1.5 trillion company in an industry that gives its primary product away?

Line Corp. did it by getting smartphone users to pay for teddy bear icons and games with cute cookies and wicked witches.

The Tokyo-based messaging application has grown to more than 370 million subscribers since its creation in 2011, when South Korean parent Naver Corp. saw a need for Internet-based communications after the Tohoku earthquake crippled Japan’s phone networks.

Now after Facebook Inc. agreed to buy rival WhatsApp Inc., Line is drawing interest, too. Mobile-phone carrier SoftBank Corp. is seeking to take a stake in the company, sources said this week.

Though cheap or free messaging services have been available since America Online Inc. mailed CD-ROM discs to U.S. households two decades ago, they’ve suddenly become multibillion-dollar businesses. Smartphone apps are drawing hundreds of millions of users and companies like Facebook want access to the audience.

“We’ve been talking about the monetization ability of mobile phones for 10 years, and it’s actually happening now,” said Duncan Clark, Beijing-based chairman of BDA China Ltd., which advises technology companies. “Look around you, look at any dinner table, who’s not looking at their phones? It’s completely transformed social interaction.”

Facebook agreed to pay $19 billion for WhatsApp, days after Rakuten Inc. said it was buying Viber for $900 million.

AOL at its peak had more than 30 million subscribers; Line last year signed up 50 million in less than three months and said it may have 500 million customers globally by year’s end. On Monday, Line said it added 2 million users in a 24-hour period.

“Line has almost completely taken over for me when it comes to smartphone chat apps,” said Jason Maitland, 35, who runs an online marketplace from Tokyo. “Though most of the people I am in touch with are in Japan, I’m slowly adding friends from abroad.”

About 85 percent of Line’s users are outside Japan, it said Wednesday. It’s the No. 1 mobile messenger service in Japan, Taiwan and Thailand, according to a Feb. 20 report from Samsung Securities Co. citing data from researcher App Annie Ltd.

Line also ranks highly in Chile, Mexico and South Korea, where it competes with KakaoTalk.

Line has several possibilities for holding an initial public offering, though nothing has been decided, Chief Operating Officer Takeshi Idezawa said Wednesday. The company may be valued at as much as $14.9 billion, according to estimates by BNP Paribas SA. That is about $40 per user.

Facebook’s offer for WhatsApp values each user at $42.

Those valuations reflect the societal shift to smartphones and mobile messaging from traditional voice calls and emails sent from desktop computers. Worldwide smartphone shipments are expected to reach 1.2 billion units this year and 1.7 billion by 2018, researcher IDC Corp. said in a report released Wednesday.

“The ultimate foundation for chat apps is the explosion of smartphone penetration globally,” said Nathan Ramler, an analyst at Macquarie Group Ltd. in Tokyo. “The barriers to entry are low, but the ability to have a critical mass and be a default chat platform in any given market is very strong.”

For SoftBank, which was founded by billionaire Masayoshi Son, Line may offer a way to strengthen its position in the United States, where it could preload the app on phones used by the 55 million customers of its Sprint Corp. unit, Bank of America Merrill Lynch said in a report released Tuesday.

A deal also may lead to collaboration between Line and Yahoo Japan Corp., in which SoftBank is the largest shareholder, potentially increasing opportunities in the areas of games and advertising, Bank of America Merrill Lynch said in a separate report.

SoftBank hasn’t offered to buy a stake in Line, Takeshi Idezawa, Line’s chief operating officer, said Wednesday. Mitsuhiro Kurano, a Tokyo-based spokesman for SoftBank, said Tuesday the company does not comment on “rumors and speculation.”

SoftBank shares fell ¥242 to ¥7,668 Friday in Tokyo trading. The shares have more than doubled in the past year. Naver has surged 98 percent in the past 12 months in Seoul.

While WhatsApp is a pure messaging application, Line has steadily added features such as games, comics, free voice and video calling, photo and video sharing, and various tie-in apps, including a camera.

Line emerged in the aftermath of the March 2011 earthquake and tsunami that killed thousands of people and triggered the Fukushima nuclear crisis. Naver started designing the app the next month after telephone services were knocked out by the disaster, said Nam Ji-woong, a spokesman for Naver.

The app includes a function allowing users to send their locations to one another.

“We decided to launch the service at the end of June due to a sense of urgency,” Nam said. “We couldn’t rule out the recurrence of the crisis.”

About 60 percent of Line’s revenue comes from games, in which users can pay money to enhance or add features, and 20 percent comes from stickers, emoticons and cartoon characters that users can buy and include in messages, it said Feb. 6.

Revenue in the three months that ended Dec. 31 was ¥12.2 billion, an increase of more than fivefold from a year earlier, the company said.

“As someone who always has one hand on his iPhone all the time, I can’t say how indispensable Line has been for keeping in contact with the people I know,” said Brian Reyes, 33, who works in marketing for a Japanese e-commerce site. “And of course the awesome stickers go without saying.”

After its initial rapid growth, Line’s expansion may slow in the medium to long term, Morgan Stanley said in a Feb. 21 report. With Facebook’s backing, WhatsApp could be a stronger competitor in some markets, the report said.

Line is still positioned to boost revenue in its key markets, including Japan, Thailand and Taiwan, said Morgan Stanley, which rates parent company Naver overweight, or buy.

“Line is the winner in the mobile messaging service market in Asia,” Kim Chang-kwon, an analyst at Daewoo Securities Co., said. “It moved fastest and cornered the markets.”