How KakaoTalk’s Billionaire Creator Ignited A Global Messaging War

FORBES: How KakaoTalk’s founder ignited a global messaging war. Kim Beom-Su, the son of a factory worker and a hotel maid, has become a billionaire by building a technological empire. Why is it difficult to grow outside of South Korea?

On a freezing January day in Seoul five teenagers huddle around the fluorescent warmth of a group of souped-up computers in a basement PC bang, or Korean videogamer hangout. K-pop from overhead speakers barely penetrates the cacophony of gaming noise as they battle ninjas in League of Legends and score goals in FIFA. The boys stop for only two things: taking bites out of microwaved hotdogs and texting friends over KakaoTalk, a messaging app used by just about everyone with a smartphone in South Korea.

They’re so engrossed with their games and mobile chatting that they’re oblivious to the man in aqua designer slacks and crocodile-skin shoes in the back corner. A good 20 years older than anyone else in the windowless warren, the goateed gamer–one of the richest people in South Korea and the founder of KakaoTalk–is fending off an alien army on StarCraft. But he’s getting crushed.

“I’m losing because I’m doing this interview,” jokes “Brian” Kim Beom-Su, as his online kingdom burns down.

To be fair, Kim’s StarCraft reflexes have waned as he’s spent most of the past decade building a different type of empire. KakaoTalk is the most popular mobile app in a country obsessed with mobile apps. Its free messaging service has effectively replaced SMS texting, transforming the way people communicate in South Korea. Three-fourths of the nation’s 50 million people use Kim’s creation monthly, along with another 10.8 million outside the country.

The quiet 48-year-old Kim is the most successful Internet entrepreneur South Korea has ever produced, a rare feat in a business culture where power and wealth are dominated by chaebols–family-controlled conglomerates like Samsung and Hyundai. Kim has created not one but two tech industry mainstays from scratch. His first venture, Hangame, started as an Internet cafe business before becoming an online game developer. It later merged with a search company to form what’s known today as Naver , or South Korea’s answer to Google.

Kakao Corp. was the follow-up and introduced to the world the big insight that messaging apps can be far more than chat. They’re platforms for selling all kinds of lucrative services such as games and virtual goods such as coupons and stickers. In October Kakao merged with Daum, South Korea’s second-largest online search company, to form the $7.4 billion (market cap) Daum Kakao. FORBES estimates that in 2014 the firm’s Kakao arm netted more than $120 million in profit on $319 million in revenue. Kim’s 39% stake in the venture is worth about $2.9 billion.

“Brian Kim is the true godfather of mobile-messaging apps,” says Goodwater Capital’s Eric Kim, an early institutional investor in Kakao and former board member. “From day one he knew messaging could be a multifaceted platform for things like gaming, commerce, media and payments.”

Great ideas, however, have a way of getting ripped off at Internet speed, and Brian Kim was copied wildly, to the point where KakaoTalk is now hemmed inside its Korean stronghold by far bigger players that ran faster with the idea. WeChat, founded by Tencent, his biggest outside investor, dominates China with 468 million monthly active users. Line, founded by Naver, Kim’s former company, dominates Japan with 170 million. Above them all is WhatsApp, which Facebook paid $22 billion to acquire in March 2014. WhatsApp has yet to begin selling games or stickers–or anything, for that matter–but it dominates the West and leads all players with 700 million users. Meanwhile recent numbers show that the number of global KakaoTalk users has dropped almost 5% over the last year. Kim is now an underdog in a global industry he started.

Kim doesn’t seem like he’s worried, but he should be. A relaxed figure who once saw a psychologist because he couldn’t get angry, he continually points to Kakao’s position in Korea as its saving grace. It’s still the most used app in South Korea, according to market research firm Rankey.com, and is used by Koreans an average of 33 minutes per day, says Nielsen. “This is a penetration that has not been achieved in any other country,” he says in Korean. To make its platform even stickier, the company has added more services, including a mobile wallet, a taxi-hailing service called KakaoTaxi and news applications to keep users connected.

Kakao’s strategy has also been to go after the smaller Southeast Asian market, where people are just starting to gobble up cheap smartphones. Here, too, Daum Kakao is not alone in its thinking. The company has spent about $15 million on billboards and TV ads to grab users in these countries, but there seems to be little immediate impact against better financed companies like Tencent and Naver. According to research firm AppAnnie, KakaoTalk was not among the top five downloaded apps in Thailand, Vietnam, Indonesia or the Philippines last year.

“Chat at this point is a giant game of Risk,” says Ted Livingston, CEO of Kik, a messenger app that’s popular with teens in North America and has more than 200 million downloads. “All the companies have been placing pieces on the board and haven’t tried to go into each other’s territories. Future growth will come from people trying to take other people’s users.”

SOUTH KOREA, A RIGID SOCIETY where wealth is passed from father to son, doesn’t have many first-generation entrepreneurial success stories like Brian Kim’s. He grew up in one of Seoul’s poorest neighborhoods, the son of a pen factory worker and a hotel maid with a grade-school education. The third of five children, and the eldest son, he and his siblings were raised in a one-bedroom apartment by their grandmother as their parents worked to feed them.

But he was smart and exceedingly driven, encouraging himself onward by writing motivational Korean words in his own blood. Kim was the first of his family to go to college and in 1986 enrolled at Seoul National University, South Korea’s equivalent of Harvard. It was there that Kim was introduced to a friend’s computer server linked up to a bulletin board system, a primitive online message service. “It was the first time I saw the Internet and the connected world,” he remembers.

Kim spent five years grinding away inside Samsung’s IT services group until the first dot-com bubble lured him away. He scraped together $184,000 from friends and family, left his job and launched an online gaming company and a PC bang. Kim published online versions of poker and the Korean card game Go-Stop under the name Hangame while his customers at the Internet cafe became guinea pigs for his creations.

Within three months Hangame was up to 1 million players. Kim needed a partner and eventually reconnected with fellow former Samsunger Lee Hae-Jin, who had started a search business called Naver. They merged to form NHN Corp., sealing the deal with five rounds of Atomic Bombs (whiskey shots dropped into beer and chugged until completion) at a bar in Gangnam, the high-end Seoul neighborhood idolized by singer Psy.

With Kim and Lee splitting leadership duties over the next six years, NHN became a force in South Korea, benefiting from the government’s check on U.S. services such as Yahoo and Google. The company expanded into search, games and e-mail and became the most visited website in the country (NHN’s name would later be changed back to Naver after a series of spinoffs).

Kim moved to Silicon Valley in July 2005 in an attempt to establish the company’s gaming presence in the U.S. He spun his wheels for two years before leaving NHN entirely. On the side he began pouring his own money into an incubator for Korean entrepreneurs called IWILAB in Mountain View, Calif., which churned out dud after dud. By summer 2007 he was ready to take a sabbatical with his family in Palo Alto, Calif. after ten years of straight work.

Then came the iPhone in 2007. The device immediately entranced Kim, and he bought four for his family. “I could feel and see the infinite potential of [the iPhone],” he remembers. Kim moved back to South Korea with his family and brought IWILAB’s staff with him, joining them full-time. They began developing apps using iPhones and iPod Touches they had brought back from the U.S. (The iPhone wouldn’t debut in South Korea until November 2009.) Among the first three apps they made were a Twitter-like service, a group-messaging product and an app they named KakaoTalk that would let any two people chat for free.

At the time mobile customers in South Korea, similar to those in a lot of countries, had to pay for incoming and outgoing texts. WhatsApp had debuted its free texting service, which used a phone’s data connection instead of a telecom’s dedicated texting SMS servers, in June 2009, and it was quickly attracting Korean fans. Inspired by WhatsApp, Kim launched KakaoTalk in March 2010, and it immediately shot to the top of the country’s App Store rankings, with a million users by September. “If the phone companies had made SMS free, it would have been difficult to have been successful,” says Kim.

Four weeks later KakaoTalk reached 2 million users and 5 million by December of that year. Koreans preferred Kakao over WhatsApp because it was free (WhatsApp is 99 cents a year) and offered group chatting. By the time it had reached 10 million users in April 2011, network effects were taking over (you use it because your friends are already on it). KakaoTalk’s size soon proved too big of a barrier even to domestic rivals such as Naver Talk and a Samsung app preinstalled on all Galaxy phones.

Kakao’s main challenge was to keep up with demand. Every week Kim had to order more servers, which took three weeks to arrive from China. To save the system from crashing under the exploding traffic, he was forced to disable nonessential features such as uploads of profile pictures. Yet he remained characteristically unfazed by the stress. “For the last 11 years I’ve never seen an instance where Brian looks extremely busy,” says Joy Lee, a former NHN employee of Kim’s who received startup funding from his ex-boss. Despite the growth numbers Kim was turned down by multiple Korean investors. He fronted the money himself, ending up with 80% of the company.

In March 2011 Kakao was just beginning to gain a foothold in Japan, its first major market outside South Korea, when a 9.0-magnitude earthquake struck 45 miles off the Pacific coast. The quake and resulting tsunami killed nearly 16,000 people and left millions without power and water. Many turned to KakaoTalk with phone lines down and SMS networks overwhelmed. Its service remained intact as Wi-Fi and 3G networks were relatively unaffected.

Kim’s old friend and NHN cofounder, Lee Hae-Jin, was in Tokyo during that quake. As chairman he had been spending a fair amount of time attempting to build a Japanese search and portal business, because NHN’s international ventures had stagnated. Lee was fielding an afternoon videoconference call with his Seoul executives when the quake hit. They laughed when he dove under his desk, as they were unaware of the tragedy unfolding in Japan.

Lee, who declined to be interviewed for this story, was motivated to launch a chat app in the wake of the disaster. He had plenty of allies back in Seoul. “At the time many people thought we should have a KakaoTalk-type of service,” says Naver CEO Sang Hun Kim. Within two months the company was testing a new messaging app called Line, which launched that June.

It had many of the same chat and group-messaging features that had made KakaoTalk so successful. It also had a similar logo, replacing the brown-and-yellow speech bubble design of KakaoTalk with white and green. And Line also had something that Kakao didn’t have: a marketing budget backed by South Korea’s largest Internet company. Naver threw millions of yen at television ads and billboards to get the Japanese to download Line. That worked surprisingly well, erasing whatever previous affection there was for Kakao among early Japanese users. By September 2012 Line had 60 million downloads, and today Lee is a billionaire, as Naver’s shares have skyrocketed due to Line’s success.

“If we had six months to a year we would have reached that critical point,” says Kim, looking back wistfully. “We only had 20 people in Korea, and we were competing against companies like Samsung and Line. To send two people from Korea elsewhere would have had a huge impact.”

Current Daum Kakao co-CEO Sirgoo Lee offers a slightly different explanation. Line’s parent company had spent ten years in Japan learning about the culture and the people. Kakao had not. “We marketed Kakao in Korea as free texting because that’s what Koreans wanted,” he says. “Looking back, free texting really didn’t appeal to Japanese users because they used e-mail on mobile phones [as a free messenger]… Line advertised itself as a free calling service, and we hadn’t yet launched that.”

Kakao’s failure to capitalize on its early lead in Japan was neither its only misstep nor its worst. The company unwittingly helped to create a far more powerful competitor in China, the world’s largest Internet market. In April 2012 Kakao, which had by then raised $24 million of outside capital, was raising money once again. Kim and then CFO Dean Song eventually reached out to Tencent, operator of QQ, China’s largest desktop chat service. Kakao hoped to learn from the giant, which had launched WeChat, its own mobile app, the prior year. Kakao took $65 million from Tencent, now the second-largest shareholder after Kim.

The two companies would meet extensively, with Kim flying to Tencent headquarters in Shenzhen to meet with its billionaire founder and CEO, Pony Ma, in June. They discussed the future of chatting and shared ideas on a whiteboard, even though Kim says that his Chinese partner remained unconvinced of the potential of mobile messaging.

“WeChat was very small at the time and didn’t have a lot of traffic but did have a lot of competitors,” says Kim. “Ma was very skeptical of messaging being a full business.”

Until, that is, KakaoTalk proved it was. Kakao’s revenue soared starting in July 2012 with successes like the social puzzle game Anipang. Before long Tencent began copying Kakao’s every move and, just by the sheer size of its home market, has been able to replicate Kakao’s model and obtain ten times the amount of active users. “Instead of bringing Korean games made in Korea to China, they made games of their own, copying them,” says Kim. “It started becoming less of a friendly relationship.”

Tension between Daum Kakao and Tencent continues, with the South Korean company recently announcing that it, too, would publish games in China. “So far each of the three players have come to dominate their local market,” says Kik’s Ted Livingston. “Kakao just got the short end of the stick starting with the smallest market.”

At some point Kim will have to face WeChat and Line head-on in China and Japan. “For the past two years we’ve been extremely competitive in marketing [in Southeast Asia],” he says, stroking his goatee. “But we’ve found that first-mover advantage has provided too big of a step to overcome, so a lot of messengers are now shutting down their marketing activity… The question here is, who will be the one that finds that new strategy first?”

I ask Kim, an avid gamer who plays Diablo III with his wife and children in his free time, if that will be Daum Kakao.

“It’s a hard game,” he says, smiling.