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LINE offering a sign of messaging apps' arrival, analysts say

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LINE offering a sign of messaging apps' arrival, analysts say

The billion-dollar-plusIPO of Japan-based LINE Corp.catapults messaging apps into the spotlight and could signal a turnaround for aslumping IPO market, analystsand industry observers said.

LINE,which is slated to begin trading in New York and Tokyo in the coming days, makesits public debut amid exploding interest in messaging apps in general. Companiesranging from social giant FacebookInc. to smaller upstart Snapchathave been investing in the format, which has evolved from a simple communicationtool to a broad ecosystem with strong monetization potential, analysts and observerssaid. 's WeChat, forexample, has taken root as a portal not only to exchange messages, but to buy movietickets, games, groceries and more.

LINE,however, is focused solely on messaging for now. Still, the app has seen rapid growthsince it was introduced in 2011, with monthly active users doubling from March 2013to March 2014, for example, though the growth rate has flattened in recent quarters.In March 2016, the company counted 218 million monthly active users across 230 countries,though most users were located in Japan, Taiwan, Thailand and Indonesia, accordingto an SEC filing.

"Mobilemessaging and social networking are some of the most frequent activities of mobileinternet users as they have emerged as a new means of connecting people online,"LINE wrote in its prospectus, echoing a theme seen in recent statements by socialmedia executives such as Facebook CEO Mark Zuckerberg. Both Facebook and Twitternow derive the majority of their advertising revenue from mobile.

Ron Palmeri,CEO and founder of Layer, which provides messaging infrastructure for businesses,said that messaging has become a ubiquitous part of everyday tasks for a large numberof people.

"A lot of times during the day, you're basically interactingwith some kind of messaging app," Palmeri said, noting that a number of companies are tappinginto this format for customer interactions, including Nordstrom, Airbnb and others.

In theU.S., Facebook Messenger and Snapchat dominate among messaging apps, with 110.5million and 85.1 million monthly active users at the March 2016 quarter, respectively,according to researchfrom SNL Kagan, an offering of S&P Global Market Intelligence. China's mainplayer is WeChat, while Japan has LINE and a separate service called Viber. WhatsApp,which Facebook acquiredfor $16.37 billion in 2014, is the leading global messaging service, followed byMessenger, WeChat and Viber.

WhileFacebook's Messenger is the U.S. leader, some say the social networking companymissed its opportunity to dominate the messaging market. Some businesses are reluctantto rely solely on Facebook Messenger and miss out on data gleaned from customerinteractions conducted via messaging, as Facebook provides only a limited amountof such information to its business users, said Layer's Palmeri. Layer helps companiesdevelop their own messaging service rather than relying on a third-party or buildingsomething from scratch.

"Whatwe hear from brands is they want to use those [messaging] channels to acquire customers… not give up that data to LINE or Facebook," Palmeri said.

Facebookdid not respond to requests for comment.

Despitegrowing interest in messaging, there is no one mold for monetization across thevarious platforms currently on the market. LINE's business is a blend of advertisingand revenue from in-game purchases and the sale of emoticons or "stickers"as they are known on the platform. LINE reported $1.08 billion in revenue for 2015,with 40.9% of that coming from games, followed by 30.2% from advertising and 23.9%from stickers.

Similarly,WeChat's business is an amalgamation of micro transactions, advertising and gaming,creating a blended monetization model that many say Facebook is looking to emulatewith Messenger. In December 2015, Facebook tackedon ride-sharing capabilities to Messenger and Zuckerberg talked about deployingbots to assist users on the platform at a conference for developers earlier thisyear. Facebook has opted to build and grow the platform over monetizing it to date,analysts noted.

Geoff Blaber, an analyst with CCS Insight, said social mediacompanies are moving to create a new type of platform with stand-alone apps thatinclude a variety of services in an effort to avoid relying too much on Androidand iOS operating systems.

"In this respect, without a doubt, it does presenta big challenge to Google and others," he said.

Whileit is not clear how various companies will monetize or build out their messagingplatforms, S&P Global Market Intelligence analyst Scott Kessler said companieswill likely stick to pre-existing patterns in their respective business models.

"Companiestend to gravitate to what they are as a core and how they generate revenue fundamentally,"he said.