Betting on the Storytellers’ Market
The scoop on the Wattpad-Naver deal from a Canadian involved in Korea’s tech scene
It was a big week for the Toronto startup ecosystem. Like many others, I had my opinions on Alex Danco’s rendition of finite and infinite games comparing Toronto and Silicon Valley. But, the big news that got me fired up was Toronto’s connection with the other side of the world: Wattpad’s acquisition by Korean conglomerate Naver for a whopping US$600 million.
I returned home to Toronto six months ago after spending six years in Asia, three of which I spent in South Korea as an active member of its vibrant startup ecosystem. My passion for startup communities was sparked in Seoul, from supporting early-stage founders with Techstars Startup Weekends to facilitating connections for growth-stage companies advancing to global markets from the Nakseong Venture Valley.
Looking back, it would not have been possible to survive in Korea without using Naver. Since this big acquisition, people in Toronto might be wondering — who is this South Korean player, and why are they betting on Wattpad?
Naver — something like Korea’s Google
Founded in the dot-com era, Naver started as an in-house venture of Samsung in 1997 before spinning off in 1999. It hosts Korea’s most popular search engine, alongside many other business lines and subsidiaries, including a map service (Google Maps doesn’t really work in Korea), an e-commerce platform, and LINE, which is known for its widely popular messenger app.
Even though I compare it to Google Search, the Naver portal is a world of its own. For starters, Naver’s busy newsfeed is a stark contrast to Google’s simple landing page. Its indexing approach is also quite different from what SEO experts that work with Google are familiar with — Naver’s search operates on an entirely different logic. Its algorithms prioritize content generated from its social community. Users are motivated to contribute to search through Naver Blogs, Naver Cafes, and updates to Naver Encyclopedia and Naver Post. Its flywheel is propelled by meaningfully connecting creators and consumers.
But search is a rather small piece of Naver’s global business. Wattpad is being brought on board to the Naver ecosystem to fulfill a need in a completely separate part of the business.
Winning the world’s largest storytelling platform
Wattpad, founded by Allen Lau and Ivan Yuen in 2006, is a user-generated storytelling platform with over 90 million users from around the world. It’s especially popular with Gen Z — aged 24 years and younger — who account for 80% of its users. Today, Wattpad hosts more than a billion stories, many of which have evolved into film, TV, digital media, and print content.
The partnership with Naver offers Wattpad the chance to grow its user base and solidify its finances by integrating with Naver Webtoon.
Naver Webtoon is the most popular webtoon application in the world. Webtoons are essentially digital comics, referred to as ‘manhwa’ (not to be confused with Japanese manga).
Webtoon has over 72 million monthly users globally. While most prominent in East and Southeast Asia, Webtoon exceeded 10 million users in the U.S. by the end of 2019, growing 70% from the previous year. The 2020 numbers have yet to be published, but we can expect an upswing given the rise of digital media consumption in response to lockdowns and stay-at-home orders.
Like Wattpad, the majority of Webtoons’s users are part of Gen Z. But, unlike Wattpad, Webtoon has a lucrative business model. The page-profit-share program launched in 2013 introduced pay-per-view and advertising on Webtoon to a very loyal domestic fanbase. The company then successfully localized its revenue model overseas. In 2019, Webtoon exceeded nearly $3 million in revenue in a single day.
With impressive margins built on intellectual property rights with minimal cost of production and substantial customer loyalty, Naver decided to double down on Webtoon’s prospects. It set targets to expand its content creation services across channels, expand to new industries, and launch new services in global markets. Almost overnight, the Wattpad acquisition will raise Naver’s user base to over 160 million monthly users (to compare, Netflix has 200 million subscribers) — making it the largest user-generated storytelling platform in the world.
Looking ahead, Naver is betting on Wattpad being able to use Webtoon’s tools to monetize its massive storytelling community successfully.
Down to the deal
Korean conglomerates, known as ‘chaebols’, are notorious for their complex corporate structures.
Fundamentally, Naver’s global content business consists of three main lines: webtoon, web novel, and video. The global webtoon business is managed by Webtoon Entertainment, the subsidiary of Naver Webtoon in the U.S. The video business is managed as a joint initiative with CJ ENM and Studio Dragon. Finally, the web novel business will be managed by Wattpad, which will become a wholly-owned subsidiary of Naver. Notably, co-founders Allen Lau and Ivan Yuen will continue to lead the company.
Even though a Korean company is acquiring a Canadian one, the $600 million transaction is expected to take place in the U.S. through the Webtoon Entertainment subsidiary. What’s interesting is that the transaction amount may depend on the payment method. Wattpad’s founders will have the option to receive their payout in a combination of cash, Naver’s stock at a discounted rate, and/or treasury stock.
Wattpad has raised $117.8 million from bets made by diverse investors including BDC, OMERS Ventures, Golden Ventures, Peterson Group, Tencent Holdings, Canso, and Raine Ventures. How much earlier investors will be able to cash in on the deal will depend on making sense of many term sheets.
Zoom out — the multi-billion-dollar game
Five years ago, creativity was seen as the final frontier. Netflix and its competitors boomed by investing in creative content.
Koreans have played a central role in this boom. The content industry is officially recognized and prioritized in Korea as part of the emerging creative economy. It’s reported to generate over $130 billion in sales, and the market is nowhere near saturated. Entertainment platforms, old and new, constantly need fresh content. Beyond the realm of American Netflix and Disney+, local competitors are emerging to meet the mushrooming demands for entertainment by the rising middle classes of Asia, Africa, and South America. If Parasite’s win at the Oscars taught us anything, it’s that Koreans have mastered not just the art but also the business of storytelling.
Fast forward to today, and it seems that automation and AI have broken past the barrier. The power of automation is chipping away at raw creativity as AI is incorporated into scriptwriting using big data gathered from our frenzied streaming consumption.
It seems like Naver is betting on what might be one of the last things truly impossible to replicate with algorithms: community.
The Korean creative industry has nurtured the unique community-centric concept of ‘fandom.’ From cosplay to BTS’s army, fan-driven community engagement has gone from a fringe subculture to a major revenue stream. This is where the fan-fiction written by amateur authors on Wattpad comes in — the value for users is not only in accessing a large volume of original and high-quality content, it lies in connecting with the community. Naver is so convinced about the value of this intangible asset, they’ve listed ‘Fandom’ on their equity valuation table. While the asset has yet to be attributed a dollar value, my time in Korea has taught me that Koreans know how to play the long game.
Wattpad and Naver are successful examples of what it means to re-imagine value creation. We’ve long talked about the cliches of Uber and Airbnb building two-sided marketplaces to optimize supply and demand. We’re now seeing the maturation of the community monetization model; in this case, it’s a bet on the growing market of storytellers.
Another aspect of the deal that’s intriguing is that it’s the first seemingly large scale collaboration between the Canadian and Korean tech ecosystems. I’m keen to continue exploring the significance, opportunities, and gaps in this untapped relationship between two middle powers that are often overshadowed by their outsized neighbours.
The Wattpad and Naver partnership is groundbreaking for the Toronto startup scene, not just because of the deal size, but for the confidence it shows in the Toronto startup ecosystem’s ability to compete on the global stage, beyond just the U.S.
This article was originally published on zany.blog.
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