How WhatsApp Makes Money

How Facebook’s WhatsApp Makes Money

WhatsApp was founded in 2009 by Brian Acton and Jan Koum as analternative to pricey SMS services. The app allows users to upload their contact book and message anyone who has the app installed, at no cost.It is available for iPhones, Androids, Blackberries, Windows Phones,Nokia phones and, most recently, desktops.

Facebook Inc. (FB)purchased WhatsApp in February 2014 for $19 billion and according to the 2014 Facebook Form 10-Q, in the nine months preceding September 30,2014, WhatsApp generated revenue of $1,289,000. On Monday, April 30,WhatsApp co-founder and Facebook Inc. director Jan Koum announced hisdeparture from Facebook. Media reports indicate that Koum decided toleave after a disagreement with Facebook over its use of user data andits desire to allow advertisements on WhatsApp. Koum, along with his cofounder Brian Acton, has long been an advocate for the privacy of WhatsApp users. 

In February 2018, WhatsApp had 1.5 billion users and was Facebook’ssecond-biggest property, after its namesake app. Ithas surpassed Facebook’s messenger and Instagram, the third and fourthbiggest properties. So how is WhatsApp making its money?

One Dollar at a Time and Beyond

The short answer used to be $1 at a time. In some countries, the app usedto cost about $1 to download; in others, the first year is free, buteach subsequent year costs $1 – in other words, WhatsApp had asubscription model. At the peak under this model it has about 700million users worldwide; yearly revenue can be estimated at $700 million per year at this time.

In January 2016, Facebook revealed in a10-Q filing that because WhatsApp was monetized in “a very limitedfashion,” it may not be generating meaningful revenue in the long term,hinting that the strategy would change. Shortly after WhatsApp announced in a blog post that the era of subscriptions had come to an end, andthe messaging app would now be free to use. 

There are still noads in the app, however. “Starting this year, we will test tools thatallow you to use WhatsApp to communicate with businesses andorganizations that you want to hear from,” the company wrote at thetime. The goal is to have people communicate directly with i.e. theirbanks, airlines etc. over the app, while the businesses picks up thebill previously paid through subscriptions. 

ThoughWhatsApp’s financial statements aren’t public (Facebook doesn’t breakdown its revenue by company), Forbes estimated total revenue to be $5billion and the average revenue per user to be $4 by 2020. Asof February 2018, WhatsApp had over 1.5 billion users and sees 60billion messages sent per day, according to Facebook CEO Mark Zuckerberg in a Q4 2017 conference call. 

Other SMS Apps

Outside of America, where sending text messages is more expensive, SMS apps are popular and have successfully monetized. WeChat – the popular ChineseSMS app has ads as well as online games. The company is partlyresponsible for Tencent’s, which owns WeChat, $6 billion revenue in thethird quarter of 2016. The app has over 846 million active users.

Focusing on Growth

WhatsApp is adding around a million users per day, mostly in Latin America, India and Europe. With SMS apps, growth is exponential – when one person in a social group downloads and advocates using the app, many new users download the app in order to communicate with the original person. These new users then encourage other members of their other social groups to use the app.

By increasing market penetration, the app becomes indispensable and the user base grows.

Is it Really About the Money Though?

Industry insiders have speculated that part of the rationale behind acquiringWhatsApp was for Facebook to access user’s behavioral data and personalinformation.

With location sharing data, 60 billion messages sentper day and access to users’ entire contact lists, Facebook has accessto a ton of personal information – all uploaded and saved onits servers. While Mark Zuckerberg has previously promised that thisdata won’t be used to improve consumer targeting in Facebook ads, itwill be unless the user changes the settings to not share informationwith Facebook.

End-to-End Encryption Controversy

WhatsApp, as well as other messaging providers (including Apple), have been inhot water with governments around the world after it was determined that terrorists used apps to communicate before and during attacks.Governments and counter terrorism agencies wanted the companies behindthese apps to share the encryption key in order to gain access tomessages sent and received by the terrorists. The companies, however,refused to oblige. This led to WhatsApp’s adoption of end-to-endencryption, which prevents anyone, including WhatsApp, except the sender and receiver from gaining access to the data shared on the app.

The Bottom Line

Whether you believe that Facebook overpaid for WhatsApp or not, the fact isthat the app has a growing revenue stream with more room to grow. 

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