Out of all the text messaging apps, none can come close to the user base and message volume of Mountain View, Calif.-based WhatsApp Inc. Acquired by Facebook Inc (FB) in 2014 for a whopping $19 billion, WhatsApp currently boasts more than 800 million active users. With numbers like these, it is no wonder that WhatsApp and other messaging services are largely responsible for the decline of traditional cell phone carrier-based SMS (or short message service). This article will compare the revenue trends of traditional SMS versus WhatsApp, the features and benefits that WhatsApp has over carrier-based texting, and the future growth drivers for WhatsApp.

By the Numbers

Since its launch in 2009, WhatsApp has grown exponentially. When Facebook acquired WhatsApp in 2014, it boasted 450 million monthly average users. Just one year later, WhatsApp founder Jan Kroum announced on his Facebook wall that the app had grown to 800 million active users and handled more than 30 billion messages a day. To put that last number into perspective, that translates into 10.95 trillion messages a year. That is a lot of messages and is also 26 percent more than the expected 8.7 trillion messages forecasted by telecom research firm, Informa.

At the same time, SMS volumes have declined all over the world: total volume in China fell 6.3 percent from April 2014 to 2015 (Statista), the United Kingdom experienced a 4.6 percent decline in volume from 2012 to 2013, U.S. text message volumes declined 5 percent in 2013 after 3 years of continuous growth, and in 2011, and all three of Spain's major carriers have experienced remarkable year-over-year downtrends in SMS volume. The research firm Informa predicts that worldwide SMS revenues will drop from $120 billion in 2013 to $96.7 billion in 2018. The Asian-Pacific region will be hit hardest with a forecasted drop in revenue from $45.8 billion in 2013 to $38 billion by 2018 owing to the popularity of message services like WhatsApp, Line (a messaging service created in Japan) and WeChat (a messaging service created by Tencent Holdings Limited in China). Read more in Asian's Tech Start-Ups Are The Next Big Thing.

Reason for the Popularity

These over-the-top messaging services are popular for several reasons:

  • Free or very low cost. After the one-year free trial, WhatsApp costs merely $1 per year, as opposed to SMS which generally costs a few dollars a month for unlimited texting or several cents per text. When roaming, per-text rates can be much higher. (Read more in How WhatsApp Makes Money)
  • More features. WhatsApp adds a whole new dimension to messaging that completely surpasses traditional SMS. For instance, WhatsApp allows group chats, the ability to send large data files (such as photos, videos and short voice messages), a library of instant messaging icons and location check ins.
  • Multiple platforms. Finally, through an additional download, WhatsApp can be run through a browser, so that users can send and receive messages on a computer.
  • No ads. WhatsApp is free of ads and extra gimmicks like games. 

The Future

Although Facebook CEO Mark Zuckerberg has gone on record to say that WhatsApp will remain ad free and will focus on continued growth and usability, sooner or later Facebook will have to introduce features to monetize and take advantage of the app's huge user base. The trick however, is for the world’s largest social network is to introduce the right balance of revenue-generating initiatives while still maintaining WhatsApp’s ad- and game-free mandate. Facebook also has its own over-the-top messaging service called Facebook Messneger, and will have to take care not to cannibalize users or profits from that platform. WhatsApp’s closest rivals may offer some solutions:

  • Pay-to-use calling service. This would reach non-WhatsApp users, for example, land lines. This is the current revenue model adopted by Skype and Viber. It is by far Skype’s largest revenue driver. (See more in Chat Wars: Business Models of WhatsApp Vs Skype)
  • Integrating with an e-commerce platform. Similar to Korean messaging app KakaoTalk and Line’s shopping features, Facebook could allow WhatsApp users to access shopping platforms or “like” brand pages to receive special deals and offers through WhatsApp messages. (Read more in Is KakaoTalk A Real Threat To WhatsApp?)
  • Payment solutions. Much like WeChat or KakaoTalk’s payment solutions, Facebook can introduce a feature that allows WhatsApp users to pay bills online. WhatsApp could take a very small cut per transaction. (Read more in How Facebook Money Transfer Will Change E-Commerce)
  • Call termination services. Originally thought up by Viber in 2013, WhatsApp can act as a call terminator, that is, the middle man between domestic and international carriers. Each time a call is placed from a domestic carrier, it gets routed to a central server which in turn passes the call to a “terminator” that decides which of the foreign carriers will pick up the call. With a nearly 1 billion-strong user base, WhatsApp is in a position to win some of these coveted terminator contracts (especially in Spain and Netherlands, where it enjoys immense popularity), and pass international calls to phones in its own vast network. (Read more in How Viber Makes Money)

The Bottom Line

Over-the-top messaging apps like WhatsApp are currently leading a paradigm shift away from traditional SMS and towards lower-cost and feature-rich alternatives. As the popularity of messaging applications continue to rise, expect to see further declines in SMS revenue on a global scale.