WhatsApp was founded in 2009 by Brian Acton and Jan Koum as an alternative 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, and 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 Sept 30, 2014, WhatsApp generated revenue of $1,289,000. On Monday, April 30, WhatsApp co-founder and Facebook Inc. director Jan Koum announced his departure from Facebook. Media reports indicate that Koum decided to leave after a disagreement with Facebook over its use of user data and its desire to allow advertisements on WhatsApp. Koum, along with his co-founder Brian Acton, has long been an advocate for the privacy of WhatsApp users.
In February 2020, WhatsApp had two billion users and was Facebook's second-biggest property, after its namesake app. It has surpassed Facebook's messenger and Instagram, the third- and fourth-biggest properties. So how is WhatsApp making its money?
- WhatsApp is a mobile app that allows users to message and call each other over the Internet.
- WhatsApp was founded in 2009 and bought by Facebook in 2014 for $19 billion.
- Facebook's biggest property is now WhatsApp, after its messenger service and Instagram.
- The way WhatsApp used to make money was through a subscription model. It cost $1 to download and then $1 a year going forward.
- Facebook eventually removed the $1 fee and made WhatsApp a free service, with the idea that consumers would communicate with businesses through it and businesses would pick up the cost.
- Potential revenue for WhatsApp is estimated to be $5 billion and the average revenue per user to be $4 in 2020.
One Dollar at a Time and Beyond
The short answer used to be $1 at a time. In some countries, the app used to cost about $1 to download; in others, the first year is free, but each subsequent year costs $1; in other words, WhatsApp had a subscription model. At the peak under this model, it had about 700 million users worldwide; yearly revenue can be estimated at $700 million per year at that time.
In January 2016, Facebook revealed in a 10-Q filing that because WhatsApp was monetized in "a very limited fashion," 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 and the messaging app would now be free to use.
There are still no ads in the app, however. "Starting this year, we will test tools that allow you to use WhatsApp to communicate with businesses and organizations that you want to hear from," the company wrote at the time. The goal is to have people communicate directly with their banks, airlines, etc. over the app, while the businesses pick up the bill previously paid through subscriptions.
WhatsApp Business, the business platform of the messaging app, provides a host of tools for businesses to access company insights and measure metrics, making it an attractive tool for businesses.
Though WhatsApp's financial statements aren't public (Facebook doesn't break down its revenue by company), Forbes estimated potential revenue to be $5 billion and the average revenue per user to be $4 by 2020. As of February 2020, WhatsApp had over two billion users.
Other SMS Apps
Outside of America, where sending text messages is more expensive, SMS apps are popular and have successfully monetized. WeChat—the popular Chinese SMS app—has ads as well as online games. The company is partly responsible for Tencent's, which owns WeChat, $13.7 billion revenue in the third quarter of 2019. The app has over one billion active users.
Focusing on Growth
WhatsApp is adding almost 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 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 acquiring WhatsApp was for Facebook to access user’s behavioral data and personal information.
With location sharing data, 65 billion messages sent per day, and access to users' entire contact lists, Facebook has access to a ton of personal information—all uploaded and saved on its servers. While Mark Zuckerberg has previously promised that this data won’t be used to improve consumer targeting in Facebook ads, it will be unless the user changes the settings to not share information with Facebook.
End-To-End Encryption Controversy
WhatsApp, as well as other messaging providers (including Apple), have been in hot 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 behind these apps to share the encryption key to gain access to messages sent and received by the terrorists. The companies, however, refused to oblige. This led to WhatsApp's adoption of end-to-end encryption, which prevents anyone, including WhatsApp, except the sender and receiver from gaining access to the data shared on the app.
The Bottom Line
WhatsApp has become one of the most popular messaging services in the world with only room to grow. Whether you believe that Facebook overpaid for WhatsApp or not, the fact is that the app has a growing revenue stream with endless possibilities that will allow it to bring in more revenues over time.