How WhatsApp Makes Money

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, Blackberries, Windows Phones, Nokia (NOK) phones and, most recently, desktops.

Facebook (FB) purchased WhatsApp in February 2014 for approximately $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. How is WhatsApp making its money?

$1 at a time

The short answer is $1 at a time. In some countries, the app costs about $1 to download; in others, the first year is free but, each subsequent year costs $1. With over 700 million active users and about 1 million new users per day, yearly revenue can be estimated at $700 million per year.

Facebook’s Form 10-Q admits that the company “[monetizes] WhatsApp in only a very limited fashion, and [they] may not be successful in [their] efforts to generate meaningful revenue from WhatsApp over the long term.” So while the company doesn’t currently have ads or other forms of income, their position could change over time.

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 boasted $924 million in revenue in the third quarter of 2014, down from $949 million in Q2, with only 438.2 million users.

KakaoTalk, a South Korean SMS app, has 48 million users and $190 million in 2013 revenue. The app makes money from online games, advertising, and from selling emoticons and stickers.

At $2.11 (WeChat) and $3.95 (KakaoTalk) in revenue per user, per year, WhatsApp can earn between $1.47-2.77 billion per year by adopting the competition’s monetization policies. Analysts have calculated that, long-term, WhatsApp could generate $2.50 in yearly revenue per user with about 2 billion users (about $5 billion per year).

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. As the user base grows, not only does the subscription service of $1/year bring in substantial revenue but advertising and alternative forms of monetization create hearty revenue.

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, 30 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 promises that this data won’t be used to improve consumer targeting in Facebook ads, it still raises questions about how private our data really is.

The Bottom Line

Whether you believe that Facebook overpaid for WhatsApp or not, the fact is that the app has a small and growing revenue stream with lots of room to grow. Will the SNS giant aggressively monetize like other SMS apps have done or use it for another purpose? Only time will tell.

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