Facebook needs to find a cash flow in WhatsApp

With the recent acquisition of
WhatsApp, Facebook is buying into a messaging revolution. According to the tech intelligence firm Analysys Mason, the total volume of messages sent from mobile devices via so-called over-the-top messaging services exceeded SMS - more traditional mobile text messaging - volume for the first time in 2013. Services such as WhatsApp handled 10.3 trillion messages, compared with 6.5 trillion for mobile carriers.

WhatsApp, with its 450 million monthly active users, reported a record 10 billion inbound messages on one June day in 2013. With WhatsApp adding about a million new users a day, 10 billion messages could also end up being its daily average for the year. That would give the service a 35 percent share of global traffic, making it the biggest competitor to SMS in the world.

As Facebook's Chief Financial Officer David Ebersman pointed out during a call with analysts following the acquisition announcement, text messaging is a $100 billion business for mobile carriers. "So this is a really valuable service that people are willing to pay for," he said.

The point of WhatsApp, however, is that people don't want to pay for instant messaging. WhatsApp costs a dollar to download, and it charges 99 cents for a year of use, starting from the second year. That may be enough to pay salaries at the very frugal company, which doesn't advertise or even have a sign on its headquarters in Mountain View, Calif., but it's nowhere near enough to justify the $19 billion price tag.

WhatsApp co-founder Jan Koum is an avowed enemy of advertising. He allowed Sequoia Capital to invest in his startup only on the condition that the venture capitalists not push the advertising model on him. On the call, Koum said that he was counting on his subscription model to yield more money as the user base continues to grow: "As we look forward to the next five or 10 years, 5 billion people will have a smartphone and we have a potential to have 5 billion users potentially giving us money."


Loading comments...
Hide Comments