How will Facebook make money off Whatsapp?

$19 billion is an insane amount of money, to sink into a company, so you’d think Facebook would start looking for returns on its investment pretty soon. But don’t expect the Whatsapp founders to be in any rush.

Yesterday, Facebook confirmed that it would buy the five-year old instant messaging app for $19 billion in a venture backed deal. Facebook will pay $4 billion in cash and $12 billion in stock, with an additional $3 billion in stock grants if the two co-founders Jan Koum and Brian Acton stay with the company for four years.

For many people, $19 billion sounds like a huge overvaluation for Whatsapp. Although it’s wildly popular, it only charges users $1 every year after the first and it shows no ads. That might not sound like a lot of revenue, but the truth is, it’s more than you think.

Whatsapp currently has over 450 million active monthly users. It reached that number faster than any other platform in history, and it is currently growing at a staggering rate of 1 million users a day, well on its course to reaching a billion users. For a company that only has 55 employees total, that’s plenty of revenue to go around. At the rate its going, Whatsapp could quite easily charge minimal subscription or download fees and still make bank.

For its part, Facebook has said that the two companies will operate separately and there will be no immediate pressure to monetize Whatsapp .

From the New York Times:

Facebook had $7.9 billion in revenue last year, most of it from advertising. Mr. Zuckerberg said that money would help give WhatsApp the breathing room to focus on growth without needing to come up with an immediate plan for making money.

However, that doesn’t mean things won’t change in the future.  Brian Blau, research director of consumer technology at Gartner says there’s no reason to not believe Facebook when it says Whatsapp will operate independently. However things could change in a year or so.

“Companies change their mind over time when advertisers come knocking at their door,” says Blau. “It happened to Facebook, it happened to Twitter, and it could possibly happen to Whatsapp.”

Despite the fact that Whatsapp CEO Koum keeps a handwritten note from fellow co-founder Acton on his desk which says “No ads, no games, no gimmicks,” Blau says he doesn’t think they’ll stick with that creed forever since advertising is so lucrative. Plenty of brands would love to tap into Whatsapp’s huge user base to communicate with their customers, he says.

So what would a Whatsapp ad look like? Blau says it’s unlikely the platform will introduce ads or messages in the middle of user’s conversations. But there could be opportunities elsewhere in the app’s user interface such as interstitial screens, pre-rolls and post rolls.

The other option Whatsapp has is to increase subscription rates, or introduce a tier system, which might lead to a fair amount of customer backlash, but might be preferable to seeing ads.

It’s important to remember that while Facebook certainly doesn’t want to own a non-revenue generating business, it didn’t buy Whatsapp to generate huge amounts of cash. With the acquisition, Facebook eliminated a massively popular platform that was taking user attention and mobile activity away from it. Instead, it has added that platform, and all 450 million of its users to the Facebook ecosystem. While Facebook doesn’t need to immediately show them ads to make money, it gains something far more valuable, access to user information and behavioral data. 

With such a huge number of active, and engaged users, Facebook just crept slightly ahead in the digital arms race with Google, which also employs a similar strategy of offering free services just to bring users inside its domain. Whatsapp is a treasure trove of insights into how users act, what they talk about, what they share, and where they are when they’re doing it.  While its founders have been loathe to use that information for direct advertising, Facebook just gave them $19 billion reasons to have that conversation.

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