WhatsApp, the product, has had a crazy journey, and I mean that, like literally.
Started by two founders who hated advertising and were pro-privacy, WhatsApp ended in the hands of Facebook — the one big tech giant that is most certainly not revered for user security and privacy.
While WhatsApp thrived under Facebook, growing from 450 million users at the time of acquisition in 2014 to over 1.6 billion at the time of writing, the founders of WhatsApp ended up leaving Facebook over disagreements on the monetization future of WhatsApp, with one of them not even sticking around for his shares to vest.
In this blog, we will trace the journey of WhatsApp — the product, the monetization mechanisms it used early on, the monetization mechanisms it uses currently and the monetization mechanisms it plans to use in the future.
And while we do all this, we will discuss all the major strategic changes, because without all that context, just learning about ‘How WhatsApp Makes Money’ would be a waste of your & our time.
How WhatsApp Started?
Before starting WhatsApp in 2009, both Jan Kaoum & Brian Acton, worked together in Yahoo for 9 years, from 1998 to 2007. In the period between leaving Yahoo and starting WhatsApp, both of them even applied for jobs in Facebook, but got rejected.
WhatsApp was born in January 2009, after the founders purchased an iPhone & realized that the app industry was an untapped market poised to grow. This was back when the Apple App store had only been around six months since its launch on 10th July 2008.
When the first version of WhatsApp was launched, it wasn’t even a messaging app. All users could do was update their statuses, which could be seen by other people in their network.
WhatsApp saw an increase in user traction after Apple launched Push notifications in June 2009, which allowed users to be pinged when someone in their network updated their status. Users liked this functionality so much that they began to use the app to ping one another, which led to the pivot of turning the app into an instant mobile messaging service.
The messaging feature, which now lies at the core of the service, was added in WhatsApp version 2.0, after which the number of users grew to 250,000.
By early 2011, WhatsApp had become a part of the top 20 App list of the Apple App Store.
As the app grew, the founders started getting attention from interested investors. However, the founders were resistant, because they wanted to build an ad-free product & accepting venture money might have forced them to compromise on their values.
A 2012 post on the WhatsApp blog titled “Why we don’t sell ads” lays out why the founders disliked ads and were not keen on ad-based monetization.
“At every company that sells ads, a significant portion of their engineering team spends their day tuning data mining, writing better code to collect all your personal data, upgrading the servers that hold all the data and making sure it’s all being logged and collated and sliced and packaged and shipped out… And at the end of the day the result of it all is a slightly different advertising banner in your browser or on your mobile screen.
Remember, when advertising is involved you the user are the product.
At WhatsApp, our engineers spend all their time fixing bugs, adding new features and ironing out all the little intricacies in our task of bringing rich, affordable, reliable messaging to every phone in the world. That’s our product and that’s our passion. Your data isn’t even in the picture. We are simply not interested in any of it.”
Despite having not been keen on taking venture money, the founders of WhatsApp did accept $8 million from Sequoia Capital in April 2011, but only after they were assured they could keep the app ad-free. By February 2013, WhatsApp had grown to have about 200 million active users & Sequoia invested another $50 million, at a $1.5 billion valuation.
But if there were no ads & there was no plan to integrate them in the future, how did WhatsApp make money in its early days?
In its initial days, WhatsApp relied on what is popularly known as the freemium business model — the product was free for a year to lure users and charged a small yearly subscription fee of $0.99 for continued service. However, many users never paid a dime to use WhatsApp because the service got renewed automatically after their free period ended.
The Facebook Acquisition
In 2014, at the time Facebook bought WhatsApp for $19 Billion, WhatsApp had 450 million monthly active users worldwide.
In hindsight, the acquisition, much like Facebook’s acquisition of Instagram, not only helped retain Facebook’s domination but also gave Facebook a sizeable operational advantage in the future. But the immediate winner of this acquisition was not Facebook, but Sequoia Capital, which made $3 billion on an investment of around $58 Million.
In case you’re thinking why WhatsApp’s founder went ahead with the deal, one of the reasons was that Facebook was to allow WhatsApp to operate independently & pursue its vision.
Here’s what the founder’s wrote on the WhatsApp blog after the acquisition,
“Today we are announcing a partnership with Facebook that will allow us to continue on that simple mission. Doing this will give WhatsApp the flexibility to grow and expand, while giving me, Brian, and the rest of our team more time to focus on building a communications service that’s as fast, affordable and personal as possible.
Here’s what will change for you, our users: nothing.
WhatsApp will remain autonomous and operate independently. You can continue to enjoy the service for a nominal fee. You can continue to use WhatsApp no matter where in the world you are, or what smartphone you’re using.
And you can still count on absolutely no ads interrupting your communication. There would have been no partnership between our two companies if we had to compromise on the core principles that will always define our company, our vision and our product.”
WhatsApp Becomes Free for All Users
The next big turn of events in the WhatsApp story came in January 2016 when the service was made free for everyone.
In the same blog that announced WhatsApp would no longer charge money to users, the founders of WhatsApp laid out the new vision for monetizing WhatsApp, that expectedly didn’t feature ads.
“Naturally, people might wonder how we plan to keep WhatsApp running without subscription fees and if today’s announcement means we’re introducing third-party ads. The answer is no.
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. That could mean communicating with your bank about whether a recent transaction was fraudulent, or with an airline about a delayed flight.
We all get these messages elsewhere today – through text messages and phone calls – so we want to test new tools to make this easier to do on WhatsApp, while still giving you an experience without third-party ads and spam.”
Facebook Begins to Leverage WhatsApp Data
2016 was an eventful full year for WhatsApp. After making WhatsApp free for its users, WhatsApp implemented end-to-end encryption in April 2016, which in simple terms meant nobody, not even WhatsApp would be able to read the content of users messages.
In case you’re interested in geeking out, you can read the white paper that provides a more technical description of WhatsApp’s end-to-end encryption, developed in collaboration with Open Whisper Systems, here.
“By coordinating more with Facebook, we’ll be able to do things like track basic metrics about how often people use our services and better fight spam on WhatsApp. And by connecting your phone number with Facebook’s systems, Facebook can offer better friend suggestions and show you more relevant ads if you have an account with them. For example, you might see an ad from a company you already work with, rather than one from someone you’ve never heard of. You can learn more, including how to control the use of your data, here.”
However, with WhatsApp having operated independently for two years after the Facebook acquisition and with no plan of ads being displayed in WhatsApp, the privacy update move was more about Facebook trying to cash in on the acquisition and less about WhatsApp being able to track user metrics and fight spam.
The only silver lining in this episode was that WhatsApp confirmed that end-to-end encryption was still in place, and neither WhatsApp nor Facebook would be able to see user messages.
The Founders of WhatsApp leave
When Facebook acquired WhatsApp in 2014, not only were the founders promised that they could operate independently, Zukurberg even assured the founders that they would have zero pressure on monetization in the next five years.
However, the pressure to monetize came earlier than promised, leading to disagreements over how WhatsApp was to be monetized. While Facebook wanted to implement ads in WhatsApp, an app which had unequivocally been anti-ads, Brian proposed moving towards a metered-user model, wherein users would be charged after a certain number of messages were used.
Brian’s proposal was rejected by Facebook, which led to him leaving in Sep 2017, without even waiting for his shares to vest, losing $850 million in the process. Jan Koum, followed suit, leaving in April 2018, after waiting out his vesting period.
So how does WhatsApp currently make money?
WhatsApp makes money through two sources — the first being WhatsApp for Business API and the second Click to WhatsApp ads.
The WhatsApp Business App helps businesses serve customers on WhatsApp, with provisions to create product catalogues as well as provide customer support. While the Business App is free to use, WhatsApp monetizes the service through the WhatsApp for Business API.
Only a month after the launch of the WhatsApp Business API, big tech companies like Netflix, Uber & Wish & 100 others had already started testing the service. WhatsApp makes money by charging registered businesses for slow replies. Businesses are allowed to respond to messages from users for free for up to 24 hours but are charged a fee per message for delayed responses, which varies by country.
WhatsApp’s late response charge not only incentivizes companies to prioritize providing support on WhatsApp, but also makes sure customers give preference to WhatsApp while communicating with businesses because they can expect quick replies. Once business and customers get used to using WhatsApp as their medium of communication, WhatsApp can charge for messages above a certain threshold, or cut down on the free window.
Apart from charging businesses for slow replies, WhatsApp also makes money through Click to WhatsApp ads, which are not ads shown on Facebook, not WhatsApp, but these ads redirect users from Facebook to WhatsApp. Since these ads are not shown in the WhatsApp app, attributing the revenue of these ads entirely to WhatsApp would be incorrect, but it is one of the ways in which Facebook leverages WhatsApp to increase revenue.
How WhatsApp Plans to Make Money in the future
Going ahead, WhatsApp plans to further monetize the app by introducing ads in the status section and rolling out WhatsApp Payment.
While WhatsApp pay hasn’t fully launched yet, it has been in the works for quite some time now and is expected to roll out worldwide in 2020.
Highlighting the potential of being able to make payments through WhatsApp at Facebook’s Q4 2019 earnings call, Mark Zuckerberg stated,
“One example we’ve been working on is WhatsApp Payments. You’ll be able to send money as quickly and easily as sending a photo. We got approval to test this with a million people in India back in 2018, and when so many of the people kept using it week after week, we knew it was going to be big when we get to launch. I’m really excited about this and I expect this to start rolling this out in a number of countries and for us to make a lot of progress here in the next six months.”
How much money does WhatsApp make?
Nobody knows how much revenue exactly WhatsApp generates except Facebook because the parent company does not share the revenue breakdown of the different products it operates.
According to Facebook’s 2014 Form 10-Q, in the nine months prior to September 30, 2014, WhatsApp had generated a paltry revenue of $1.28 million, but that was way back when WhatsApp was charging users $1 per year fee after the first year.
In a Jan 2016 post, Forbes had predicted that WhatsApp’s average revenue per user would be $4 by 2020, which could yield revenue of around $5 billion for Facebook in 2020. But the estimates were off because they assumed WhatsApp would reach 1.3 billion total monthly users by 2020 — which WhatsApp had acquired by midway through 2017.
In November 2017, Forbes upped the revenue estimates for WhatsApp, ranging from $5 billion to $15 billion, with the average revenue per user ranging from $4 to $12.
With WhatsApp’s earning potential far from being realized even as of now, the product can be expected to have an increased contribution to its parent companies baseline revenue in the coming years.
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