The Real Reasons Whatsapp is Worth 19 Billion Dollars to Facebook

Four months ago Facebook paid a whopping $19 billion for Whatsapp and a few people may have thought that it was an exorbitant price to pay. For any doubters out there, Whatsapp is worth every cent of the $19 billion that was paid for it. Why is it really worth so much? As of the time of the deal in February 2014, Whatsapp had an estimated 450 million users. It is still growing daily and said to be adding an estimated one million users daily. It currently has an estimated 500 million active users as of April 2014 and so has the largest user base of any messaging service in the world.

However, what makes it truly appealing is that it exists on almost all mobile OS platforms available - iOS, Android, Blackberry, Windows Phone, and even Symbian and Asha. Android may rule the world and the USA may worship the iPhone but hundreds of millions of users around the world still use other platforms. Many people in countries like India and Nigeria (with a combined population of more than 1.2 billion people) still buy, own and use Nokia Symbian and Asha phones (S40 and S60 platforms). Symbian OS may be a dying - or dead - platform but for many of these Nokia phone owners the natural progression may be to purchase a newer Nokia smartphone most likely running on Windows Phone. For many other smartphone users in many countries, Blackberry is the current trend even if its use is plummeting in the USA and Europe.

Which is why it is truly perplexing to find that many app developers make their apps for only iOS and Android. They may make a tidy profit doing this but not many of them can boast nearly as many downloads or users as Whatsapp which is also available on iOS and Android as well as on other platforms. Yet, Whatsapp still is one of the most downloaded apps on both the Apple App Store and Google Play Store.

Facebook has contrived to pay a total of $20 billion dollars for both Instagram and Whatsapp but these are very shrewd purchases. For internet companies, the ultimate thing is getting traffic to their websites or apps and this depends on their number of visitors or users. From this traffic they make money from adverts or subscriptions or other business models they employ. Facebook already knows this as it has more than 1.2 billion users and it knows that generating more revenue means increasing its number of users. It also realizes that acquiring mobile users is the new frontier which is where Whatsapp and Instagram come in. Bringing these companies under Facebook increases its userbase and gives it a better position in the race to acquire more mobile users. As of now Facebook owns four of the most popular smartphone apps in the world: Facebook itself, Whatsapp, Instagram and Facebook Messenger. In any case, Whatsapp was already more popular than Facebook Messenger and so the purchase served not only to increase Facebook's mobile userbase but also to eliminate the competition.

Google is a profitable company with a good revenue generating model but it does something similar to what Facebook is doing. Google spends billions of dollars developing Android OS only to give it away for free. It does this just to acquire and get mobile users to use its search engine and then it makes money on the ads that accompany search results. And of course it gets a percentage of the revenue from all paid mobile app downloads from the Google Play Store. Facebook also wants to increase its number of mobile users only it is paying billions of dollars to acquire already existing users. Which way is better is another debate entirely.

Whatsapp currently has a subscription based revenue model that requires users to download the app for free and then a pay a yearly subscription fee of 99 cents after 12 months of free use. I am not sure how this works as I have used Whatsapp since 2011 and have not been asked to subscribe even once in the three years since then. Assuming this model works properly and I am going to oversimplify here, a yearly fee of 99 cents from more than 500 million users gives almost 600 million dollars in annual revenue. This revenue will only increase as Whatsapp adds more users which is estimated to grow to as many as almost 1 billion users by the end of 2015. In short, Facebook can expect to start earning an annual revenue of more than 1 billion dollars in under 24 months from Whatsapp alone. However, Facebook's primary business model is ad sales and Whatsapp's users are 500 million more people - and counting - that it can target. Imagine the potential revenue from serving Whatsapp's ever increasing userbase. How it intends to do this remains to be seen.

Whatsapp is also getting better at keeping its users - which is not to say it was losing plenty in the first place. It used to be that users were asked to register a new number every time they changed the SIM card in their phones. Now all you get is a prompt asking if you would like to change your Whatsapp number. If you choose not to, you continue messaging as usual with all of your previous conversations intact. That way users have much less to worry about using the app and allows Whatsapp to remain their messaging app of choice irrespective of network carrier or geographic location in the world. Could that be the hand of change from Facebook? Seeing how Instagram has been integrated into Facebook with ads now showing up on Instagram, I doubt it will take too long for Facebook to tie Whatsapp into its primary revenue model in some way.

Keeping Whatsapp as a separate service is the best way to go but Facebook ostensibly bought Whatsapp for its userbase and intends to serve ads to them and it will find a way to make that happen.