Facebook: Here's How To Monetize WhatsApp

| About: Facebook (FB)

Summary

WhatsApp user now at 1b - a perfect time for monetization.

Payment will tie O2O services together on WhatsApp, thereby driving FB's long-term payment revenue.

I remain bullish on FB.

Facebook's (NASDAQ:FB) WhatsApp mobile messenger service has surpassed the 1b user mark about two years after FB purchased the platform for a whopping $19b. At the time of the purchase, WhatsApp's valuation appeared to be rich relative to the other mobile messenger or mobile advertising apps when valued at a price per user of $42, which was significantly more than the $12/user paid for Instagram. Now with 1b users and counting, the price appears to worth every penny given the monetization potential of the platform. FB has often said that WhatsApp monetization won't be considered until it hits 1b users. Now that the user target has hit (and its annual fee recently waived), I suspect that we could soon see new products that are designed to drive WhatsApp monetization.

If Tencent's WeChat or Korea's LINE are any indications, I believe that WhatsApp could follow the examples set by its rivals and roll out financial, entertainment and transportation services. This will allow FB to have a global messenger product and to capitalize on the growing O2O trends that are happening around the world. I have been wrong on my view of WhatsApp in that I always thought that FB would eventually want to migrate the users onto its Facebook Messenger platform to maintain consistency and allocate resources to deliver the best user experience. However with 1b users, it is getting difficult to execute on the migration and WhatsApp is here to stay. I remain bullish on FB given its ownership of the world's top two leading mobile messengers.

Looking at the current WhatsApp offering, the messenger only has simple texting, image and video sharing, VoIP and group chat. In essence WhatsApp is the simplest form of mobile communication but there is certainly plenty of upside for this platform with 1b users. On the other hand, lack of innovations could encourage users to turn off WhatsApp and migrate to competing platforms so it is essential that FB upgrade the WhatsApp messenger in the near future. In short, FB's current messenger services significantly lag those of its Asian peers but the good news is that introducing mobile services is not difficult once payment infrastructure is in place. Given how FB's own messenger platform now allows P2P payment, I wouldn't be surprised to see WhatsApp rolling out similar features.

In my view, mobile payment-related services such as hotel/air booking, taxi booking and entertainment are the most likely areas WhatsApp could potentially offer. Hotel/air booking are natural derivatives of mobile service given that travelers often book on the go, so a partnership with Priceline (NASDAQ:PCLN) or Expedia (NASDAQ:EXPE) makes a lot of sense. On the transportation front, FB Messenger is already working with Uber, and such service is likely to be extended to WhatsApp similar to that of Tencent's WeChat's integration with the Didi-Kuaidi taxi app where users can book an Uber taxi via FBM. Finally, entertainment such as restaurant booking via Yelp (NYSE:YELP) or OpenTable will likely be introduced. Partnerships with theater operators could allow WhatsApp users to purchase movie tickets via the app.

All the features will ultimately result in a superior user experience for the users but the key is for FB to charge a reasonable transaction cost (most likely around 50bps) that will drive the long-term growth of its payment revenue. Ultimately, I see FB's mobile messengers eventually replacing credit cards at point of sales via QR-code scan so payments are routed directly from the user's WhatsApp account to the merchant. This feature is already being used by Tencent and Alibaba in stores across China and I believe that it is only a matter of time before it is rolled out in the U.S. (see - Alibaba: Setting An Example In Mobile Payments).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.