Facebook: Monetizing WhatsApp Provides The Next Leap

| About: Facebook (FB)


When Facebook acquired WhatsApp, it paid $55 per active user; current base has widened from 400 million to more than a billion. More importantly the number of ‘groups’ have exploded.

It is time Facebook acts to recover $22 per user at the current base, which is not difficult going by the value it provides to 'groups' in mobile business communications.

Revenue model for WhatsApp in smartphones will come from its extension to connect data from the conversations in groups to business interactions just like 'Windows' does in laptops.

When WhatsApp was acquired, many skeptics pointed out to the apparent disconnect between the two models of business; potentially Facebook (NASDAQ:FB) could not complement WhatsApp. However, the skeptics were right that a mobile messenger was not something one would be paying for with such a hefty amount, especially when the revenue model was not clear.

Mr. Zuckerberg thought differently.

At the time of acquisition, WhatsApp had a revenue per user (in October 2014) in cents not in dollars, while Facebook paid for $55 per user going by the user base of 400 million in October 2014. Revenue of WhatsApp was just $10 Million with losses of $133 Million in 2013.

That number in terms of active users have now crossed a billion in less than two years, which says a lot about the vision of Zuckerberg in understanding the strength of this app in terms of capturing user reach. The revenue part of the story did not change much as still today the majority of what is done through WhatsApp goes free.

But WhatsApp brings in a completely new dimension to mobile messaging and is actually the reason most mobile companies have faltered to gain much revenue from the SMS or text messages. The entire mobile messaging moved to the mode of charging almost zero fees thanks to WhatsApp. That explains the drivers for growth.

The internet mail system is the next which is under threat. If attachments and video messages have to be transferred, E-mail has been fast replaced with WhatsApp.

The whole generation of new smartphone users could directly move to mobile messaging without even bothering to start their internet mail account. This was a direct competition to Google Mail, something that brings a completely new dimension. Messaging through E-mail, which is the more official way of communicating is now slowly but steadily moving to WhatsApp, something that slowly and steadily wiped out Yahoo Mail as a contender and now actually competes with Google Mail as a potent tool for mobile messaging.

But monetizing WhatsApp cannot go in the same lines as the other Apps, which is the platform model or the two-sided market model. Jean Tirole's paper summarizes this existing platform model well:

"The platforms' usage or variable charges impact the two sides' willingness to trade, and thereby their net surpluses from potential interactions; the platforms' membership or fixed charges in turn determine the end-users' presence on the platform. The platforms' fine design of the structure of variable and fixed charges is relevant only if the two sides do not negotiate away the corresponding usage and membership externalities."

So it is similar to the newspaper advertising model where if the price of a newspaper is raised it would drive away the readers, who are the potential source of revenue from an advertising standpoint. Putting too small a charge on readership or free readership ensures the readers' (end users') presence on the platform.

But WhatsApp will not tread on this model as people use WhatsApp for specific need-based messaging and it is not a platform where advertisers can expect people to stay connected for long hours, which allows advertising to be displayed. It is rather a platform where more number of short touches is the norm.

So how could we monetize WhatsApp?

Business Groups in WhatsApp will replace E-Mail: This is one area where WhatsApp could actually generate revenues. In the business interactions through established professional business groups that use the WhatsApp platform, it could create new revenue models. Imagine any multi-locational business entity where large numbers of people need to exchange information throughout the day. E-Mail is not the right platform, while WhatsApp is. It allows all group members to see the same information at the same time. Those who are in very disparate time zones can still see the information at a different time instant, but could use that as a valuable input.

The formation of groups in WhatsApp allows different puzzle solvers to form different groups. The only feature that is not in WhatsApp is the automatic download of data in a form that allows analysis to be done. This App could be loaded on each smartphone as a fixed charge.

Business communications could switch to WhatsApp-based Apps: Interactions in business that use Windows, which is so easy in a laptop or iPad, is difficult to be replicated on a mobile smartphone. The merging of WhatsApp with other modes of computing and communication will allow trend analysis to be done, or computing or communication as in PowerPoint. These would act as good flash points for quick business decisions. The history of strings of data captured in different forms in WhatsApp could be used very effectively in business communications.

For example, if WhatsApp allowed to flip through screens where the data could be stored and retrieved or if data could be added to create trends, this could have become a handy (mobile) way of bypassing the use of laptops or other devices where one uses Excel or other applications.

WhatsApp with this add-on application would have replaced Excel or use of other applications, which currently is only used in laptops. Making a user-friendly computing app as part of WhatsApp could become the next Windows in the mobile space.

This has enormous potential. I see that in the future we will have (like laptops loaded with Windows) applications like WhatsApp with some add-on apps that could be like Windows in smartphones.

That will be the easiest way to monetize WhatsApp as every smartphone will come with this WhatsApp add-on (just like Windows in laptops) application.

What a change it would bring to the Facebook bottom line!

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.