How Does WhatsApp Make Money? Why WhatsApp Will Become A Super App

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How Does WhatsApp Make Money? Why WhatsApp Will Become A Super App

Founded in 2009 by Brian Acton, Jan Koum WhatsApp is a messaging app acquired by Facebook in 2014 for $19B. In 2018 WhatsApp rolled out customers’ interaction services. WhatsApp might be transitioning toward a set of features from video chats to social commerce that might transform WhatsApp into a Super App.

WhatsApp origin story

Brian Acton and Jan Koum who had previously spent 20 years combined at Yahoo founded WhatsApp in 2009.

As reported on CNBC Jan Koum affirmed:

“It started with me buying an iPhone; I got annoyed that I was missing calls when I went to the gym.”

That’s how they managed to build an app that made them show their status, and he added: “We didn’t set out to build a company. We just wanted to build a product that people used.“

In 2009 WhatsApp got its first seed round for $250k. In a few years, WhatsApp became a hit and in 2011 and 2013 WhatsApp got $60 million from Sequoia Capital with the first round of $8 million and the second round of $52 million.

The name WhatsApp is a pun on the phrase What’s Up, and it started as an alternative to SMS.

Advertising as a broken business model according to its founders

As reported on the WhatsApp blog by its founders Koum and Brian Acton:

When we sat down to start our own thing together three years ago we wanted to make something that wasn’t just another ad clearinghouse. We wanted to spend our time building a service people wanted to use because it worked and saved them money and made their lives better in a small way. We knew that we could charge people directly if we could do all those things. We knew we could do what most people aim to do every day: avoid ads.

Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought. 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.

This showed how reluctant they were about advertising as a business model. The paradox though is that in a couple of years the company would be acquired by the largest digital advertising network, after Google.

The Facebook acquisition

It was June 18, 2012, almost two years before WhatsApp got sold to the most profitable advertising network on earth, Facebook Inc.

In a previous post they said:

So first of all, let’s set the record straight. We have not, we do not and we will not ever sell your personal information to anyone. Period. End of story. Hopefully this clears things up.

On February 19, 2014, when Facebook acquired WhatsApp. As reported on Facebook financial statements Facebook “paid approximately $4.6 billion in cash and issued 178 million shares of Class A common stock in connection with the acquisition of WhatsApp” this is how it was announced on WhatsApp blog:

Almost five years ago we started WhatsApp with a simple mission: building a cool product used globally by everybody. Nothing else mattered to us.

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 founders remarked once again that its business model would not change toward anything related to third-party ads. Things would start to change in a couple of years.

The freemium growth model
[image error]The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting in customers help spread the brand.

Once WhatsApp had financial support to keep growing, it started to leverage the freemium model to gain traction even more. As explained on their blog:

That’s why we’re happy to announce that WhatsApp will no longer charge subscription fees. For many years, we’ve asked some people to pay a fee for using WhatsApp after their first year. As we’ve grown, we’ve found that this approach hasn’t worked well. Many WhatsApp users don’t have a debit or credit card number and they worried they’d lose access to their friends and family after their first year. So over the next several weeks, we’ll remove fees from the different versions of our app and WhatsApp will no longer charge you for our service.

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 wantto 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.

WhatsApp started to focus more on communication between businesses and its users to create a line of products that could be monetized by selling services to companies using WhatsApp features.

Facebook takes over
[image error]The digital advertising industry has become a multi-billion industry dominated by a few key tech players. While the industry advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, and Pinterest.

The time came when Facebook finally started to take advantage of WhatsApp data to sell more of its ads. As reported on the WhatsApp blog:

The updated documents also reflect that we’ve joined Facebook and that we’ve recently rolled out many new features, like end-to-end encryption, WhatsApp Calling, and messaging tools like WhatsApp for web and desktop.

But as we announced earlier this year, we want to explore ways for you to communicate with businesses that matter to you too, while still giving you an experience without third-party banner ads and spam. Whether it’s hearing from your bank about a potentially fraudulent transaction, or getting notified by an airline about a delayed flight, many of us get this information elsewhere, including in text messages and phone calls. We want to test these features in the next several months, but need to update our terms and privacy policy to do so.

That policy change created a set of backlashes that remain as concerns. As pointed out on Facebook financials for 2017:

The Irish Data Protection Commissioner has challenged the legal grounds for transfers of user data to Facebook, Inc., and the Irish High Court has agreed to refer this challenge to the Court of Justice of the European Union for decision. We also face multiple inquiries, investigations, and lawsuits in Europe, India, and other jurisdictions regarding the August 2016 update to WhatsApp’s terms of service and privacy policy and its sharing of certain data with other Facebook products and services, including a lawsuit currently pending before the Supreme Court of India. If one or more of the legal bases for transferring data from Europe to the United States is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results

It is important to remark that the terms of service changes applied to things like:

Enable you to communicate with businesses on WhatsApp. For example, if you visit a business’s Facebook page, you might see a button that lets you easily open a WhatsApp chat with them.

However, it is undeniable that in 2016 it finally started a process of monetization that revolved around data sharing between WhatsApp and Facebook products.

In 2017 the WhatsApp founders left Facebook and $1.3B in stock options, presumably because desperate to leave the company. As reported by bizjournals, “Jan Koum and Brian Acton have more recently clashed with Facebook CEO Mark Zuckerberg and COO Sheryl Sandberg, and quit the company, leaving hundreds of millions of dollars worth of unvested stock options on the table. Acton, who quit in November 2017, walked away from $900 million in unvested shares, while Koum, who will exit Facebook in August, will leave $400 million in unvested shares, the Wall Street Journal reports.”

Following Cambridge Analytica scandal, in March 2018, Brian Acton also launched a hashtag campaign – #deletefacebook – which in a way backfired on him:

It is time. #deletefacebook

— Brian Acton (@brianacton) March 20, 2018

WhatsApp becomes a solution provider: A quick glance at customers’ interactions management

In August 2018 on its blog, WhatsApp reported the creation of new tools to allow businesses to connect to users which included three kinds of interactions:

Request helpful information
Start a conversation
Get support

In this way, businesses will start paying for certain interactions with users to manage their customers’ interactions.

As reported on the WhatsApp website:

From time to time, a business may use a solution provider to help provide the tools it needs to send and receive messages from you. Businesses rely on these solution providers to store, read and respond to your messages.

The business you’re communicating with has a responsibility to ensure that it handles your messages in accordance with applicable law and its privacy policy. For more information on the provider’s privacy policy, please contact that business directly.

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While the app is free of charges, some services will be paid. For instance, if a business that uses WhatsApp will reply to a customer later than 24 hours, it will pay a fixed charge based on the country.

As pointed out on theverge.com, “WhatsApp Business lets business owners set up a profile to share company details like their email or store address, and also have access to greetings and away messages to manage interactions with customers (who contact them using the standard WhatsApp client).”

In April 2019, WhatsApp rolled out officially the launch of its WhatsApp business.

Will ads come to WhatsApp?
[image error]Facebook is an attention-based business model. As such, its algorithms condense the attention of over 2.4 billion users as of June 2019. Facebook advertising revenues accounted for $31.9 billion or 98.66% of its total revenues. Facebook Inc. has a product portfolio made of Instagram, Messenger, WhatsApp, and Oculus.

In August 2018, Facebook announced on its blog the WhatsApp Business API:

You can use the WhatsApp Business API to sendcustomised notificationswith relevant, non-promotional content such as shipping confirmations, appointment reminders or event tickets. These messages will be charged at a fixed rate for confirmed delivery.

As Facebook highlighted:

We’ve been testing ways to help people start a WhatsApp chat from ads they see on Facebook.

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Example of a Facebook Ads prompting a WhatsApp conversation as shown on Facebook Blog, when the company announced this new feature within its ads platform.

However as pressure grew on the Facebook business model, the company announced it would give up, for now, the ads revenue model for WhatsApp (at least for now) as reported by WSJ.

Will WhatsApp ever make meaningful revenues for Facebook?

In the 2019 annual report Facebook highlighted:

We have also invested, and expect to continue to invest, significant resources in growing our WhatsApp and Messenger products to support increasing usage of such products.

And it continued:

We have historically monetized messaging in only a limited fashion, and we may not be successful in our efforts to generate meaningful revenue or profits from messaging over the long term.

If Facebook isn’t planning to monetize WhatsApp directly in the long term. What are the plans and how will it integrate with its overall products in the long run?

A payment platform for Calibra?

As highlighted on the 2019 annual reports:

We also intend to launch certain payments functionality on WhatsApp and have announced plans to develop digital payments products and services, which may subject us to many of the foregoing risks and additional licensing requirements.

As part of this plan, in June 2019, Facebook launched Libra Association, and as part of it, Calibra, a digital wallet for Libra. And WhatsApp together with Messenger, might work as platforms for the launch of Calibra.

Interoperability and products’ integrations

While WhatsApp revenues might not be substantial in terms of direct monetization. WhatsApp is part of the family of products that Facebook Inc. acquired over the years and that made the company able to easily transition from the desktop to the mobile era.

How will the WhatsApp business model look like in the coming years?

In Q1 2020, Mark Zuckerberg highlighted:

Video calling is when you actually ring a person’s phone or computer. It’s by far the most used type of video chat. Between WhatsApp and Messenger, there are more than 700 million daily actives participating in calls. We’re doubling the size of WhatsApp video calls from 4 to 8. This is important because WhatsApp is the most popular end-to-end encrypted calling service, so if you care about privacy and encryption and you want to be able to reach anyone, you’re probably using WhatsApp. Now you’re going to be able to get your whole family or a larger group together on calls.

As the pandemic hit, from a simple chat application, WhatsApp muted more and more into a group video conference for consumers. While this might be the next killer app for WhatsApp to make it as sticky as possible.

Future revenue generation will be about social commerce.

WhatsApp, social commerce, catalogs, and new messaging ad formats

Social commerce will be an integral piece of the WhatsApp business model. Indeed, with payments (integrated between the various Facebook products) and social commerce the WhatsApp business model will take a different shape:

So we’ve started rolling out things like catalogs in WhatsApp. We’re working on payments to be able to complete transactions. And we’ve rolled out a new ad format click to messaging ads, where basically a lot of small businesses and different businesses are finding that their message threads with people perform better for driving sales than their websites or other presences.

How might catalogs be integrated with the Facebook Ads system? Zuckerberg explained it:

They basically buy ads inside Facebook or Instagram that send people to chat threads. And then as we build out all these tools around that — around making those threads more valuable, we think that those ads will only increase in value, which is the way we’re currently thinking about that business.

Why the Facebook-Jio deal is about transforming WhatsApp into a Super App

In April 2020, Facebook acquired a substantial stake in Jio, owned by the Indian conglomerate Reliance Industries.

The deal will create a digital giant in India, able to transform WhatsApp into a Super App. As Zuckerberg highlighted:

In India, with Jio, Jio has had this vision for a while. I want to be careful not to put words in their mouth, but just from what they’ve basically described both to us and publicly, about their Jio Mart vision, is there are millions of small businesses and shops across India, and they want to try to help get them onto a single network that you’ll be able to communicate with through WhatsApp and do payments online through WhatsApp.

Key takeaways

WhatsApp started as an alternative app that could be used to give status updates and messages. It gained traction until it was acquired for $19B by Facebook.
Starting in 2016 WhatsApp changed its terms of service to integrate its services with Facebook business products.
That created some concerns about the data shared between WhatsApp and Facebook. In 2018 both WhatsApp founder presumably left Facebook due to conflicts with Mark Zuckerberg.
In 2018, WhatsApp launched a new service that allowed businesses to reply to customer support requests for free for the first 24 hours. After that, the company would be charged.
In 2020, WhatsApp is transitioning toward video chats and business catalogs. In addition, payment functionalities might be added to the product. This will potentially give businesses the ability to communicate with potential customers with new ad messaging formats.
In addition, in 2020, Facebook is acquiring the social platform Jio, with the objective of presumably transforming WhatsApp into the first western Super App.

Other handpicked related business models: