The media, both old and new, have been filled this week with a debate over whether Facebook’s $19 billion acquisition of WhatsApp is crazy or brilliant (or crazily brilliant). The actual answer to that question won’t be known (or knowable) for some time yet, probably years. But however you figure it, $19 billion is a lot of money for a company with estimated revenue last year of only about $20 million, which means, notwithstanding Facebook CEO Mark Zuckerberg’s promise to let WhatsApp focus on growth rather than monetization for the next few years, Facebook will eventually have to figure out to monetize WhatsApp’s 450 million-plus users.
WhatsApp’s founders, of course, are famously averse to advertising. And based on the structure of the deal, which includes $3 billion in restricted stock units to be paid out to WhatsApp employees who stick around for four years after the deal closes, the founders plan to be around a while. So unless they have a complete change of heart, simply porting Facebook’s primary monetization model — advertising — to WhatsApp is not an option.
WhatsApp also doesn’t collect a lot of information about its users beyond their phone numbers and is highly protective of their privacy, which leaves it very much out of step with Facebook strategy of hoovering up as much personal information on its users as possible.
Fortunately, WhatsApp already has the basis of a formidable monetization engine in place. It currently charges users $1 a year after the first year for unlimited messaging. While that’s a pretty low ARPU by the standards of other online subscription services, at WhatsApp-scale, even small payments can add up to a lot of money. Google has built an empire on a pile of pennies, to cite one obvious analog.
Even without collecting a lot of personally identifying information on users, moreover, you can learn a lot about people from their phone-call metadata, as Edward Snowden and the NSA have recently taught the world. Especially so when you have a ton of other data on them that can be linked to that phone metadata, as Facebook does. Data from WhatsApp users could eventually be quite valuable to Facebook, therefore, even if it isn’t used to target them with ads in WhatsApp.
More critically, WhatsApp isn’t just a messaging service. It’s a universal web-based communication platform that is independent of any carrier and of any particular operating system. There are plenty of other, fee-based services that could eventually be layered onto that platform, such as voice and real-time video chat. WhatsApp has already played a major role in disrupting wireless carrier’s once-lucrative SMS texting business; their still-lucrative voice business could eventually be just as vulnerable.
The integration of WhatsApp could also move Facebook a big step closer to becoming its own, virtual mobile operating system. Facebook Home was a half-baked effort at a virtual OS. But a Facebook phone or SIM card, with the WhatsApp communications platform fully baked in, including VOIP-based voice communication, should be a frightening prospect to Apple, Goolge and Microsoft.
Carriers might be willing to trade cellular-based voice revenue for increased data usage, giving Facebook potentially powerful partners in marketing phones with Facebook SIM cards that did not rely on iOS, Android or Windows Phone.
Does all that add up to $19 billion of value for Facebook? Who knows? But the WhatsApp acquisition gives Facebook a chance to develop some non-advertising based and mobile-centric revenue streams without greatly disrupting its current business. And that’s certainly worth something.