One of biggest technology deals for 2014 was the Facebook acquisition of
Whatsapp for a cool $19 billion. The deal was announced in February this year.
Facebook recently finalised the acquisition and closed the deal with a price
tag of $22 billion thanks to the increased value of Facebook’s stock in
recent months.
Now as Facebook’s results for third Quarter of 2014 are out, the company has
also filed a detailed report with US stock regulator SEC on WhatsApp’s
financial results. It pretty much confirms what has been an open secret about
WhatsApp. That this isn’t the most profitable service given that Koum has
always insisted with his no-ads policy.
Given that WhatsApp is essentially a free service (sure iPhone and Android
users are expected to pay some $1 after one year, most users end up getting a
free-service extension) with no ads, the source of revenue was never really
there.
According to the regulatory filing by Facebook, we
can see that WhatsApp’s total losses were close to $138 million in 2013 alone,
against a revenue of $10.2 million. This is much more than the $3.2 million
revenue in 2012, but the losses in 2012 for WhatsApp stood at $54.7 million,
which means that in 2013 the messenger’s losses were more than double.
But it’s not all bad as this piece in The Verge notes, that
out of WhatsApp’s losses in 2013, “a large part of that money went to paying
out stock to employees.” If you look at the filing, WhatsApp spend close to $76
million on Research and Development in 2013, while they spent $30 million in
marketing.
From the numbers, it does look like Facebook really paid a high price for
this deal. According to this Bloomberg piece, “WhatsApp
which had 400 million users in December, generated less than 3 cents in revenue
for each one last year. By comparison, Facebook paid $55 per user when it
acquired the company.”
So why pay so much for a service that obviously isn’t making any money? For
starters, it was pretty clear that Facebook did this acquisition for the sheer
number of users and the potential new users that are likely to come and
join the service.
As we had noted at the time of the deal, Facebook is pretty much a
“mobile company,” (Zuckerberg said so himself in 2012) and getting Whatsapp is
a way to ensure that the company has key products in the three most important
spaces in mobile which are: Social media, photographs (Instagram) and social
messaging via WhatsApp.
Zuckerberg was also quick to reiterate the importance of WhatsApp during his
investor call this time as well.
He said during the call, “One big priority for us here is messaging, and
continuing to build and grow Messenger and now WhatsApp as well, as great
services… We have a number of services which we think are well on their way
to reaching 1 billion people: WhatsApp Instagram, and search are a number
of them. And once we get to that scale, then we think that they will start to
become meaningful businesses in their own right.”
It’s evident that after the 1 billion users on Facebook, Zuckerberg is
hoping the next one billion will come on Instagram and WhatsApp and once that
happens, it’s only then that they will focus on making them ‘profitable.’ He
added that the aim was not to “monetise them very aggressively in the next year
or two.”
So what about Facebook Messenger, why is that still there when Zuckerberg is
talking getting WhatsApp to grow to the next 1 billion? The Facebook CEO was
quick to point out the difference between the two services, something that tends
to get over looked.
He said during the call, “SMS and WhatsApp are more for real-time activity.
People have contacts on WhatsApp who they wouldn’t want to make friends on
Facebook. The graphs are somewhat different.” And it’s true, you might not be Facebook
friends with everyone on your Whatsapp or even add all your Facebook friends on
WhatsApp. Additionally, the people you choose to interact with on WhatsApp, you
might not interact with them on Facebook, even if they are your friends.
For Facebook, WhatsApp still makes sense, given that it has a lot of
potential for growth. After all this is an ad-free, virtually cost-free service
that allows for real-time messaging and if your network of friends is here, and
constantly using it, you’re unlikely to leave. There’s no denying that WhatsApp
has rivals, like Snapchat, WeChat, Line, but that’s hasn’t stopped the growth
of its user base.
In August, Koum announced that the company has over 600 million
monthly active users and he also pointed out that these are
active users, meaning ones who use the account regularly and not just
“registered” users. With registered users you could have a lot of people who
aren’t actually using the service but have downloaded the app and completed the
setup process.
So yeah, WhatsApp might not be making any money right now, but it’s
potential is definitely big and this is something that Zuckerberg is still
keenly aware of.
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