No Subscription Charges For WhatsApp: Does Facebook Have A Monetization Strategy In Place?

Recently, Facebook (NASDAQ:FB) announced that its messaging platform, WhatsApp, will no longer charge subscription fees and will be a free service for its users. ^[1] As the messaging app reaches the billion users mark globally, the company believes that charging a subscription fee has not worked well for WhatsApp. Several of its users who don’t have access to a credit or debit card could lose the service after the first free year. Facebook now plans to introduce tools which will allow users to communicate with businesses via WhatsApp, thus making it the “go-to” app for several services. We believe this is in line with Facebook’s strategy to monetize a platform once it crosses the billion users mark and use organic interactions between businesses and users as the first step toward monetization.

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WhatsApp Key To Facebook’s Valuation

According to our estimates, Instagram and WhatsApp comprise nearly 25% of Facebook’s valuation. We expect average monthly users on WhatsApp to increase from the current 1 billion figure to nearly 1.5 billion by the end of our forecast period and average revenue per WhatsApp user to be around $6 by the end of our forecast period.

While a zero subscription fee will attract more users, especially in the emerging markets, and the user base could increase at a faster pace, Facebook will need an alternate monetization plan to generate higher revenues per user. Although the subscription charges were only around $1 per year, the company did have an option to increase these in the future. WeChat, the messaging app in China, is being monetized through an array of features such as advertisements, games, online payment functions, in app purchases, etc., and the estimated revenue per user for WeChat was at $7 as per Nomura’s estimates. ^[2] While Facebook has made it clear that it will not be putting ads on WhatsApp and would also work hard to avoid users getting spam messages from businesses, it is working on monetizing the platform via “commercial participation.” It plans to make WhatsApp a communication platform between businesses and consumers for interactions such as making restaurant reservations, getting flight statuses, booking cabs or getting communication from the bank about credit card usage.  Businesses would eventually pay for this communication with users which will generate revenues for WhatsApp. However, the company does not appear to have the tools or applications in place to facilitate these interactions and WhatsApp will “start experimenting” the commercial participation this year.

While the free WhatsApp service should continue to see an increase in the number of users, its ultimate monetization strategy, once established, will allow Facebook to generate revenue from this large user base. Just what form the the desired “commercial participation” is unknown at present.  Hence it is yet to be reflected in our valuation.

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1. Making WhatsApp free and more useful, WhatsApp Blog, January 18, 2016 [↩]
2. WeChat is nothing like WhatsApp- and that makes it even more valuable, Quartz, February 2014 [↩]