How does WhatsApp make money? What started out as a very simple business question led
me down a rabbit hole much darker than I would have imagined—one that affects every single
one of us. But to make sense of all this, we need to travel back in time.
2009: The Birth of WhatsApp
It’s 2009. The iPhone came out a couple of years ago, and the world is getting to grips with this
new concept of smartphone apps. Facebook is rapidly gaining momentum, and a guy called
Brian Acton applies for a job there. He gets turned down, but he says he’s looking forward to
life’s next adventure.
That adventure would come just a couple of months later when Brian and his friend Jan Koum
had a smartphone app idea of their own: WhatsApp. It was initially designed as a way for people
to update their status, but once they introduced private messaging, the app started to gain
popularity very quickly. At the time, traditional texting was still quite expensive, whereas
WhatsApp was offering global instant messaging completely free.
How WhatApp Initially Made Money
Now, free applications normally make money in at least one of three ways: advertising, in-app
purchases, or selling your data. But the WhatsApp founders hated ads and actually left their
previous jobs at Yahoo because of disagreements over the extensive use of advertising. They
even made a post on the official WhatsApp blog about why they hate ads, so that wasn’t an
option.
For similar interesting blogs, check out our new site: Bluechipbg.com
They also didn’t want to start charging people to use features in the app. The reason they
started this in the first place was simply because they wanted to build a great product that
people wanted to use. Making the product better truly was the priority.
Option three was a total non-starter as well. Both WhatsApp founders were privacy activists. So,
for a little while, they got by without any revenue. They were simply using the original seed
funding they’d been given by some wealthy friends at Yahoo and keeping costs to an absolute
minimum. To save money, the WhatsApp team even worked off cheap Ikea tables and wore
blankets for warmth. If you picture the stereotypical Silicon Valley startup looking to grow as
quickly as possible and make millions, WhatsApp was the opposite.
WhatsApp’s $1 Fee
But inevitably, as more and more people downloaded the app and more features were
introduced, like picture messages, WhatsApp needed some revenue to invest in servers and
hire a bigger team. So, WhatsApp introduced a one-dollar fee. In some countries, you had to
pay this upfront to buy the app, while in other countries, you got the app free for a year and then
had to pay one dollar a year after that to keep it.
What’s interesting about this is that the one-dollar fee wasn’t actually enforced all that often. If
anyone didn’t pay the one-dollar renewal at the end of each year, WhatsApp would normally just
let them keep the app for free anyway. It was almost like the fee was more of a voluntary
donation.
As crazy as that sounds, it worked fairly well. It meant they didn’t alienate their users, and
enough people did pay the one-dollar fee that WhatsApp was able to keep running smoothly for
quite a while. After all, one dollar a year for such a convenient app was well worth it to many
people.
WhatsApp’s Unprofitable Success
Of course, while the one-dollar fee did bring in some much-needed revenue for WhatsApp, it
was mainly just to cover their costs. They still weren’t very profitable with such a small fee. But
strangely, that didn’t matter.
Tech companies exist in a very strange realm where you can be worth vast sums of money,
even if you’re not profitable and have no clear plan to make money. If you’ve got lots of users,
investors see the potential.
Now, the reason the WhatsApp founders were reluctant to take on new investors in the
beginning was that they were worried the investors would want to push heavier monetization
and compromise the quality of the app. However, soon WhatsApp was growing so fast that
investment companies like Sequoia Capital started offering them millions of dollars and
agreeing to whatever terms WhatsApp wanted. This meant the investors wouldn’t interfere with
the app or make them implement ads, and WhatsApp would get a big cash injection.
The Network Effect Strategy
Herein lies the revenue strategy WhatsApp used for a while: get investments. Essentially, they
said, rather than trying to get more money out of our users, let’s just invest in making our app
the best it can be, which will bring in more users, which will then bring in more investors. The
cycle repeated.
Seriously, that was their plan, and it worked out great for everyone. You see, WhatsApp is an
app that benefits from the network effect, meaning the more people who have the app, the
better it is for all users, as it means they can message more people. So by not cashing in and
plastering it with ads or lots of paid features, WhatsApp could grow much quicker because
people would tell all their friends and family about the app, and the user count would keep
rising. Thus, they kept attracting more investors, giving WhatsApp even more money to improve
the user experience further.
The Problem with Investment-Driven Growth
Of course, there is one big problem with this strategy: you can’t rely on investors forever. At
some point, they’ll want to see that the company actually has a profitable business model. Well,
unless of course, you just sell the app for a huge payout.
Facebook’s $19 Billion Acquisition
Facebook bought the mobile messaging service WhatsApp for $19 billion in cash and stock. At
the time, a lot of people were confused by this sale, with many baffled by the figure paid.
Nineteen billion dollars? Come on, is it really worth it?
In fact, there’s data to suggest that in the prior nine months to Facebook’s acquisition,
WhatsApp had generated just $1.2 million in revenue, and thus it was making a huge loss. So
why would Facebook buy it for $19 billion?
For context, they bought Instagram for $1 billion. For comparison, that kind of money could fund
about 20 Mars missions or build 13 Burj Khalifas. Instead, Facebook bought a messaging app
with very similar features to their own messaging app that had relatively low revenue and was
quite possibly making a loss every single year.
Facebook’s Real Motive
Why? Facebook’s next trick is to turn WhatsApp into a real business. The messaging service
makes practically no money now, but Mark Zuckerberg has plans to change that. “There’s
strategic value in what we can do together. And I actually just think that by itself it’s worth more
than $19 billion,” Zuckerberg explained.
Hearing Zuckerberg talk about synergy between Facebook and WhatsApp rang alarm bells for
many people. After all, Facebook’s whole business model is collecting your data and using that
to shove limitless personalized ads in your face. Pretty much everything WhatsApp was meant
to stand against.
WhatsApp’s Privacy Concerns
Facebook has a terrible track record when it comes to privacy. The Cambridge Analytica
scandal, where millions of Facebook users had their data taken and used against them without
consent, was one of many examples. Not just that, but in a leaked private message from the
early days of Facebook, Zuckerberg allegedly told a friend that he had over 4,000 emails,
pictures, and addresses from users who trusted him with their data.
Since then, Facebook has faced numerous scandals involving privacy, security, and data. Each
scandal ends the same way: “It was my mistake, I apologize,” followed by Zuckerberg’s public
apologies, and then everything carries on as normal.
The $1 Subscription Fee is Scrapped
In 2016, WhatsApp announced that they would no longer charge subscription fees. The one-
dollar fee that wasn’t properly enforced anyway was scrapped. On the surface, this sounds
great—maybe Facebook really does just care about connecting the world. But, in reality, the
truth becomes clearer.
The Real Value: Data and Control
Firstly, Facebook was buying the users and their data. Facebook is in the surveillance business,
arguably the biggest surveillance-based enterprise in the history of mankind. WhatsApp
provided behavioral data, contact lists, and endless personal information. Some have argued
that WhatsApp was the missing link for Facebook as the access to phone numbers now bridges
the offline and online worlds of Facebook users.
Plus, WhatsApp now has well over 1 billion users and still has a lot of growth opportunity. That’s
why Facebook scrapped the one-dollar fee—getting new users into the Facebook ecosystem is
far more profitable than charging one dollar each. Your data is worth much more to Facebook
than one dollar a year.
By removing the fees, it eliminates any barriers for people to use the app, allowing it to expand
further. Facebook's ultimate goal is to get the entire world using its services, which are all
connected.
Conclusion:
Facebook’s Dominance and WhatsApp’s Future
Another reason for Facebook’s purchase was simply to stop the competition. Zuckerberg had
heard that WhatsApp founders had been in talks with Google, so he rushed to make them an
offer they couldn’t refuse, ensuring WhatsApp wouldn’t fall into the hands of a competitor.
In essence, Facebook’s very model makes it impossible for new companies to flourish
separately. Facebook's acquisition of WhatsApp may not have been about immediate
profitability but rather about owning data and users.
While WhatsApp may never become profitable in the traditional sense, its integration into
Facebook’s ecosystem means the company has plenty of time to find ways to cash in on its vast
user base.