Why Facebook made WhatsApp free

WhatsApp is the factory where data gets collected for Facebook. And, the cost of that data collection is insignificant as against the monetisation happening on the Facebook platform

In February 2014, when Facebook acquired WhatsApp for a whopping $19 billion, the messaging platform was earning only around $15 million in annual revenue but had a user base of around 450 mn, with a million getting added each month. The revenue was primarily from the annual subscription fee, of around $1, the company was charging users in selected countries after rendering one year of free service.

Now, with WhatsApp having decided to make it free for users, it indicates that garnering revenue by charging the users was never the prime focus of its monetisation strategy. With the company now part of social networking site Facebook, the most valuable asset on the WhatsApp platform is the free user-generated data, mostly generated real-time, by close to a billion users that it has worldwide, without paying for it.

“They were not making any money actually because every year they were basically extending the service, telling the customers we are waiving the $1 fee,” says Dippak Khurana, founder and chief executive of mobile advertising network Vserv.

“I’d say this is in sync with Facebook’s philosophy. Today, if I am consuming a service of Facebook, I know the platform is free to me. Now, in the same manner, WhatsApp is also another Facebook service, and by making it free to users, they’ve made it sync with all their offerings.”

While announcing WhatsApp would be free to users, the company has said its model of charging an annual subscription fee did not work well because many do not hold any debit or credit card. The messaging platform, one should note, has more numbers of users in developing countries than in the developed world. Such users, while joining the platform, have always a fear in their mind that they might lose access to their contacts after the first year. That jeopardises the most important assets that social platforms like WhatsApp have, the number of users.

Beside, the only numbered willing to pay for the service range from one to 10 per cent. Assuming it has around 800 million users across the world, the annual revenue would have been $8-80 mn. Which is really nothing compared to the huge money Facebook paid to acquire it, says Mahesh Murthy, marketer and founder of Pinstorm. “First of all, it was never a big revenue stream. Second, if they charge for it, there was a real danger people would leave and move to the competition like Telegram, Viber, WeChat, etc.”

Rather, Murthy says, the business model WhatsApp is now talking about, to license the platform to corporates, looks more viable. “For example, if Flipkart wants to chat with its customers on Flipkart, they will charge the businesses that way, which will fetch them more money.”

Having a platform like WhatsApp, where close to a billion users interact with their contacts real-time, puts Facebook in an enviable position to understand consumer interests, and leverage that for sharper advertisements on its own platform. For example, if someone just bought a car or returned from a holiday abroad, and is sharing the information with friends on WhatsApp, that data can be leveraged on the Facebook platform for targeted advertisements which best serves the user requirement at that moment.

“If you look at it this way, WhatsApp is the factory where data gets collected for Facebook. And, the cost of that data collection is insignificant as against the monetisation happening on the Facebook platform,” added Khurana of Eserv. “There is a lot of consumer intent and interest which is captured on WhatsApp.”

Experts also say that in the case of internet platforms, traditionally, the real challenge has been charging the users, even if after offering a premium service. For example, Yahoo! Messenger was a free service when it was started in 2000; even Yahoo! Mail was. ”They tried to come out with premium versions but there were hardly any takers,” is one observation.

Some of WhatsApp’s global competitions have been adopting different monetisation strategies instead of charging a subscription fee. For example, instant messaging platform Line monetises by selling the users stickers and emoticons. Viber is also monetising the platform by selling stickers and other digital products. Though WhatsApp is so far the leader in the instant messaging space in India, competitions like WeChat, Viber, Line and Hike have been catching up.

Photograph: Dado Ruvic/Reuters