Founded in 2009 by Brian Acton and Jan Koum Whatsapp is a messaging app acquired by Facebook in 2014 for $19B. In 2018 WhatsApp rolled out customer interaction services. WhatsApp might be transitioning toward a set of features from video chats to social commerce that might transform WhatsApp into a Super App.
Brian Acton and Jan Koum, who had previously spent 20 years combined at Yahoo, founded WhatsApp in 2009.
As reported on CNBC, Jan Koum affirmed:
“It started with me buying an iPhone; I got annoyed that I was missing calls when I went to the gym.”
That’s how they managed to build an app that made them show their status, and he added: “We didn’t set out to build a company. We just wanted to build a product that people used.“
In 2009 WhatsApp got its first seed round for $250k. In a few years, WhatsApp became a hit, and in 2011 and 2013, WhatsApp got $60 million from Sequoia Capital, with the first round of $8 million and the second round of $52 million.
WhatsApp is a pun on the phrase What’s Up, which started as an alternative to SMS.
Advertising is a broken business model, according to its founders
As reported on the WhatsApp blog by its founders Koum and Brian Acton:
When we sat down to start our own thing together three years ago we wanted to make something that wasn’t just another ad clearinghouse. We wanted to spend our time building a service people wanted to use because it worked and saved them money and made their lives better in a small way. We knew that we could charge people directly if we could do all those things. We knew we could do what most people aim to do every day: avoid ads.
Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought. At every company that sells ads, a significant portion of their engineering team spends their day tuning data mining, writing better code to collect all your personal data, upgrading the servers that hold all the data and making sure it’s all being logged and collated and sliced and packaged and shipped out… And at the end of the day the result of it all is a slightly different advertising banner in your browser or on your mobile screen.
Remember, when advertising is involved you the user are the product.
This showed how reluctant they were about advertising as a Business model.
The paradox, though, is that the company would be acquired by the largest digital advertising network after Google in a couple of years.
The Facebook acquisition
It was June 18, 2012, almost two years before WhatsApp got sold to the most profitable advertising network on earth, Facebook Inc.
In a previous post, they said:
So first of all, let’s set the record straight. We have not, we do not and we will not ever sell your personal information to anyone. Period. End of story. Hopefully this clears things up.
On February 19, 2014, when Facebook acquired WhatsApp. As reported on Facebook financial statements, Facebook “paid approximately $4.6 billion in cash and issued 178 million shares of Class A common stock in connection with the acquisition of WhatsApp” this is how it was announced on WhatsApp blog:
Almost five years ago we started WhatsApp with a simple mission: building a cool product used globally by everybody. Nothing else mattered to us.
Today we are announcing a partnership with Facebook that will allow us to continue on that simple mission. Doing this will give WhatsApp the flexibility to grow and expand, while giving me, Brian, and the rest of our team more time to focus on building a communications service that’s as fast, affordable and personal as possible.
Here’s what will change for you, our users: nothing.
WhatsApp will remain autonomous and operate independently. You can continue to enjoy the service for a nominal fee. You can continue to use WhatsApp no matter where in the world you are, or what smartphone you’re using. And you can still count on absolutely no ads interrupting your communication. There would have been no partnership between our two companies if we had to compromise on the core principles that will always define our company, our vision and our product.
WhatsApp founders remarked once again that its business model would not change toward anything related to third-party ads.
Things would start to change in a couple of years.
The freemium growth model
The freemium is usually a growth and branding strategy rather than a business model. A free service is provided to most users, while a small percentage of those users convert into paying customers through either marketing or sales funnel. The free users not converting into customers help spread the brand.
Once WhatsApp had financial support to keep growing, it leveraged the freemium model to gain even more traction.
As explained on their blog:
That’s why we’re happy to announce that WhatsApp will no longer charge subscription fees. For many years, we’ve asked some people to pay a fee for using WhatsApp after their first year. As we’ve grown, we’ve found that this approach hasn’t worked well. Many WhatsApp users don’t have a debit or credit card number and they worried they’d lose access to their friends and family after their first year. So over the next several weeks, we’ll remove fees from the different versions of our app and WhatsApp will no longer charge you for our service.
Naturally, people might wonder how we plan to keep WhatsApp running without subscription fees and if today’s announcement means we’re introducing third-party ads. The answer is no. Starting this year, we will test tools that allow you to use WhatsApp to communicate with businesses and organizations that you wantto hear from. That could mean communicating with your bank about whether a recent transaction was fraudulent, or with an airline about a delayed flight. We all get these messages elsewhere today – through text messages and phone calls – so we want to test new tools to make this easier to do on WhatsApp, while still giving you an experience without third-party ads and spam.
WhatsApp started to focus more on communication between businesses and its users to create a line of products that could be monetized by selling services to companies using WhatsApp features.
Facebook takes over
The hidden revenue generation model is among the most profitable patterns for business models built on advertising. Businesses like Google and Facebook have managed to gain more than $290 billion in 2021 from advertising on their platform, even though many users might not be aware of the mechanisms that drive those platforms.
The time came when Facebook finally started to take advantage of WhatsApp data to sell more of its ads.
As reported on the WhatsApp blog:
The updated documents also reflect that we’ve joined Facebook and that we’ve recently rolled out many new features, like end-to-end encryption, WhatsApp Calling, and messaging tools like WhatsApp for web and desktop.
But as we announced earlier this year, we want to explore ways for you to communicate with businesses that matter to you too, while still giving you an experience without third-party banner ads and spam. Whether it’s hearing from your bank about a potentially fraudulent transaction, or getting notified by an airline about a delayed flight, many of us get this information elsewhere, including in text messages and phone calls. We want to test these features in the next several months, but need to update our terms and privacy policy to do so.
That policy change created a set of backlashes that remain concerns.
As pointed out on Facebook financials for 2017:
The Irish Data Protection Commissioner has challenged the legal grounds for transfers of user data to Facebook, Inc., and the Irish High Court has agreed to refer this challenge to the Court of Justice of the European Union for decision. We also face multiple inquiries, investigations, and lawsuits in Europe, India, and other jurisdictions regarding the August 2016 update to WhatsApp’s terms of service and privacy policy and its sharing of certain data with other Facebook products and services, including a lawsuit currently pending before the Supreme Court of India. If one or more of the legal bases for transferring data from Europe to the United States is invalidated, if we are unable to transfer data between and among countries and regions in which we operate, or if we are prohibited from sharing data among our products and services, it could affect the manner in which we provide our services or adversely affect our financial results
It is important to remark that the terms of service changes applied to things like:
Enable you to communicate with businesses on WhatsApp. For example, if you visit a business’s Facebook page, you might see a button that lets you easily open a WhatsApp chat with them.
However, it is undeniable that in 2016 it finally started a process of monetization that revolved around data sharing between WhatsApp and Facebook products.
In 2017 the WhatsApp founders left Facebook and $1.3B in stock options, presumably because they were desperate to leave the company.
As reported by bizjournals:
“Jan Koum and Brian Acton have more recently clashed with Facebook CEO Mark Zuckerberg and COO Sheryl Sandberg, and quit the company, leaving hundreds of millions of dollars worth of unvested stock options on the table. Acton, who quit in November 2017, walked away from $900 million in unvested shares, while Koum, who will exit Facebook in August, will leave $400 million in unvested shares, the Wall Street Journal reports.”
Following the Cambridge Analytica scandal, in March 2018, Brian Acton also launched a hashtag campaign – #deletefacebook – which in a way, backfired on him:
It is time. #deletefacebook
— Brian Acton (@brianacton) March 20, 2018
WhatsApp becomes a solution provider: A glance at customers’ interactions management
In August 2018, on its blog, WhatsApp reported the creation of new tools to allow businesses to connect to users, which included three kinds of interactions:
Request helpful information.
Start a conversation.
Get support.
This way, businesses will start paying for certain user interactions to manage their customers’ interactions.
As reported on the WhatsApp website:
From time to time, a business may use a solution provider to help provide the tools it needs to send and receive messages from you. Businesses rely on these solution providers to store, read and respond to your messages.
The business you’re communicating with has a responsibility to ensure that it handles your messages in accordance with applicable law and its privacy policy. For more information on the provider’s privacy policy, please contact that business directly.
While the app is free, some services will be paid for.
For instance, if a business that uses WhatsApp will reply to a customer within 24 hours, it will pay a fixed charge based on the country.
As pointed out on theverge.com, “WhatsApp Business lets business owners set up a profile to share company details like their email or store address, and also have access to greetings and away messages to manage interactions with customers (who contact them using the standard WhatsApp client).”
In April 2019, WhatsApp officially rolled out the launch of its WhatsApp business.
Will ads come to WhatsApp?
Facebook, the main product of Meta, is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues in 2021, of which $114.9 billion was from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm).
In August 2018, Facebook announced on its blog the WhatsApp Business API:
You can use the WhatsApp Business API to sendcustomised notificationswith relevant, non-promotional content such as shipping confirmations, appointment reminders or event tickets. These messages will be charged at a fixed rate for confirmed delivery.
As Facebook highlighted:
We’ve been testing ways to help people start a WhatsApp chat from ads they see on Facebook.
An example of a Facebook ad promoting a WhatsApp conversation is shown on Facebook Blog when the company announced this new feature within its ads platform.
However, as pressure grew on the Facebook business model, the company announced it would give up, for now, the ads revenue model for WhatsApp (at least for now), as reported by WSJ.
Will WhatsApp ever make meaningful revenues for Facebook?
In the 2019 annual report, Facebook highlighted:
We have also invested, and expect to continue to invest, significant resources in growing our WhatsApp and Messenger products to support increasing usage of such products.
And it continued:
We have historically monetized messaging in only a limited fashion, and we may not be successful in our efforts to generate meaningful revenue or profits from messaging over the long term.
Suppose Facebook isn’t planning to monetize WhatsApp directly in the long term.
What plans and how will it integrate with its overall products in the long run?
A payment platform for Calibra?
As highlighted in the 2019 annual reports:
We also intend to launch certain payments functionality on WhatsApp and have announced plans to develop digital payments products and services, which may subject us to many of the foregoing risks and additional licensing requirements.
As part of this plan, in June 2019, Facebook launched Libra Association, and as part of it, Calibra, a digital wallet for Libra.
And WhatsApp and Messenger might work as platforms for the launch of Calibra.
Interoperability and products integrations
While WhatsApp revenues might not be substantial in terms of direct monetization.
WhatsApp is part of the family of products that Facebook Inc. acquired over the years, enabling the company to transition from the desktop to the mobile era easily.
What will the WhatsApp business model look like in the coming years?
In Q1 2020, Mark Zuckerberg highlighted:
Video calling is when you actually ring a person’s phone or computer. It’s by far the most used type of video chat. Between WhatsApp and Messenger, there are more than 700 million daily actives participating in calls. We’re doubling the size of WhatsApp video calls from 4 to 8. This is important because WhatsApp is the most popular end-to-end encrypted calling service, so if you care about privacy and encryption and you want to be able to reach anyone, you’re probably using WhatsApp. Now you’re going to be able to get your whole family or a larger group together on calls.
As the pandemic hit, from a simple chat application, WhatsApp muted more and more into a group video conference for consumers.
While this might be the next killer app for WhatsApp, make it as sticky as possible.
Future revenue generation will be about social commerce.
WhatsApp, social commerce, catalogs, and new messaging ad formats
Social commerce will be an integral piece of the WhatsApp business model.
Indeed, with payments (integrated between the various Facebook products) and social commerce, the WhatsApp business model will take a different shape:
So we’ve started rolling out things like catalogs in WhatsApp. We’re working on payments to be able to complete transactions. And we’ve rolled out a new ad format click to messaging ads, where basically a lot of small businesses and different businesses are finding that their message threads with people perform better for driving sales than their websites or other presences.
How might catalogs be integrated with the Facebook Ads system? Zuckerberg explained it:
They basically buy ads inside Facebook or Instagram that send people to chat threads. And then as we build out all these tools around that — around making those threads more valuable, we think that those ads will only increase in value, which is the way we’re currently thinking about that business.
Why the Facebook-Jio deal is about transforming WhatsApp into a Super App
In April 2020, Facebook acquired a substantial stake in Jio, owned by the Indian conglomerate Reliance Industries.
The deal will create a digital giant in India, able to transform WhatsApp into a Super App. As Zuckerberg highlighted:
In India, with Jio, Jio has had this vision for a while. I want to be careful not to put words in their mouth, but just from what they’ve basically described both to us and publicly, about their Jio Mart vision, is there are millions of small businesses and shops across India, and they want to try to help get them onto a single network that you’ll be able to communicate with through WhatsApp and do payments online through WhatsApp.
Key takeaways
WhatsApp started as an alternative app that could be used to give status updates and messages. It gained traction until it was acquired for $19B by Facebook.
Starting in 2016, WhatsApp changed its terms of service to integrate its services with Facebook business products.
That created some concerns about the data shared between WhatsApp and Facebook. In 2018 both WhatsApp founders presumably left Facebook due to conflicts with Mark Zuckerberg.
In 2018, WhatsApp launched a new service that allowed businesses to reply to customer support requests for free for the first 24 hours. After that, the company would be charged.
In 2020, WhatsApp was transitioning toward video chats and business catalogs. In addition, payment functionalities might be added to the product. This will allow businesses to communicate with potential customers with new ad messaging formats.
In addition, in 2020, Facebook is acquiring the social platform Jio to presumably transform WhatsApp into the first western Super App.
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Related Business Models
Mark Zuckerberg Empire
Mark Zuckerberg is the principal shareholder of the company. Not only he retains ownership and control of the company. Facebook, like Google, has issued two kinds of common stocks, Class A and Class B. Where the holders of Class B common stocks are entitled to ten votes per share, and holders of our Class A common stocks are entitled to one vote per share. Mark Zuckerberg has a total voting power of 57.9%.
Attention-Merchants Business Model
In an asymmetric business model, the organization doesn’t monetize the user directly. Still, it leverages the data users provide and technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data and its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
Asymmetric Business Model
In an asymmetric business model, the organization doesn’t monetize the user directly. Still, it leverages the data users provide and technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data and its algorithms sold to advertisers for visibility.
Facebook Business Model
Facebook, the main product of Meta, is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues, in 2021, of which $114.9 billion was from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm).
Facebook ARPU
The ARPU, or average revenue per user, is a key metric to track the success of Facebook – now Meta – family of products. For instance, by the end of 2021, Meta’s ARPU worldwide was $11.57. While in US & Canada, it was $60.57, in Europe, it was $19.68, in Asia $4.89, and in the rest of the world, it was $3.43.
Facebook Organizational Structure
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