Facebook's (NASDAQ:FB) $19 billion acquisition of messaging start-up WhatsApp accentuates a reality that's becoming increasingly obvious in the sphere of social networking services: growth and revenue are almost completely reliant on mobile users.
The most important number in the announcement wasn't the head-turning price of $19 billion. It also wasn't WhatsApp's user base of 450 million users, which grows by one million per day and is remarkably loyal, with 70% active each day. The key number to understanding Facebook's biggest acquisition ever: one billion.
It's a number introduced by Facebook founder and CEO Mark Zuckerberg. "WhatsApp is on a path to connect one billion people. The services that reach that milestone are all incredibly valuable."
Facebook says WhatsApp's messaging volume approaches the entire global SMS volume of mobile carriers. And Zuckerberg's confidence that WhatsApp will hit one billion users is backed up by Mashable's Kurt Wagner, who projects that WhatsApp is on pace to join the billion-user club with Facebook and YouTube in August of 2015. Facebook is not only betting that WhatsApp will continue on its current trajectory of growth, but is betting that that growth will be valuable in Facebook's perennial pursuit of connecting everyone in the world.
Why messaging apps are gaining momentum -- and what they're going to replace
The billion-user club is small and elite. Facebook claimed its membership in October of 2012. At the time, Zuckerberg pointed out that Marc Andreessen mentioned to him the only other companies in the world to have a billion customers were McDonald's and Coca-Cola. He also realized that getting to two billion users would be dependent on the growth of the mobile user base.
If you hadn't heard much about WhatsApp before the acquisition, you're not alone -- messaging apps like WhatsApp are less popular in the US than they are in Asia and Europe. US carriers usually offer unlimited messaging with data plans. But internationally, carriers charge for texting plans, and WhatsApp and competing apps like Line, WeChat, Apple's iMessage, and BlackBerry's BBM, allow users to bypass messaging charges by sending texts, videos, pictures, and audio straight from the app. The apps are also useful for sending messages overseas, which can quickly rack up charges, including for US users.
The closest thing that US users are widely familiar with is Apple's (NASDAQ:AAPL) iMessage. The service, native to all Apple devices, provides free Wi-Fi messaging among them. iMessage is limited both because it's only available to Apple users, and WhatsApp essentially takes iMessage a step further, giving users the ability to opt out of carrier messaging services across device platforms. Apps separate from a phone's native SMS and MMS functionality can also offer slick new interfaces and novel user experiences to attract users.
And here's where that one billion user figure comes to bear: Ovum estimates that WhatsApp and its competitors will cost carriers $32.5 billion in lost fees this year. By 2016, that number is expected to rise to $54 billion.
Who are Facebook and WhatsApp competing with? And why?
WhatsApp has several formidable competitors. In China, Tencent's WeChat has over 250 million users. Naver Corporation's Line has 300 million registered users in Japan, and 350 million users globally.
In South Korea, KakaoTalk is reportedly installed on 93% of smartphones. Viber is the most popular messaging service in the Middle East, and was recently bought by Japanese e-commerce giant Rakuten for $900 million.
Each of these messaging apps is dominant at home, but they're battling to win loyalty in other markets. Facebook and WhatsApp can move to gain traction in the markets that are up for grabs, and the potential for growth in user base is huge -- anyone in the world who sends messages with a smartphone.
While older services like iMessage, and texting itself, won't be going away anytime soon, it's clear that data services like WhatsApp will take an increasing chunk out of the usage of carriers' traditional services. The way their growth will be monetized is a little bit less obvious. WhatsApp's current model is a free trial year followed by an annual 99-cent subscription charge -- an interesting contrast with Facebook's revenue model, which relies primarily on advertising revenue (a full 53% of Facebook's revenue comes from mobile advertising).
But the numbers for investors to watch are the user numbers: who will hit one billion next, and who can reach two billion first. And as far as the revenue that these apps are competing for -- and whether Facebook's $19 billion investment will pay off -- just take the words of the tried and true start-up strategy: growth first, revenue later.