In January, WhatsApp CEO Jan Koum claimed the popular messaging app had 700 million monthly active users, or MAUs, up from 600 million last August. If that growth rate remains constant, it could reach one billion users by year-end.
Unfortunately, a popular app is not always easy to monetize. Last year, Facebook (NASDAQ:FB)paid $22 billion for WhatsApp, which posted a net loss of $138.1 million on $10.2 million of revenue in 2013. In the first half of 2014, it reported a wider net loss of $232.5 million on $15 million in revenue. Of that loss, $206.5 million went toward stock-based compensation.
Let's look at the WhatsApp business model and whether it should be rebooted to monetize what could soon be one billion users.
An odd business model
WhatsApp is free for the first year but then costs a nominal annual fee of $0.99 for continued use. Unlike most other messaging apps, WhatsApp does not depend on ad revenue.
This business model is designed to compete against SMS fees rather than free messaging services such as LINE and WeChat. Yet the numbers do not add up. For 2013, 400 million active users only generated $10.2 million in revenue, indicating the vast majority were free users. To exacerbate the problem, the $1 fee can be bypassed in numerous ways.
Facebook CEO Mark Zuckerberg previously claimed his company was in "no rush" to monetize WhatsApp. During the third quarter earnings call, he stated, "The right strategy is to focus on connecting the people before aggressively turning them into businesses. Once we get to that scale, then we think they will start to become meaningful businesses in their own right."
But in January, David Marcus, head of Facebook messaging products, said the company might start adding advertisements to WhatsApp and Facebook Messenger, which has over 500 million MAUs.
No ads, no games, no gimmicks . . . no revenue
By placing ads in WhatsApp, Koum would break his original promise that the app would have "no ads, no games, and no gimmicks" after the acquisition.
Yet such a move would be great news for Facebook investors. The current business model of just $1 per year is not sustainable. It would be smarter to drop the fee and embrace lucrative revenue streams such as sticker sales and display ads used by rival services.
LINE, which has over 180 million MAUs, reported that its 2014 revenue rose 126% annually to 77.4 billion yen ($640 million), thanks to display ads, sticker sales, and games with microtransactions -- the three things Koum wants to avoid. But considering how much more revenue per user LINE is generating, Facebook should consider expanding WhatsApp into all three areas.
WeChat, which has about 470 million MAUs, relies on ads, paid stickers, and freemium games to generate revenue. However, WeChat is also integrated with e-commerce sites, including JD.com, which encourages customers to order products directly from the messaging app. Barclays estimates that WeChat revenue will rise 40% annually to 9.6 billion RMB ($1.53 billion) this year.
BlackBerry recently followed their example by adding sponsored channels and paid stickers to BlackBerry Messenger, one of its few pillars of growth.
Tougher than it looks
Facebook could be tempted to copy the LINE and WeChat business models to monetize WhatsApp, but abruptly introducing ads, paid stickers, or games could drive away longtime users. Adding games or third-party app/site integration could also cannibalize Facebook's own single sign-on efforts.
Nonetheless, Facebook should take this step to justify the huge premium it paid for WhatsApp. The growth of LINE and WeChat proves companies can simultaneously connect and monetize users. Facebook wants to let WhatsApp attract as many users as possible before monetizing them, but it is also passing up on chances to generate revenue and build an ecosystem for microtransactions.
Hitting one billion users would be a remarkable achievement for WhatsApp, but it would be pointless if those users generate no meaningful revenue.
Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.