WhatsApp Could Give Facebook a Third Revenue Stream: Subscriptions

Unless of course, they stop charging…

Facebook has long been considered one of those businesses that no one would deign to pay for. So the company turned to advertising for revenue, hit it out of the park, and laid to rest worries that the social network couldn’t deliver real value to shareholders.

But Facebook hasn’t wanted to be a one-trick revenue pony; and so it has kept a possible secondary source of revenue, payments, alive. Of course alive is different from thriving, and the division has been pretty lackluster. I wrote about this for The Information, saying that Facebook’s inability to grow this business was a lost opportunity, but an understandable one given the outside pressures to find a revenue stream that got big, fast. That stream, as we now know, was advertising; and all of the company’s manpower has been focused on that effort. Hunter Walk over at Homebrew picked up the story and argued that no matter why Facebook couldn’t get Payments off the ground, it missed a Bitcoin-size opportunity.

But Facebook has up and acquired a diversified revenue stream with the recently announced acquisition of WhatsApp, which people actually pay to use. It costs $1 to download the app, or $1 to subscribe, and then 99 cents a year after the first year.

So essentially WhatsApp is a subscription service that costs about $1 a year. WhatsApp has 450 million users and is adding a million users a day. Assuming the no one leaves after a year (and that’s a very generous assumption) that’s a best-case scenario of $450 million a year in subscription revenue that’s growing by about 80% a year. By comparison, Payments revenue for 2013 was $241 million and it grew by about 10% year-on-year.

Aaron Pressman points out on Twitter that “WhatsApp doesn’t charge in many countries and Forbes reported today they had only $20 million of revenue last year.” But people are willing to pay to use the site, whose founder has long been anti-advertising.

Of course there are plenty of people who think that this revenue situation could change at any moment. Facebook could make WhatsApp free in order to get more users, and it could then try to monetize the messaging app through ads. (And WhatsApp’s founders say they’re anti-ad; but don’t all founders say that in the beginning? And isn’t that a weird thing for me to write given that I work at a subscription business that doesn’t do ads? Anyhoo…) Any official news stories on subscription revenue probably won’t come out until Facebook gives a strong signal that it will handle pricing one way or the other.

But I’m happy to write this knowing that Facebook could make WhatsApp free. That’s because I worry that in doing so the company could miss out on another opportunity to diversify its revenue stream, whether it’s a Bitcoin-size flub or merely a footnote.

Facebook’s ad strategy has a lot of room to run. Analysts think it can increase revenue per user in all markets with not that much effort. But the gap between the developing world and the US/Canada/Europe is startling.

About 75% of the company’s global revenue comes from the US, Canada, and Europe, even though those regions account for only 39% of the company’s overall user base. The company says in its filings that real growth is coming from Asia and developing markets like India, Brazil and Mexico, where it is unable to convert users into big money. For example, average revenue per user in the US and Canada is $6.03 and it’s only 95 cents in Asia.

While users everywhere are worth something, Facebook is clearly still figuring out how to make users in their fastest growing markets worth even more. But WhatsApp has already figured out how to make these folks valuable. The chat app company has turned users into subscribers in the very areas of the world where Facebook’s popularity is growing, but not translating into revenue.

Facebook’s CFO Dave Ebersman said during the post-announcement call that “This is a really valuable service that people are willing to pay for.” You could argue that FB is a valuable service that no one is willing to pay for, and in that way the two companies are perfectly complimentary. So why not let WhatsApp be WhatsApp, and let people continue to pay for the service they love?