WhatsApp’s Big Draw Is That It Declines to Gouge Its Users

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When news dropped that Facebook bought the messaging service WhatsApp for a whopping $19 billion, it was followed by the usual wave of arguments over why an app—a lowly app! goes one refrain—would be worth such astronomical sums of money. But another question is far more interesting: How did such an app get so popular?

It seems pretty clear that Facebook wants to leverage WhatsApp’s 450 million monthly users into faster growth, especially considering that many of those users are from large, developing markets like the BRIC nations, where Facebook, so far, has little penetration. Facebook had 1.23 billion monthly users as of last December, but continued growth is integral to its success. So getting a foot in less established markets, where the rate of internet adoption itself is rapidly growing, is crucial.

If Facebook felt that half a billion users and counting, living largely in places where Facebook hasn’t poked, are worth $19 billion, that’s the firm’s call. Figuring out why those users began using WhatsApp in the first place offers some insight into the mobile space, however. And as you might guess, it’s because WhatsApp and its ilk, also known as over-the-top messaging apps, are saving their users money.

According to a report from Bloomberg, phone carriers globally lost out on around $32.5 billion dollars in texting fees in 2013 thanks to free messaging apps like WhatsApp and WeChat, another massive service that’s popular in China. That number is projected to rise to $54 billion by 2016, says the Ovum, Ltd. study that Bloomberg quotes. Being a business-minded publication, Bloomberg focuses on the ramifications for carriers, which have had trouble delivering US-style cell subscriptions to developing markets:

As more customers have switched to smartphones with better Internet access, people are relying more on applications such as WhatsApp to communicate. Instant-messaging services have taken off outside the U.S. where carriers don’t throw unlimited texting into voice and data plans. The rise of these applications has offered a cheaper source of communication, especially for correspondence between different countries, undercutting the texts that had once been a key source of income for carriers worldwide.

On its face, it’s pretty easy to counter the figure that Bloomberg is quoting. The same flaw in the argument that copyright piracy equates to lost sales applies here: Just because someone takes a free option over a paid one doesn’t mean he or she would have paid if the free option didn’t exist. If text messages are too expensive, a user won’t send them, whether or not a cheaper or free option using cell data exists. 

And whoever you are, text messages are too costly. “SMS messaging generates 50,000 times more revenue per megabyte, on average, than data average revenue per user,” reads a 2012 report on over-the-top (OTT) messaging from McKinsey & Company (PDF).

The following line in the report explains why carriers haven’t tried to create their own WhatsApp. “Defensive actions that reduce profitability or self-cannibalize the SMS channel to hold off an OTT threat are expensive and should not be taken prematurely,” it reads.

“SMS messaging generates 50,000 times more revenue per megabyte, on average, than data average revenue per user.”

In other words, text messages—when not bundled in an unlimited package, as is the case for many people in emerging economies with pay-as-you-go plans—are so lucrative that ceding ground in the OTT market is worth it as long as you don’t cause a massive users’ flight from SMS messaging by doing something stupid like offering a free messaging service of your own.

Ovum presumably came to its $32.5 billion figure by measuring how many messages are being sent over OTT apps, and calculating how much that would cost if they were instead sent as texts. (I’m sure it was more complicated, but this simplistic view should be fine for our purposes.) It’s hard to definitively say that carriers actually lost that much revenue, as a lot of people would have just sent fewer texts if they had to pay for them.

But the reverse is more valid: OTT apps delivered $32.5 billion worth of value to users. That doesn’t mean WhatsApp and the others saved users that much money; again, it’s impossible to know how much they would have spent if the apps weren’t free or near-free. (WhatsApp has a negligible $0.99 yearly fee.) But we can know that such a gap does represent the value delivered, which points to an extremely powerful shift in messaging.

The simple truth is that mobile data is cheaper than ever, and in fact, the growth in mobile data usage has been partly driven by the growth of smart, free service apps. For example, a great story in the New York Times from last December looked at how cheap, mobile banking services are sweeping through South Asia. 

“Because of the nation’s huge population, broad adoption of cell phones and some of the lowest airtime rates in the world, even a modest conversion to mobile money in India could make South Asia the world’s largest wireless-transfer economy,” writes reporter Richard Shaffer. Countries like Kenya, which have a wide infrastructure gap but healthy development communities, have had similar successes with mobile banking. 

So is WhatsApp a $19 billion venture? Facebook’s analysts would know better than I. What’s indisputable is that it represents an enormously valuable service to its users, which is why it has been able to penetrate so many markets that other companies haven’t. (For the record, the security apparently sucks.)

That’s an important lesson for anyone in the mobile space: rather than finding a new remix of a social network, developing a system that can bring our current platforms to more people for less money can be hugely successful. Of course, when your service is popular because it’s free or nearly so, figuring out how to monetize that base is the big challenge—but having hundreds of millions of users doesn’t hurt.