What’s Up with WhatsApp And Payments?

Almost exactly one year ago Facebook managed to shock just about everyone with its $19 billion dollar acquisition of chat app WhatsApp?  Published reactions of disbelief included

“That’s gotta be a typo.”

“That sounds exorbitant.”

“Holy S–, that’s a big number.”

Note, those weren’t quotes from pundits or investors – those were the reactions of people who were building their own chat apps and would, at least, be expected to immediately agree with any high valuation.  If people with hopes of selling their own “WhatsApps” thought the number sounded crazy – the number must be crazy, right?

Mark Zuckerberg, it seemed to many commentators, had simply gone wild with his (big) checkbook.

But that was late February 2014, and late February 2015 is a very different landscape. Uber raised $1 billion in its last funding round, and is valued slightly north of $40 billion And, although it is the most successful start-up in the sharing and mobile start-up economy, it is not unique in bringing in big dollars from investors looking to figure out how to leverage mobile’s entrance into the consumer economy.

A year ago however, the VC investment arms race in mobile was still just getting started, and Facebook’s purchase price seemed over the top – especially for a chat service that is notoriously opposed to advertising and instead relying on a paid subscription model when many of its competitors are free.

Today the landscape looks different – and mobile chat apps like WhatsApp are becoming an increasingly important puzzle piece for players looking to level mobile eyeballs into quantifiable dollars. What seemed like a exorbitant expenditure of money a year ago now might be Facebook’s way of making sure it doesn’t join the ranks of tech firms that got behind the tech.

The War For Mobile Dominance

Zuckerberg and company tried to purchase WhatsApp rival Snapchat in 2013 for $3 billion – an offer the company rebuffed.  CEO Evan  Spiegel went on to compare Facebook to Yahoo as a company at risk on joining the list of “once great” tech firms that weren’t able adapt to a changing digital landscape.

“Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars — largely due to mobile advertising performance, especially app install advertisements,” Spiegel wrote in an email, “VC dollars are being spent on user acquisition despite unknown [lifetime value] of users — a recipe for disaster.”

However, before one starts to worry too much about Facebook’s hurt feelings, it is worth noting that WhatsApp is not exactly brimming with respect or enthusiasm for what Snapchat does.

“It’s not 100% clear to me what’s working about Snapchat. Great, teenagers can use it to get laid all day long. I don’t care. I’m 42, essentially married with a kid. I don’t give a s— about this.” noted WhatsApp co-founder Jan Koum in an interview with Wired UK.

The wider world does not agree with Koum’s assessment – Snapchat brought in $45 million in funding and was valued at $10 billion to start 2015, a number it is looking to double to $20 billion by the end of its next funding round.  But the heightened war of words between chat programs makes some sense – as the mobile chat platform is starting to look an awful lot like the next big idea for capitalizing on the mobile payments ecosystem that getting increasingly tied to mobile devices.

Mobile chat apps are opened more often than any other type of device applications, including social media sites like Facebook or Twitter.  While those other sites might hold users for longer, the frequent short sessions on chats make them an excellent tool for moving the digital crowd around the web for other experiences.

They are also an excellent way to make sure you have eyeballs.

WhatsApp, when it was purchased,  had 450 million active users per month, since its acquisition that number has grown to 700 million.  Facebook’s native Messenger program, a separate application from WhatsApp, has grown to 500 million users.  Snapchat does not publicly release user counts, though according to the Wall Street Journal estimates peg the number as north of 100 million active users per month (by comparison, Twitter has $271 million).  WeChat – Tencent’s chat app- has around 468 million active users in China alone (they don’t disclose outside of China), Line, the Japanese service, like Snapchat does not release official numbers information, but around 500 million is the general estimate.

The Path To Monetization

If the first tech crash of the early 2000’s taught anyone anything, it is that a large number of eyeballs does not necessarily mean that a company can be a successful revenue generator, and the difficulty associated with chat apps is how to leverage users frequent short tours through the platforms into a sound monetization strategy.

It is, however, a challenge that is increasingly being met.

Using the WeChat app, Chinese consumers can call a taxi via an Uber-like service, purchase movie tickets, make restaurant reservations, transfer money to friends and just plain old–fashioned shop online.  Recently the company moved 1 billion Red Envelopes for Chinese New Year’s – Red Envelopes stuffed with cash is a traditional New Years gift in China, and one that has gone extremely digital in the last few years.

The Japanese chat app, Line, may be the best monetized chat service in the world.  Line  supports Line Pay, Line TV, and an identity platform for games. Moreover, Line makes money. The company’s reported revenue in 2014 was $656 million, and is diversified over a range of sources: It sells games that can be played solo or with other Line users; digital stickers; marketing deals with brands and celebrities that want to reach its user base; and merchandise such as the products at the Harajuku shop.

Domestically, even Snapchat is getting in on making its service more than just a chat service. Late in 2014 they announced it would be partnering with Square to release  Snapcash to help its users transfer funds to friends in real-time through Square Cash.

It has also added the Stories product for broadcasting sequences of photos and videos is a hit with star content creators and curated content from sources like CNN, Comedy Central and ESPN among others.

The monetization path Facebook has for WhatsApp is less clear.  However, some are coming around to the idea that Facebook doesn’t have to make money with WhatsApp’s chat feature, and can instead opt to focus on taking a cut of commerce, charging for promotion of content or monetizing other parts of the platform while keeping the chat aspect neat, clean and ad free.

Plus, sometimes the greatest value can come not from what one gets, but instead what one can deprive their competitors of.  By buying WhatsApp, TechCrunch noted, they prevented Google from buying it and using it jumpstart its late-to-the-game Hangouts messenger.

But Google didn’t buy WhatsApp, Facebook did.  And though it seemed a crazy price to pay for it a year ago, in today’s valuations rodeo, perhaps Mark Zuckerberg actually got off pretty cheap.