Betting the farm on standalone messaging

With Facebook’s $19 billion purchase of WhatsApp, the high stakes game of social media chess has new angles to it. Why was this the OTT mobile messaging app of Zuckerberg’s choice, and what does it symbolize about the differences between strategies in this space?

There’s a great deal of reasoning behind the massive purchase. Though some in the US have been a bit surprised by the purchase, as WhatsApp has a bit lower penetration rate there compared to much of Europe, Latin America and many countries in Asia, the app sits solidly in the leading position globally and there are many indications that it will not move from that anytime soon. As far as the OTT mobile messaging space, WhatsApp is quite dominant, with the fastest growth of up to one million users per day currently, and the highest number of monthly active users at 450 million. Growth is very strong for the other leading apps as well, which add up to hundreds of thousands of users per day. WeChat, based in China, currently has 272 million active users, and apps Kakao Talk, Line, and Kik are coming up quickly in hundreds of millions of registered users. These apps are widely seen as the biggest competitors to WhatsApp, but their penetration is relatively region-specific (WeChat, KakaoTalk and Line mostly dominant in China, South Korea and Japan respectively), while WhatsApp has users are widely distributed across regions, with an over 90% penetration rate in markets as varied as Mexico, Italy, Brazil and India.

WhatsApp’s growth compared to other messaging competitors is more remarkable when considering that the latter have big marketing and advertising budget spends, while the leader has grown organically across the globe with no spending on promotion at all, at a rate that is already faster than Facebook, Instagram, Skype and Gmail’s ever were. By several accounts they are on track to reach 1 billion users within a couple years. Beyond the exponential growth across borders and across mobile platforms, the user engagement rate is one of the most telling signs of the app’s value. 70% of users return to WhatsApp every day, a stickiness level that significantly outplays Facebook’s 62%. Communication apps generally enjoy the highest frequency of use along with retention over 90 days compared to all other apps, including social games, social networking, streaming music and news. But the engagement rates tell only part of the story: the messaging volume passing through WhatsApp is approaching the value of global SMS volume. The average user sends over 1200 messages per month, along with 40 photos, 13 voice messages and 7 videos, plus 2200 messages received. Users do not see it directly as an SMS placement; but as an increasingly more indispensible method of communication that is more intimate, expressive, casually conversational, media sharing and group chat friendly.

Where many question the purchase and it’s high price tag is regarding the potential strong revenue streams that the app seems to lack. This, and the related differentiations that the other top messaging apps provide, may be where people have space to critique the move.

Monetization and stickiness strategies diverge greatly between the market leader and the rest. WeChat, Line, Kakao Talk, Kik and most other OTT messaging apps are extremely focused on monetization, by way of paid for premium content that is designed to keep users returning and engaging their friends. This includes gaming, in-app purchasing (which includes stickers, filters and themes), and brand, celebrity and merchant sponsored accounts. And beyond these revenue streams, some apps are offering additional services to try to keep users in their ecosystem, such as Kik’s own in-app HTML5 browser and WeChat’s new foray into mobile payment options.

So while most OTT mobile messaging apps are looking to create a feature-rich community and ecosystem that is sticky and revenue abundant, the WhatsApp is the only one with paid for subscriptions; users typically pay $0.99 per year after a year of free use. WhatsApp’s CEO, Jan Koum, has often stated that the company had no plans to draw revenue from ads or games or other added content, and doesn’t see users leaving his service to play a game or connect with a brand as a threat. He says he sees messaging as a utility for which users are willing to pay regularly for, and that the company’s focus should be providing an effective and uncluttered service. The subscription revenue is steady income, and one that the company claims to enable it to be profitable, but it does not really put stars in investors’ eyes.

Many who question the wisdom and value of the purchase seem to see problems with WhatsApp being able to retain its leadership and resistance to the same revenue streams and service diversification as other apps have. Those who believe in the purchase, including Zuckerberg himself, seem to be placing their bets on WhatsApp as a singularly focused game changer; the only actor treating messaging as a staple standalone utility (which will apparently include voice calling later this year) for which users will pay to use. Where the VP of Tencent, which owns WeChat, seeks to extend the service beyond a single service to become a comprehensive ecosystem where users can carry out many activities, the Facebook purchase of WhatsApp (and those who validate it) symbolizes confidence that focused service apps with massive user bases will corner the market in the long term.

I don’t believe, as many do, that the $19 billion committed towards this purchase is some urgent and perhaps unwise attempt to crush any social sharing competition. I think it is part of Facebook’s desire to own and expand the dominant avenues of connections between people globally in a portfolio of largely separate and focused applications.  What exactly meaningful monetization will look like for WhatsApp down the road remains to be seen, but whatever it will be will not be related to ads, games or any extensive social-network sharing, as the lack of all that is precisely why, I believe, the app has reached its advanced position in the first place.

/Corinne

Corinne is a Consultant at Northstream

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