As the dust settles from the bombshell that was Facebook’s $16+ billion acquisition of WhatsApp, most of the public’s attention has moved from the softer side of the story — like one cofounder’s rise from welfare to wealth and another’s transition from failure to Twitter employee – to the cold hard facts. The primary fact under the spotlight is the price tag attached to the deal, the biggest of its kind in over a decade.
How exactly, most have wondered, can Facebook prove that WhatsApp is profitable enough to justify the billions of dollars in expense?
In the week that has passed since news of the merger broke, Facebook’s higher-ups have generally avoided replying to that question with talk of potential earnings. Instead, they have shifted focus to the overall potential of the company, the growth of its user base and the potential for profit that can be made off that base in the future.
“The primary thing we focused on is how healthy the network is and how fast it’s growing, they are on a path to get to a network of one billion or more in a relatively short period of time,” Facebook CFO David Ebersman said during a conference call last week. “…The service is tremendously useful. Messaging is the No. 1 activity on smartphones. This is a valuable service people are prepared to pay for.”
In general, the social networking giant has offered a response that amounts to something along the lines of, “It won’t make us money any time soon, but just trust us, it’s worth it.”
A number of critics have given Facebook a vote of confidence over the acquisition, giving a thumbs up to the fact that Facebook has captured a platform that has 450 million active users on it, regardless of what the social network will do with it. Others, though, have not been equally impressed, with some even going as far to criticize the acquisition as symptomatic of a new tech bubble.
For those skeptics, a startup from the far east similar to WhatsApp is making the type of financial progress that provides an example of what a popular mobile messaging app can achieve.
Kakao, a South Korean company that occupies the same space as WhatsApp, has 133 million registered users and is generating revenue, seemingly through the process of trial and error.
“We’re trying all kinds of different things and services. You can call it our survival instinct,” Kakao CEO Sirgoo Lee told the Wall Street Journal.
Cheng, who said the company stands out as a “laboratory of experimentation” in its industry, was also able to yank other interesting pieces of information from the CEO.
Kakao, which the Journal says is so popular in South Korea that it runs on 93 percent of the country’s smartphones, has ventured into the business of in-app purchases, which notched the company $42 million in sales and $6.5 million in profit in 2012. Kakao Corp. hasn’t released its numbers for 2013, but it is preparing to file an IPO, which would see the company hit the stock market at a potential value of over $2.5 billion, according to the WSJ.
More importantly, though, the progress that the mobile messaging app has made in the past two years makes for a pretty strong case for why Mark Zuckerberg has every chance of making WhatsApp a financial success.
Just consider the numbers. Kakao’s $42 million in revenue for 2012 was generated in a year during which the South Korean company grew from boasting just over 30 million users in January to 70 million users in December of that year. Kakao achieved this mainly through packing advertisements, mobile games like Candy Crush and other services, such as an Instagram-like feature, into its app.
Furthermore, as Cheng reports in WSJ, the company accomplished this by trying many avenues, of which only three have become steady streams of revenue.
In the interest of keeping score, that’s $42 million generated in 12 months while gaining 40 million users to grow to 70 million, with over 280 employees.
To compare, WhatsApp boasts 450 million active users, 70 percent of whom use the app everyday, powered by 55 employees whose sole focus has been to improve the quality and efficiency of their services since day one.
Their growth and popularity have been attributed to that focus, with their user-friendly “no games, no gimmicks” interface becoming a fan favorite amongst those whose only interest is to enjoy a great way to communicate with friends and family while saving money.
Facebook has recognized its interface as the key to its newest asset’s success and, since acquiring WhatsApp, has vowed to stand out of the way and allow CEO Jan Koum and cofounder Brian Acton to continue leading the messenger with no change in tactics. That is, until a certain point.
Facebook’s upper brass may be unified in the “growth is everything” message, for now, but it has also implied that there is a targeted tipping point at which they will aim to cash in on their progress.
“We are excited by where we are going to be five to 10 years from now,” said Koum, who will join Facebook’s board as part of the deal. “…We have potential to have five billion users potentially giving us money through this subscription model.”
If Facebook were to generate revenue through, as Koum says, “this subscription model” (WhatsApp demands $.99 per year from the users it does charge), the math becomes fairly simple. A billion users “prepared to pay” for WhatsApp service could mean nearly $1 billion revenue generated per year. That type of cash flow would put the company well on par with companies like Tesla, which generated $761 million in revenue in 2013, and Twitter, which has half as many users as WhatsApp and generated $664 million last year. Furthermore, both of those companies reached valuations well over $20 billion in the last six months of 2013, despite operating at a loss and, thus, generating no profit.
The prospect of a profiting, well-run machine like WhatsApp generating nearly a $1 billion annually is enough to consider Facebook’s purchase a sensible move, and that’s without considering what the company can do beyond subscriptions fees for a billion users.
As Kakao has proven, messengers can generate money when they venture into other spaces. Meanwhile, Kakao’s much touted $2 billion present-day valuation, after being valued at around $454 million in May 2012, implies that the Korean company made great strides in increasing cash flow last year.
But even without the benefit of knowing the exact amount of progress Kakao made in 2013, which could give even greater indication of how WhatsApp could prosper, taking its numbers from 2012 lends a sensible benchmark by which WhatsApp can be judged.
If Kakao could generate tens of million in revenue in a year during which it’d grown to process 4.2 billion messages daily, the mind can’t help but wonder about the hundreds of millions that a Facebook-backed WhatsApp could make after it grows from the 19 billion messages it currently processes every day.
Indeed, if WhatsApp found a way to match Kakao’s pace of $42 million generated with a mean of 55 million users in 2012, Mark Zuckerberg’s new asset could see itself making over $760 million in a year.
Furthermore, while Zuckerberg himself has noted that advertisements aren’t the perfect way to monetize a messaging service, it wouldn’t be farfetched to think he’d consider using ads as a supplement to an already reliable stream of revenue. After all, though Jan Koum might be well within his right to object, it is in Facebook’s DNA to use advertisements, as Elite Daily compatriot Aaron Kaufman noted.
The comparison of metrics can go all day long, but the point will remain the same. If speculation is to be had over 1) How WhatsApp can grow to being worth the $16 billion Faceboook paid for it, and 2) How it can generate revenue, a look at its counterparts can only be seen as due diligence.
Companies such as Tesla and Twitter are being valued at over $20 billion while generating around $750 million in revenue, without making profit. Meanwhile, Korean sensation Kakao has shown a messenger’s capabilities to make money, even without charging a subscription fee.
Considering those companies’ present fortunes and juxtaposing them with WhatsApp’s future aspirations of reaching over a billion users reveals a clear avenue to success for Facebook. Even through user subscriptions alone, if WhatsApp did indeed accomplish its goals, in terms of customers, the messenger could be looking at the type of revenue that would more than justify a $16 billion valuation in today’s market.
The conversation of how Facebook could make its recent purchase “worth it” could end right there, but the prospect of further monetizing WhatsApp through other in-app purchases in a way that is reminiscent of Kakao’s success could further increase its value.
In fact, so numerous are the reasons to believe that, with enough users, WhatsApp could be well worth its price tag that a shift in focus might be required. To put it simply, the question is not how WhatsApp could be worth $20 billion; the question is whether or not the company can get to the one to two billion in users that it desires, and how fast?
With a company on its hands whose popularity is only set to increase, companies around it that are being valued at similar amounts with no profit, and similar companies generating significant revenue with much fewer users, Facebook has every reason to believe that WhatsApp can grow into a company worth every single penny and stock unit that was paid for it.
The aim, now, as Mark Zuckerberg has said all along, is to gather the amount of users that can take them there.
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