Weekly Business Saga

WHATSAPP: Whats up with its Business Model?

Authored by Dhruv Paniya, Student at School of Law, NMIMS Indore

A brief history of WhatsApp

WhatsApp was incorporated in the year 2009 by two former Yahoo employees, Jan Koum and Brian Acton. It is a free messaging app that allows its users to share photos, videos, or messages using the internet. It started with a seed funding of 250000 USD which came from 5 ex-Yahoo employees who were also friends with Brian Acton. With over 5 billion downloads, it is the most widely used messaging app in the world. In many parts of the world, it works as the primary mode of communication. It is currently owned by Facebook but it operates independently.

Business-cum Revenue Model

WhatsApp executives had initially planned for earning revenues by charging a subscription fee of 1 USD annually. However, this fee was never charged. WhatsApp received its first funding of 250000 USD from 5 ex-Yahoo employees/friends. The second round of funding was from Sequoia’s Capital, which invested a total of 60 million USD in WhatsApp. It is this financing that provided income for the staff of 50 who was then working at WhatsApp. After WhatsApp was acquired by Facebook, it started a new App called WhatsApp for Business. It is this app that generates revenue for WhatsApp. The moot question is how does WhatsApp earn money from this model? In fact, the innovative manner whereby WhatsApp earns revenue is by charging businesses for late replies. In actual practice, this means that if a business replies to a user 24 hours after receiving a message then a fixed amount is charged. This amount varies from country to country.

Investors and Acquisitions

Sequoia Capital invested around 60 million USD in WhatsApp in the year 2011. It was a spectacular investment as this amount converted into 3 billion USD, assuming that Sequoia held a 20% stake in WhatsApp after the latter was acquired by Facebook in 2014.

WhatsApp was acquired by Facebook in the year 2014 for 19 billion USD including 4.59 billion USD in cash and the remaining amount in Facebook stocks, making it the biggest deal in the history of software acquisitions. WhatsApp got lucky because when the deal was finalized in October 2014, Facebook’s share price rose, adding another 2.1 billion USD to the deal which took the total to 21.8 billion USD. Jan Koum received 6.8 billion USD and Brian Acton 3.5 billion USD out of this acquisition. Jan was also inducted on the Facebook board. Even after the deal, WhatsApp continued working independently with Jan acting as the Chief Executive Officer.

Technologies 

Whatsapp is a messaging app that uses XMPP i.e., Extensible Messaging and Presence Protocol. Upon installation, a personal user ID is created using the mobile number of the user. Whatsapp lets the user send messages, photos, videos, etc. through its platform. Initially, WhatsApp was only compatible with IOS devices; eventually, it was released for Android too. When WhatsApp was first launched, it only supported messaging.  However, in 2015, the call feature was also added. Similarly, in 2016, video calling was also incorporated into WhatsApp. A feature to delete messages sent by mistake was started in 2017, which helped the user to delete the messages within a 7-minute frame after sending them. One of the most important technologies that Whatsapp uses is end-to-end encryption which was incorporated in the app in 2014. It did so in partnership with Open Whisper Systems, a software development group. End-to-end encryption ensures that messages sent, or calls made, remain private between the two users. No other person can hear the calls or access the messages and videos, not even Whatsapp. WhatsApp messages are encrypted by Signal protocol and WhatsApp calls are encrypted by Secure Real-time Transport Protocol.

Revenues and Profits

Whatsapp is being used by almost 2 billion people. Such an enormous user base assures the company a considerable amount of revenues and profits. Facebook does not share the revenue of WhatsApp. It is for this reason that the exact revenue or profits are not known to the public. However, the estimated revenue of WhatsApp for the fiscal year 2014, 2016, 2018, and 2020 are 1 million USD, 0.2 billion USD, 1.3 billion USD, and 5.5 billion USD respectively. The revenue for WhatsApp in India for the fiscal year 2019 was Rs. 6.84 crore and profits of Rs. 57 lakhs.

The Contentious Privacy Policy and its Impact

Recently, WhatsApp rolled out a new privacy policy, mandatory for its users. In case the user refused to fall in line, she would not be able to access its services. A deadline was set for the same, but it was extended due to the resultant uproar by the users. The new privacy policy gathered a lot of criticism since the intention was to share the data of the users with the parent company, Facebook. In the weeks following this announcement by WhatsApp, rivals such as telegram and Signal saw a growth of 1200%. This included an increase of 25 million Telegram users, just days after the announcement of the policy. This clearly demonstrates that the new privacy policy had a significant impact on customers. Many of them were apprehensive that their data would be shared with third parties. Soon after the uproar, WhatsApp clarified that the new privacy policy will not affect the user and that the end-to-end encryption would stay intact, ensuring the privacy of the users. Although the new policies were beneficial for WhatsApp rivals, it did not affect the growth of WhatsApp to a great extent, even though it lost some users in the weeks following the announcement. WhatsApp has been in this sector for quite some time now, and ups and downs are part and parcel of the game. In the long run, WhatsApp is here to stay.

China and WhatsApp

In 2017, China added WhatsApp to its list of banned apps. However, WhatsApp was not very popular in China at the time of the ban as it only had 2 million users in the country. Therefore, the ban didn’t affect the WhatsApp business much as it was still in the nascent stage.

Whatsapp Payments

WhatsApp Pay was fully launched in India in November 2020, although a trial had started way back in 2018. As of now, WhatsApp Pay is not a huge success in India as it accounts for only 1.7 million UPI transactions out of the 6.7 billion transactions processed in the country since its release in November 2020. People are still not using WhatsApp Pay as the primary mode of payment. This seems to indicate that it still lacks the trust of the users. WhatsApp officials state that even though WhatsApp Pay is not a success right now, it will prove to be a huge success in the long run. This assumption that WhatsApp Pay will be successful in the future is unsubstantiated as it has strong rivals such as PhonePe, G-Pay, Paytm, etc. These companies have captured the market share dominantly and their strong customer base and trust make it obvious that they will continue to dominate the market in the future too.

Conclusion

In the last one decade, there have been numerous technological inventions which have changed our life to a big extent. When we talk about communication or chat nowadays, the first thing which comes to our mind is WhatsApp. Also, due to the COVID-19 induced lockdown, it has become a primary mode of communication for almost everyone including students, businesses, educational institutions, big corporations, etc. WhatsApp grabbed the opportunity when no one else could imagine its potential. It provides an ad-free platform where people can chat with each other seamlessly and which is much cheaper than the normal messaging apps. Also, the one unique feature which attracts users is the end-to-end encryption, which ensures that none but the people involved in the conversation can access the messages or files. These features make WhatsApp very safe to use. In the long run, there may be other apps that can or will compete with WhatsApp; but as it appears today, it holds its position firmly among all the users. 

Edited By: Ayush Verma

*Disclaimer: The content of this article is intended to provide a piece of general information. The views are expressed by the Author solely and BFTLR may or may not subscribe to the views of the Author.

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