How Facebook Can Monetize WhatsApp

 | Feb 21, 2014 | 4:00 PM EST  | Comments
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There's been a lot of talk this week about WhatsApp making next to no money. Some people are wondering how Facebook (FB) can justify paying $19 billion for a mobile-messaging app with a weak revenue history. Forbes reported recently that WhatsApp only made $20 million in revenue by selling $1 downloads to users.

But Facebook CEO Mark Zuckerberg already has a playbook for making money with WhatsApp; he wrote himself at Facebook.

While Facebook continued to add hundreds of millions of users at the end of the last decade, many complained that the service made relatively little money. They couldn't understand why investors kept paying up at high valuations to buy into the social network. Remember when Goldman Sachs' private-client group invested in Facebook at a $50 billion valuation? Many laughed.

But Zuckerberg knew this simple truth: If you collect a billion users for a service that they keep coming back to on a regular basis, you can figure out lots of ways to monetize it. Eventually, he figured out the most efficient way to do that was by shoving ads on users' browser screens and mobile devices. Facebook played around with other types of services, like payments, gifts and virtual goods. So far, those revenue streams are small compared to ads.

But by buying WhatsApp, Facebook has acquired a service that's bigger than Twitter (TWTR), with more user engagement, for about a third less than Twitter's current market cap. It's remarkable, really.

So how will Facebook make money off it? Well, it won't be by shoving ads in between users' messages. In all likelihood, Facebook will do it through e-commerce.

You only have to look as far as Asia and see what Tencent (TCEHY) is doing with its WeChat and LINE apps. Tencent already figured out that it could let users pay for things such as taxis or goods via a payment mechanism in the apps. It also figured out how to do flash group sales. That's in addition to selling stickers in big volumes -- and notice that BlackBerry (BBRY) started selling stickers today, too.

So, there are many ways for Facebook to make loads of money off a service with a billion, possibly 2 billion, future users.

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