To no one’s surprise at all WhatsApp has let loose the news that it will indeed be placing ads on the app, in the Status section. The interesting part of this to us around here is, well, what’s the margin on those going to be? Sure, such estimations are rather like guessing the length of a piece of string but a little bit of background knowledge will tell us that the margin should be up at the 99% sort of level. Given they’ve a billion users or so, each of whom is going to be worth something to them, that’s going to be a nice addition to the bottom line of the parent company, Facebook. Quite how much there, well vide lengths of pieces of string. But why not guess – that’s so much fun after all.
The important thing to understand here is quite how few resources Facebook needs to devote to keeping WhatsApp running. Agreed, my information is a little old but I did get it direct from the company itself. They wouldn’t tell me what the running costs were, nor what the budget was, but they were willing to share that they had perhaps 200 engineers working on, expanding and maintaining WhatsApp itself. This isn’t much to provide a service to 1 billion people, not much at all.
Even at Silicon Valley rates it’s not much. Say an entry level salary of $100,000 year plus the same in restricted stock units per year. That’s $40 million a year. OK, let’s say they’re all more senior than that, it’s a rare talent to be able to work on this stuff, call it $500 k each – that’s still $100 million only.
Yes, obviously, $100 million is an “only” match only in the Silicon Valley universe. But now think about ads:
For almost 10 years, WhatsApp defied the odds and staunchly rejected placing advertisements in the app. Unfortunately, WhatsApp vice-president Chris Daniels confirmed with Outlook India that the messaging service’s opposition to ads would soon come to an end.
According to Daniels, WhatsApp will place ads in the Status section. This is the section that takes more than a few inspirations from Instagram Stories and lets you share text, photos, videos, and GIFs. After 24 hours, any content you put in the Status section disappears.
This is some serious level monetisation:
But times have changed at WhatsApp. Its founders have left, motivated in part by Facebook exploring advertising-based revenue models for the service without consulting them. The company introduced ways for the service to make money from businesses earlier this year.
That was always going to happen, obviously enough. No one is going to look at a business that size and decide to take no revenue at all from it.
Whether you like it or not, Status is ripe for milking ad revenue, having surpassed Snapchat’s daily active users.
WhatsApp apparently has some 450 million daily users, 1 billion more generally.
OK, so, how much can they make from each user? Say it’s $1 each user each year – we’re already talking about a 90% margin on that $1 billion in revenue. And $1 per user per year isn’t that much. That’s seeing 3 of the lowest priced ads out there each day. That’s what an ad supported site would get paid, not what the ad agency selling would make. And Facebook handles both of those itself, gaining both ends of the deal.
Or perhaps we might want to think a little more aggressively, even the other end of the spectrum. Facebook itself makes some $6 per user per quarter in revenue. Call that $20 a year. That’s $20 billion in revenue against still those same costs of $100 million isn’t it. We’re over 99% gross margin now. And we can go right out of reality to the ultimate bound, Facebook’s revenue per North American user per year is closing in on $100 a year. At which point they’d have a 99.9% margin if they could replicate that on WhatsApp.
No, they’re not going to manage that this year. But the future, well, who knows? I can’t see WhatsApp ads having a less than 90% margin for Facebook, would happily bet on a 99% in the near future and can imagine, but wouldn’t predict, 99.9%. That’s not a bad little business really, is it?