Did Facebook Just Make A Billion Dollar Mistake?

  • Facebook-owned messaging service WhatsApp recently announced that it will end its subscription fee.
  • The company will test new tools that will allow users and businesses to interact.
  • This article addresses why this decision might not be the best move for Facebook.

Facebook (NASDAQ:FB) owned WhatsApp has seen a rapid growth in number of monthly active users over the last two years, as detailed in the chart below. Between April 2013 to April 2014, WhatsApp grew its monthly active users by 150% in 12 months. The monthly user number grew by 60% between April 2014 to April 2015.

By September 2015, WhatsApp had 900 million monthly active users. This could have translated to $891 million in annual revenues based on their $0.99 annual subscription fee. As of their last annual report, Facebook had $12.466 billion in revenues. The lost WhatsApp revenues potentially represent ~7% of Facebook's total revenues (percentage will be less when Facebook report earnings on the 27th of this month).

Source: Statista

WhatsApp did something noble for users but not for business. They announced that the company will no longer charge subscription fees on WhatsApp. The company said that the subscription model has not worked because most users do not have access to a debit or a credit card.

"For many years, we've asked some people to pay a fee for using WhatsApp after their first year. As we've grown, we've found that this approach hasn't worked well. Many WhatsApp users don't have a debit or credit card number and they worried they'd lose access to their friends and family after their first year. So over the next several weeks, we'll remove fees from the different versions of our app and WhatsApp will no longer charge you for our service." - Making WhatsApp free and more useful." -WhatsApp Blog.

Maybe the problem is not that many WhatsApp users do not have access to a debit or credit card but that Facebook's only acceptable mode of payment on WhatsApp is a credit or a debit card.

This is the major problem inherent in multinational firms attempting to penetrate developing markets, they want to impose technologies from developed worlds into developing markets. You have to meet people where they are most comfortable not where you are most comfortable.

If you have an active user on WhatsApp it means, at the very least, they own a phone. 85% of people in emerging markets are on pay-as-you-go mobile subscriptions. The other 15% either do not use data plans (does not matter because they cannot be WhatsApp users) or they can afford monthly subscriptions (most likely they own credit or debit cards). Therefore, if your users own smartphones and they are on pay-as-you-go, that means that they can buy minutes and send minutes with a dollar equivalent as payment. All Facebook needs to do is to partner with local mobile phone carriers.

In addition, the announcement was self-contradictory. On one paragraph the blog mentions that "many WhatsApp users don't have a debit or credit card number" but the new plan is to test tools that allow, among other things, "communicate with your bank about whether a recent transaction was fradulent." Why will the "many users" who do not have credit or debit cards suddenly want to talk to their banks?

"Starting this year, we will test tools that allow you to use WhatsApp to communicate with businesses and organizations that you want to hear from." - Making WhatsApp free and more useful. That could mean communicating with your bank about whether a recent transaction was fraudulent, or with an airline about a delayed flight. We all get these messages elsewhere today - through text messages and phone calls - so we want to test new tools to make this easier to do on WhatsApp, while still giving you an experience without third-party ads and spam."-WhatsApp Blog

Furthermore, why take out ~$1 billion in revenues before fully developing an alternative solution? Why didn't they roll out a new potential avenue and see how that resonates with people before pulling the plug on the old one that worked.

"Starting this year, we will test tools that allow you to use WhatsApp to communicate with businesses and organizations that you want to hear from." - Making WhatsApp free and more useful." - WhatsApp Blog

Besides, allowing WhatsApp users to communicate with their banks is very risky. People in developed nations are more aware about cyber attacks and yet identity theft is still an issue. If people in developing nations become complacent with their bank security knowing that a bank can reach them through a messaging app, it makes them more vulnerable to identity theft. This is detrimental to the banks and to WhatsApp because it will only increase people's skepticism towards online banking and it can create a mistrust of WhatsApp.

Mobile phones are the easiest to attack. People connect to WiFi networks easily in restaurants, coffee shops or airports. The United States Computer Emergency Readiness Team (U.S-CERT) in the report "Cyber Threats to Mobile Phones" outlined how "smartphones' popularity and relatively lax security have made them attractive targets for attackers." Meaning that WhatsApp can open users to a whole new world of problems.

Therefore, even after slashing ~$1 billion in potential revenues, the new initiative might not work. Depending on how the new initiative will be set-up, it might become an annoyance to people who are used to the current WhatsApp system. The common adage, "when you go to Rome do what the Romans do" applies to Facebook in its global initiatives. As Facebook attempts to penetrate developing countries and monetize its initiatives, they need to meet people where they are mostly comfortable and not where Facebook is mostly comfortable.

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