Facebook’s $19 billion acquisition, WhatsApp, lost $138 million last year

One of biggest technology deals for 2014 was the Facebook acquisition of Whatsapp for a cool $19 billion. The deal was announced in February this year. Facebook recently finalised the acquisition and closed the deal with a price tag of $22 billion thanks to the increased value of Facebook’s stock in recent months.

Now as Facebook’s results for third Quarter of 2014 are out, the company has also filed a detailed report with US stock regulator SEC on WhatsApp’s financial results. It pretty much confirms what has been an open secret about WhatsApp. That this isn’t the most profitable service given that Koum has always insisted with his no-ads policy.

Given that WhatsApp is essentially a free service (sure iPhone and Android users are expected to pay some $1 after one year, most users end up getting a free-service extension) with no ads, the source of revenue was never really there.

According to the regulatory filing by Facebook, we can see that WhatsApp’s total losses were close to $138 million in 2013 alone, against a revenue of $10.2 million. This is much more than the $3.2 million revenue in 2012, but the losses in 2012 for WhatsApp stood at $54.7 million, which means that in 2013 the messenger’s losses were more than double.

But it’s not all bad as this piece in The Verge notes, that out of WhatsApp’s losses in 2013, “a large part of that money went to paying out stock to employees.” If you look at the filing, WhatsApp spend close to $76 million on Research and Development in 2013, while they spent $30 million in marketing.

From the numbers, it does look like Facebook really paid a high price for this deal. According to this Bloomberg piece, “WhatsApp which had 400 million users in December, generated less than 3 cents in revenue for each one last year. By comparison, Facebook paid $55 per user when it acquired the company.”

So why pay so much for a service that obviously isn’t making any money? For starters, it was pretty clear that Facebook did this acquisition for the sheer number of users and the potential new users that are likely to come and join the service.

As we had noted at the time of the deal, Facebook is pretty much a “mobile company,” (Zuckerberg said so himself in 2012) and getting Whatsapp is a way to ensure that the company has key products in the three most important spaces in mobile which are: Social media, photographs (Instagram) and social messaging via WhatsApp.

Zuckerberg was also quick to reiterate the importance of WhatsApp during his investor call this time as well.

He said during the call, “One big priority for us here is messaging, and continuing to build and grow Messenger and now WhatsApp as well, as great services… We have a number of services which we think are well on their way to reaching 1 billion people: WhatsApp Instagram, and search are a number of them. And once we get to that scale, then we think that they will start to become meaningful businesses in their own right.”

It’s evident that after the 1 billion users on Facebook, Zuckerberg is hoping the next one billion will come on Instagram and WhatsApp and once that happens, it’s only then that they will focus on making them ‘profitable.’ He added that the aim was not to “monetise them very aggressively in the next year or two.”

So what about Facebook Messenger, why is that still there when Zuckerberg is talking getting WhatsApp to grow to the next 1 billion? The Facebook CEO was quick to point out the difference between the two services, something that tends to get over looked.

He said during the call, “SMS and WhatsApp are more for real-time activity. People have contacts on WhatsApp who they wouldn’t want to make friends on Facebook. The graphs are somewhat different.” And it’s true, you might not be Facebook friends with everyone on your Whatsapp or even add all your Facebook friends on WhatsApp. Additionally, the people you choose to interact with on WhatsApp, you might not interact with them on Facebook, even if they are your friends.

For Facebook, WhatsApp still makes sense, given that it has a lot of potential for growth. After all this is an ad-free, virtually cost-free service that allows for real-time messaging and if your network of friends is here, and constantly using it, you’re unlikely to leave. There’s no denying that WhatsApp has rivals, like Snapchat, WeChat, Line, but that’s hasn’t stopped the growth of its user base.

In August, Koum announced that the company has over 600 million monthly active users and he also pointed out that these are active users, meaning ones who use the account regularly and not just “registered” users. With registered users you could have a lot of people who aren’t actually using the service but have downloaded the app and completed the setup process.

So yeah, WhatsApp might not be making any money right now, but it’s potential is definitely big and this is something that Zuckerberg is still keenly aware of.