Eliminating a fee charged to hundreds of millions of users may seem like a crazy move, but in the case of Facebook's (FB) WhatsApp, it's a good bet the step will lead to even more revenues and profits in the future.
The popular messaging app, which just announced on Monday that it had reached a billion users, recently eliminated its 99-cent annual subscription fee that was charged to users after a year of free service. In a Jan. 18 blog post explaining the change, Jan Koum, WhatsApp's co-founder and CEO, said instead of featuring third-party ads to make money, the company would be experimenting with business-to-customer services.
"That could mean communicating with your bank about whether a recent transaction was fraudulent, or with an airline about a delayed flight," wrote Koum.
Analysts said making WhatsApp free is necessary if the platform and Facebook, which acquired WhatsApp in 2014, are going to continue as top competitors in the global messaging industry.
Facebook CEO Mark Zuckerberg said in the company's earnings report last week that WhatsApp and Facebook's other messaging platform, Messenger, will start to build out business applications that fit with the respective user bases in mind.
Facebook is a holding in Jim Cramer's Action Alerts Plus portfolio.
"It has become clear that Facebook is the most efficient and effective company when it comes to monetizing a large user base," wrote Cramer and director of research Jack Mohr. "The company and its agile management team are outdoing their peers in all categories and they are just getting started on what is promised to be a long, profitable journey."
Facebook doesn't break out WhatsApp's revenue in its SEC filings, but the company's move to consumer services is about more than just recouping lost revenue, however, said Jeff Richards, a managing partner at venture capital firm GGV Capital, which is based out of Menlo Park, Calif., and China. It's about disrupting the way customers find and buy products and services.
While WhatsApp's subscription model brought in significant revenue, it's now more important for the company to attract and keep users if it is going to compete with WeChat, a popular free messaging system by Tencent (TCEHY) that is WhatsApp's equivalent in China and that generates large amounts of revenue by enabling in-app purchases and e-commerce.
However, Facebook had previously urged patience among its investors regarding WhatsApp's revenue growth, saying monetizing the service may take some time.
"We currently monetize WhatsApp in only a very limited fashion, and we may not be successful in our efforts to generate meaningful revenue from WhatsApp over the long term," the company stated in its 10-Q released in November.
WeChat already integrates consumer requests and instant payment into its service, and users often use it to buy items from purses to pizza.
Richards said eliminating subscriptions was a step toward eliminating any barriers to WhatsApp's popularity while it competes with WeChat for the "next billion" mobile users and "hundreds of billions" in transactions.
"From my vantage point, this was both inevitable and irrelevant in the long-term game that is being played out," he said. "Getting rid of subscriptions is a blip in the battle. Moving to a model with more functionality and full-fledged transactions capabilities, a la WeChat, is where the market is headed."