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Why is WhatsApp Worth $19B? How do Apps Even Make Money?

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Some build apps for fun. Others for financial gain. No matter your interest in apps, here is something for you: Facebook just purchased WhatsApp…for $19 billion. $19 billion—yes, with a “b”!

What? Why? How is it possible for an app to be worth so much?

WhatsApp was built to be a “better SMS alternative,” according to the company’s website (and SMS stands for short message service; better known as text messaging). The app allows for cross-platform messaging – across the globe – with users not having to pay for the texts they send and receive. Instead, WhatsApp “uses the same internet data plan that you use for email and browsing.”

Sounds cool. Sounds neat. But does it sound like $19 billion?

Summarizing the details of a recent Forbes.com post, WhatsApp is worth the price tag to Facebook because: it will help the social network grow globally, it is the new SMS, it will be (and has already been) coveted by other companies, and it “is the only app we’ve ever seen with higher engagement than Facebook itself,” according to Mark Zuckerberg.

Moving away from WhatsApp in particular, and just looking at the transaction on a very basic level…$19 billion for an app; a little piece of software downloaded on your mobile device. What else could you buy for that sum of money instead? How about the most valuable sports franchise in the world, Manchester United (valued at $2.23B by Forbes.com), along with Real Madrid ($1.88B), the New York Yankees ($1.85B), the Dallas Cowboys ($1.85B)…get the picture? It’s easier to wrap your head around the value of these teams. Man U has over 650 million fans, the Yankees own a piece of the most profitable regional sports network in the country. Value here is more tangible.

But how does an app make money?

Most apps generate revenue through the following:

    • Purchases: Just like other products, apps earn money when they are purchased. $.99 per purchase might not sound like a whole lot, but it adds up (Angry Birds sells for $.99, just saying). Then of course you look at an app like Minecraft: Pocket Edition that sells for $6.99 and made $1 million in iOS App Store revenue—on Christmas day alone.
    • The “freemium” model: Even apps that are free to download make money. This freemium model allows users to download the app for free, but will then charge for extra features, lives, power-ups, and other in-game resources. Think Candy Crush and Clash of Clans.
    • Advertisements: You’ve probably noticed advertisements on your favorite apps. (How can you ignore them?) Just like ads in magazines, on TV, etc. companies pay for their products and services to be seen within mobile apps.

All of this considered, there is one big thing missing. I mean, WhatsApp earns $.99 per download on iOS and $.99 per year on other platforms (after the first year). Even with a large user base, the company’s revenue might only be hundreds of millions of dollars. There is a large, unfilled gap between hundreds of millions and $19 billion.

So why was so much offered for WhatsApp? Because that is how much the app is worth to Facebook. 450 million users, growth opportunity, future prospects, keeping the app out of the hands of competitors. All of these things have a price tag.

Something to keep in mind when building apps. There are many ways to monetize your creations, but who knows the value others will place on them.

Header image from Sam Azgor, via mashable.com.

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