“I’ll do anything for free stuff.” ~ Sandra Bullock
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My Grandparents were very wise. They always knew the right parable and the life lessons behind them. Who hasn’t been told: “if something looks too good to be true, it is”? Did you ever hear the same?
The word “free” is considered the most powerful word in the marketing dictionary. It’s so powerful we made sure we used it in our final landing page (not online yet). The reality is that everyone loves "free stuff." Third caller gets “free” tickets. Who wants a “free” T-shirt? On your next pizza order, you get a “free” drink. Buy one-get one “free”!
But when is free really not free at all?
Several technology providers now offer you “free” use of their services. Just download their “free” app and you can do the coolest things ever. This is AMAZING considering many of these companies spent years developing this technology and millions of dollars putting out a product that doesn’t cost a cent. How is this possible? In technology, the devil is in the data, but what is the most sensitive data of all?
Let me set a quick scenario and see what you think. Close your eyes and imagine handing over your unlocked phone over to a co-worker, boss or parent. They can now read every text…every email…see every picture and every video. It doesn’t get much more personal than that. In 2015, phones carry conversations, memories, passwords, credit card information and possibly some private things you don’t want others to see.
Several technology giants have access to your information at any given moment. You probably already knew that. What may surprise some of you is that the biggest violators of all are none other than texting apps.
In the world of texting, you most likely use one of the following options. You either use an "app" (like WhatsApp, Viber, Skype) or a "carrier" (like Sprint, T-Mobile or AT&T). With carriers, you are billed for your service but probably do not think about the actual cost of your text messages as they are often rolled into a “data plan.”
With "Apps" on the other hand, the fee can range from free to $1 for a year. This triggers a few questions:
1) How is that possible?
2) Does using a "free" app eat up my data?
The answer to #2 is "yes" it does eat up your data, so it's far from "free." Here is a link from the biggest and baddest texting "app" in the world. "WhatsApp Messenger uses your phone's internet connection to send and receive messages, pictures, audio, video, location, and contacts. As long as your phone is not roaming and you have not exceeded your data limit, messaging over WhatsApp should not cost you extra."
So it's eating your data...and you pay for your data? OK...but it's free? Let me summarize this in another way..."as long as you have paid for the data we eat up with our app, the service is free."
”if you pay for it, it's free.” Let's let that slide for the time being, because these app companies don't make their money off THAT kind of data.
Back to WhatsApp, you may think that if they are able to give their service away or charge about 8 cents a month that it must be very inexpensive to run a communications company. Is it cheap to create an App and run an infrastructure? The short answer is no. Designing and developing a product is half the battle, then you have all the following costs (and more):
-Server IT Staff
-Software Infrastructure Costs
Hosting by itself can costs hundreds of thousands of dollars a month. After all, every text, image and video is stored for years and each company is on one big “data plan” (just like your cellular phone), only your now carrying the data of all of your customers. WhatsApp claims to not store your texts (that they are stored locally on your phone driving up the data costs). Will that continue with the Facebook purchase? You be the judge.
That partial list above is a whole lot of expenses for a business to give away a product “for free.”
These texting app companies are not charities or altruistic ventures by secretive billionaire “do-gooders.” All businesses need to make money, right? So where do these "free" apps make their money?
For the purpose of this article, let's take a look at the big boy on the block: WhatsApp. WhatsApp is software that allows you to text and make calls using the Internet. WhatsApp currently handles over 60% of the world's text messages. Facebook paid 19-21.3 BILLION dollars for the messaging app (depending on who is reporting). Why so much money? Surely WhatsApp must be cranking in money hand over fist to secure such a massive valuation? The answer, which may shock some of you, is no.
To better understand this seeming contradiction, we have to turn to WhatsApp’s business model. WhatsApp is "Free" (there is that word again) for the first year, then $1/year thereafter.
So they must sell ads? Nope...WhatsApp runs no ads.
Quick recap...free for a year...no ads...$1 every year thereafter. Maybe they have so many $1 customers they make a killing? Good theory...
Well, per Josh Constine of TechCrunch "In the six months ending June 30, 2014, WhatsApp brought in $15.921 million in revenue, but had a net loss of $232.5 million. However, $206.5 million of that loss was for share-based compensation expenses and issuance of common stock below fair value. Its net cash used in operating expenses during the first half of 2014 was $13.5 million."
What does that mean in laymen's terms? It means in 6 months they lost 13.5M in real money and 206.5M in underpriced stock based compensation (we can call it hypothetical money or awesome accounting, whichever you prefer.)
So, Facebook paid almost 19-21.3B for a company losing an average of 2.25M every month? That's OK...WhatsApp probably has badass intellectual property (IP) that no one else has that will help Facebook corner the entire messaging market? WRONG – no patents or IP were secured by Facebook in this purchase. No IP? ”Facebook acquired no patents.”
This means anyone with money and time can technically recreate WhatsApp from their interface to their pricing...they just can't call it "WhatsApp." This article estimates you could recreate WhatsApp technology for about 250k (although I think the person making that estimate understands software very well, but not server infrastructure costs). ”How much to develop WhatsApp.” Here is ”how to valuate a software company.”
Certainly the markets must be dying laughing at this purchase!
Well...let's ask the same esteemed reporter Josh Constine who provided us the numbers showing WhatsApp was losing millions every month. Fast forward to 1 year after the purchase. He has to think the Facebook purchase was crazy, right?
Josh answers the question of whether this was a mistake with a simple “Wrong.”
He continues, "Instead, Facebook possesses the most popular messaging app, and has neutralized the biggest threat to its global domination of social networking."
He’s not the only one saying the WhatsApp purchase was a bargain. I couldn’t find a recent article that said otherwise. After all, WhatsApp had 450M users when Facebook purchased them, now it boasts 700M users - and counting. ”The consensus is that WhatsApp for 19-21.3B was a bargain.”
Let's look at how Facebook itself valued this purchase.
User Base: $2.026 billion
Brand: $448 million
Technology: $288 million
Other: $21 million
$15.314 billion is leftover from the total purchase price? What is that 15.314B for?
That my friends, is the "catch." That is the “too good to be true.”
This acquisition of WhatsApp by Facebook can be boiled down to one sentence: Facebook paid 19-21.3B for the immense amount of personal data WhatsApp has on all of their users.
If you use WhatsApp, this means your data.
Listen, I love Facebook. I respect the hell out of that company-but when it comes to data and privacy Facebook has a track record that could be called "dubious," at best. Facebook is a company that Edward Snowden exposed as selling your data to the government. Facebook has been accused of being involved in governmental social experiments. ”DOD mood experiment through Facebook?”
This is a company that ”tracks your behavior when you log off.”
This is a company that allows its ” messenger app to use your microphone to record private conversations.”
So is it reasonable that WhatsApp, who promised to never sell consumer data would keep that promise? No. No, it isn't. You see, in the "real world" of business no company can lose 2.25M/month and stay in business. Businesses must make a profit, and the free model is unsustainable...unless they sell the data. ”The skepticism over how your data will be handled is shared by many.”
Ask yourself, why would Facebook pay so much for the data with a company that loses money every month, and then not use the data? If that’s the bill of goods that is being sold to consumers I understand why, but does it make sense?
So in the case of WhatsApp your data may be incorporated in Facebook or sold to the highest bidder…or even the lowest bidder. That's the enormous price you pay when you go with a free messaging app…you give up your intimate and private conversations, pictures, videos and details.
Also keep in mind we are just covering WhatsApp, which is the only one with a published model that includes a fee. Viber and Skype charge nothing. Ask yourself how that can possibly be sustainable without a backend revenue stream that involves selling your personal and most sensitive data?
So, do the free messaging apps look too good to be true? You tell me…how important is your privacy to you? Do you mind the thought of strangers, corporations and/or governments having access to your most personal conversations?
Is your “free” app really “free?” There is a catch…there is ALWAYS a catch. Be mindful of that very thought when using the free apps…because as our wise elders would also have said, “you get what you pay for.”
ABOUT THE AUTHOR:
Eric Beans is CEO of Texting Base, Inc., out of Orlando, Florida. Texting Base is a cloud-based software that adds efficiency and power to business texting communications. Combining the efficiency of a “mass text” and the effectiveness of a personal text message, Texting Base uses patent pending software to allow businesses to build relationships with their customers like never before. Prior to Texting Base, Eric was a partner in Premier Mortgage Capital, Inc., a nationwide state charted Mortgage Company that grew to over 1B/Year in originations. Eric is an inventor, investor, and entrepreneur. Eric has experience in writing, radio, TV and entertainment.