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February 2, 2016updated 04 Sep 2016 10:40pm

UX and mobile ads: How WhatsApp, Facebook and Gmail embraced new business models

News: “A billion dollars is cool."

By Alexander Sword

"A million dollars isn’t cool, you know what’s cool? A billion dollars."

In the 2010 film the Social Network, Sean Parker presents Mark Zuckerberg with a vision of Facebook based on allowing the user base to grow before introducing advertising.

It is no coincidence that Facebook-owned WhatsApp crossing 1 billion users comes almost simultaneously with its announcement that it has scrapped the annual subscription fee and is planning to open the platform up to businesses.

The company claims that this new approach will not involve third-party ads, but will simply allow its users to "communicate with businesses and organisations that [they] want to hear from."

"We’ve dropped the subscription fee and made WhatsApp completely free," wrote Mark Zuckerberg, Facebook founder and CEO on his Facebook page following the announcement. "Next, we’re going to work to connect more people around the world and make it easier to communicate with businesses."

Facebook bought the platform for $19 billion in 2014. Since then, WhatsApp has more than doubled its user base for a number of reasons. Compared to traditional SMS, the app streamlines multi-party communication through its group chat feature, and as it is a Voice over IP and Text over IP service it can be used when cellular coverage is unavailable or prohibitively expensive.

Based on Facebook’s history, one might wonder if one billion users is a sort of magic number for monetising a platform. Certainly adoption is more likely to take off if the user isn’t bombarded with advertising.

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This is especially true on a mobile device, where the screen space is limited and users are much easier to alienate.

However, cracking it is the difference between winners and losers in the internet market. As Yahoo sheds a large chunk of its workforce, its perceived failure to engage with the increasingly lucrative mobile market has been cited as one of its biggest failures.

"[Chat apps] possess huge user bases and need to make it easy for brands to integrate and use their platforms as they monetise communications between customers and brands", said Chris Moore, VP Chat Apps, Nexmo.

"WhatsApp should start by focussing on its dominant markets of North and South America and EMEA, where it has cultural similarities with the brands it will want to work with."

Martin Garner, SVP at CCS Insight, said that the approach is a "formula" for success.

"Mark Zuckerberg recently described his formula as: first build a great consumer experience; then introduce ways in which people can interact with businesses; then it feels natural to both consumers and businesses to dial up the advertising. This is what Facebook plans to do increasingly with Messenger, with WhatsApp and with Instagram."

"Only once you have that ramped up to a good scale, can you really start dialling up advertising," said Zuckerberg on the Facebook earnings call.

The idea is that by the time the advertising is introduced, the user is so much a part of the app community, has so many friends on there and considers it so essential that negative changes to the user experience will not drive them away.

If this is also Zuckerberg’s plan for WhatsApp, then we are currently entering the second phase, and may need to expect advertising in the future.

This could be the future of Facebook’s other platforms as well. The Messenger app has around 800 million users while Instagram has 400 million.

Of course, this fact will present challenges of its own if the platforms are not considered sufficiently different to each other.

"As the owner of four key consumer web services (Facebook, Messenger, WhatsApp, Instagram), one of the challenges Facebook will have as it monetises them all will be to show advertisers that it’s worth spending on several of them and that the services are not just substituting for each other," said Garner.

Arguably, Google followed a similar model with Gmail, which has coincidentally also just crossed the 1 billion user threshold. Google focused on building a free service that was enjoyable to use before bringing in advertising.

This may, then, be the business model of the future: hook them and then advertise to them. It certainly seems to be successful; Facebook made $5.841 billion in revenue and $1.562 billion in net income in its Q4. Meanwhile, Google generated revenues of $21.33 billion and $4.92 billion in net income. All of these figures are on the up.

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