Facebook’s acquisition of WhatsApp for at least $16 billion has minted dozens of new millionaires and billionaires this week, but there was another big winner in the deal: Parents and their teenage children, who have most likely saved hundreds or even thousands of dollars in texting fees thanks to the hugely popular messaging app, and will continue to do so after the deal.
Before WhatsApp — and Line, Viber, WeChat and a few other messaging apps now being hungrily adopted by young people and adults across the globe — the main way to send a message from one phone to another was through SMS, a technology that routed the text through the same infrastructure that mobile carriers used to handle voice calls.
To the carriers, these texts are essentially free to provide. Each text occupies a minuscule amount of bandwidth on their airwaves, and it rides across the infrastructure that they have set up to provide voice calls.
But because there is little competition in SMS — after you sign up for a carrier, you cannot send your SMS messages through any other provider — carriers once charged exorbitant rates for texts, minting huge profits.
In the United States, until recently, Verizon charged 20 cents a text to customers who did not sign up for a messaging plan. Those who did — at $5-$20 a month per phone — could bring their costs down to as low as half a cent a message, although that was only if 5,000 messages were sent a month. AT&T’s rates were similar, and so were those of many carriers around the world.
These prices proved enormously lucrative for carriers. Analysts’ estimates put global SMS revenue at around $100 billion a year annually — money that was essentially all profit for carriers.
WhatsApp did not start out as a messaging app. Its earliest version, introduced in 2009, was more of a mobile status-updating app – something closer to Twitter than SMS. But as Forbes reported in a detailed profile of the company, its founders quickly noticed that people began using the app for back-and-forth communication, a way to send texts without incurring SMS fees.
Technically, this was not totally free to users, but it was very close to free. WhatsApp routes its messages over the internet, so people had to have a mobile data plan to use it. They also had to have a smartphone. (SMS could work on more basic phones.) But after that cost, each message over WhatsApp required such a tiny slice of mobile bandwidth that it was basically free. If you paid AT&T $25 for a 2-gigabytes-a-month data plan, each WhatsApp message might cost about two ten-thousandths of a cent, according to Gizmodo’s math.
This means that someone who sent 5,000 messages over WhatsApp, a not unreasonable number for some overactive teenagers, would pay about a penny in data fees. If 5,000 SMS texts were sent at AT&T’s nonplan rate of 20 cents a message, the sender would be out $1,000, which is 100,000 times WhatsApp’s price.
But internet texting was not just cheaper, it was also better. In WhatsApp’s early days, it was one of hundreds of apps trying to offer a replacement for SMS, so it was forced to create a better service to stand out. Among other features, it eschewed ads, while some competitors’ apps were glutted with them, and per-message fees.
The company also focused on the service’s functionality, making sure messages flew across the globe extremely quickly and efficiently, and that the app itself was well designed and easy to use.
Its founders were also determined to make the app work everywhere: They started on the iPhone, but quickly created versions for Android, BlackBerry, Symbian and Windows Phone. This gave WhatsApp a leg up over proprietary messaging systems like BlackBerry’s BBM and Apple’s iMessage, which worked only for messages between similar devices.
It is still unclear whether WhatsApp can make a lot of money providing very cheap texts. Today, it charges $1 for the app, and then, after one year of use, $1 per user per year. With 450 million users and growing, that could add up to a lot of money, but it is not obvious that the company is worth as much as $19 billion.
That is especially true when you consider that the service does not collect a lot of data about its users – data that the company’s new owner might use for ad targeting – and that it has pledged to remain ad-free after the acquisition.
But to users, WhatsApp’s fortunes are almost irrelevant now. In response to the rise of WhatsApp and other app-based messaging services, carriers have had to reduce their SMS prices. Both AT&T and Verizon now offer unlimited texting with their basic smartphone plans. Around the world, carriers’ SMS revenues are now falling by tens of billions of dollars a year.
And even if Facebook fails to turn WhatsApp into a viable business, we are never going to return to the old pay-per-text days. Messaging is now on a one-way path toward its natural price, which is free.
There is a larger lesson in this story: When telecom companies control specific protocols on their lines — whether it is texting, voice calls or even cable TV — customers lose out. And as soon as our devices get access to the open internet, we have a bounty of competitive choices that reduce prices and improve service.
What happened to texts is likely to happen to voice calls, too, in a few years’ time. Because of competition from FaceTime Audio, Google Hangouts, Skype and lots and lots of other internet-phone services, few of us will worry about voice minutes anymore; for some, that might even be true today.
And perhaps the SMS story will play out on TV, too. Cable is expensive and inflexible. Internet-based alternatives like Netflix and YouTube are cheap and available everywhere. In the long run, there is only one way that story ends.
