Facebook’s (FB - Free Report) WhatsApp will be offering free voice-call services beginning second quarter of this year. In the ongoing Mobile World Congress (MWC), it announced that the service will initially be available on iOS and Android and will gradually be extended to Windows and Blackberry (BBRY - Free Report) users.
Moreover, WhatsApp’s free voice-call service will intensify competition for telecom companies such as AT&T (T - Free Report) . According to Bloomberg, worldwide telecom companies lost $32.5 billion in text fees due to free services like WhatsApp in 2013. WhatsApp’s free service is expected to further erode their voice revenues in the long run.
However, despite this anticipated strong growth in user base and market share gains WhatsApp is not expected to earn significant revenues over the next few years. Currently, the company’s text-messaging service is offered free for the first year and charges a meager 99 cents from the second year.
WhatsApp developers are also well-known for their aversion to advertisements. Hence, its decision to offer free voice-call service is expected to increase Facebook’s operating expenses, going forward.
However, Facebook is not worried. According to its Chief Executive Officer (CEO) Mark Zuckerberg, WhatsApp’s only aim should be to continue to add users rapidly and the addition of voice-call services will help it to do so in the long run.
In the MWC, he not only defended Facebook’s decision to pay a hefty $19.0 billion for WhatsApp, but also said that the service is much more valuable than what it is paying for. Per Facebook, WhatsApp is an important part of the company’s Internet.org initiative, which aims at providing Internet access to billions of people at low cost.
As part of the initiative, Facebook is seeking partnership with three to five wireless carriers who will roll out telecom networks and offer data services at affordable prices particularly in developing countries. This will help to connect billions of people who will be able to access basic data services such as search and Facebook.
Facebook and WhatsApp said that they will encourage users to move to data plans, which will boost telecom revenues. Nonetheless, we believe this initiative will take a considerable time to earn noticeable revenues. Moreover, data security and government regulations are major headwinds. These factors may prevent major wireless carriers, particularly in the U.S. from joining this initiative.
Nevertheless, Facebook is already partnering on a regional basis (in Paraguay and Philippines). We believe WhatsApp’s significant international presence, particularly in Asia and Europe, will expand Facebook’s footprint in these regions over the long run.
Currently, Facebook has a Zacks Rank #2 (Buy).