Update: Whatsapp has spoken to AllThingsD. Whatsapp’s Head of Business Development Neeraj Aroratold has said that Whatsapp “is not holding sales talks with Google” and the company declined to provide additional comment.

Messaging app WhatsApp is in the negotiating phase over prices with Google in what could be Google’s next billion dollar acquisition, according to an inside source.

While the deal started four or five weeks ago, we’ve been told that WhatsApp is “playing hardball” and jockeying for a higher acquisition price, which currently is “close to” $1 billion right now.

We’ve suspected for some time now that a messaging app would be the next billion dollar acquisition deal following Facebook’s Instagram buy-out last year. 2012 was the year for photo-sharing apps, which you know everything about by now. So, 2013 has been dominating by the messaging app-meets social network market.

There are rumors that Google Babel will combine Google’s disparate communication services under one roof, but the platform still needs to do something to innovate in this space; mobile messaging has been taken over by smaller apps and Facebook has made a major push as well. Google hasn’t given an answer to this competition. Even Google Product Manager Nikhyl Singhal confessed to GigaOM in June of last year that “We have done an incredibly poor job of servicing our users here.” Messaging is a huge, gaping hole in Google’s mobile strategy.

Communication services are the pillar to any connected device; knowing this, if Google wants to be taken seriously on mobile, it’ll need a standout like WhatsApp to take under its wing, and it needs to work fast.

By all regards, the acquisition is a no-brainer. Apps like LINE, WeChat, Nimbuzz, Tango, KakaoTalk, and of course WhatsApp, are making a splash on mobile (and as social apps) in record time. LINE has gone from zero to 130 million users in just under two years. Even new entrant MessageMe has rocketed from zero to one million users in just 12 days.

Google can’t afford the time to rebrand and rebuild a competitive messaging app at the risk of entering the game too late – or, it needs to be able to work off the platform WhatsApp has already established and use this technology (and sensically, the user base) to fill out the purported Babel. 

Also justifying the rumors is the fact that Google has approached WhatsApp before (as has Facebook). Look at it this way: WhatsApp is consistently the number one paid app in more than 100 countries with an enviable user base size spread throughout more than 100 countries and 750 mobile networks. To give you an idea about WhatsApp’s scale, on New Years Eve 2012 alone WhatsApp saw a record 18 billion messages processed in a day.

But more importantly, WhatsApp has a proven monetization scheme. Its yearly but nominal $0.99 subscription fee keeps the service ad-free. Behind the scenes however, WhatsApp also generates revenue through profitable partnerships with international telecommunications companies. For instance WhatsApp’s monthly local plan in Hong Kong with mobile operator 3 HK costs just $8HK ($1.03 USD) and an international package will run for $48HK ($6.18 USD) per day. And whatever Whatsapp is doing is working: The app has even had a direct hand in declining SMS usage around the world.

WhatsApp has remained mum about its revenue, but our source says that WhatsApp may have a ballpark of $100 million in yearly revenue – we’re working on corroborating that detail.

Edit: We previously referred to Google’s unified communication services as “Babble,” but new evidence has come to light suggesting that the service will be called “Babel.” The changes have been reflected above.