It is no secret that Facebook has identified mobile as the platform of the future. In the investor call held to announce the WhatsApp acquisition, Mark Zuckerberg categorically stated that the company has tried over the last couple of years to position itself as a strong mobile player. Statements such as this have been part of recent spiel of almost all top Facebook executives.
Facebook’s $19 billion acquisition of IM service WhatsApp has caused some eyebrows to be raised, with the more sardonic not failing to point out that the size of the deal is greater than the GDP of Iceland or the cost of CERN’s Large Hadron Collider.
Most detractors of the deal also point out to the alleged Facebook interest in Snapchat last year. Facebook first courted WhatsApp back in 2012 but were rebuffed, which caused Zuckerberg to turn his attention to Snapchat, the largest mobile IM network in the US with almost no presence in other geographies. Conversely, WhatsApp has a strong presence in Asia and Europe, but isn’t that well known in the US.
Facebook had allegedly offered Snapchat founders Evan Speigel and Robert Murphy a tune of $3 billion dollars, which, if compared to the cash component of the WhatsApp deal, is $1 billion less. Of course, there is the matter of nearly $15 billion in Facebook shares and RSUs, but it is a more strategic buy with more long-term, global value. Also, WhatsApp’s user base and other statistics are well known and available, which is not the case with Snapchat.
A strategic move
What WhatsApp gives Facebook is an entry into the fastest growing platform in the world currently as well as the latest trend in it - mobile instant messaging. “Of all the acquisitions that Facebook has made, WhatsApp makes most sense,” said Preetham Venkky, Business Head (Asia), KRDS. “Facebook has not been able to grow users through mobile, while WhatsApp has been able to do this very quickly. WhatsApp has a more global appeal and they now have the opportunity to bring it to the US too.”
The high price has definitely baffled some other mobile advertising experts. Musing on the $19 billion price tag, Abhay Doshi, VP (Product Management & Marketing), Flytxt said that he saw it more as a way of killing the competition than actually acquiring a prospect. “WhatsApp has no revenue model, so it cannot be about the money. If you are paying $19 billion for something, then you would at least expect $2 billion-$3 billion in topline a couple of years. Maybe they (Facebook) believe that the revenue potential of WhatsApp is much higher and this could be possible as a ‘one-to-one’ model,” he added.
The problems with conventional business models for WhatsApp
The question of what exactly Facebook plans to do with WhatsApp has been the topic of quite some discussions among analysts. After all, WhatsApp’s co-founders have been dead set against intrusive advertising since its inception and Jan Koum, during the announcement call, made it clear that this policy is set to continue. On the other hand, ad revenue is the main (if not the only) source of Facebook’s revenues.
The simplest option of course is that WhatsApp continues with its subscription model. With the service adding 1 million users a day and expected to reach 1 billion subscribers in a couple of years, it’s a readymade revenue stream. Currently, there is no data available on how much money WhatsApp earns from subscription and how many users will actually subscribe to the service once it becomes paid after a year. Also, WhatsApp does not have a consistent subscription model in all geographies. Combined this with Facebook’s ‘freebie’ attitude, one could not think of two more different companies to form a partnership.
Of course, another option would be for WhatsApp to have in-app purchases, which is quite a popular business model for many ‘freemium’ apps, ranging from games to IMs. But what would WhatsApp sell? It’s founders’ vision of having ‘No Frills’ precludes it from offering fancy stickers like LINE or skins and themes like some of the other IMs.
An example to cite here would be Instagram, which from having no revenue model, started limited paid advertisements with some brands last year. It is still in a nascent stage, but this could be the way forward for WhatsApp too, regardless of its founders’ intentions. To support this argument, one has to just take a look at the areas Facebook has been focusing on in recent months. Earlier this year, it announced that it would be starting limited trials of self-playing video ads. The idea being that the ads would play automatically without sound with the user just having to keep scrolling to shut them off. Facebook has been tinkering to improve its native advertising and even the Instagram ads were designed to be as non-intrusive as possible. Is this an indication of Facebook’s eventual plan for all its suite of products - great, content-driven ads delivered in the least disturbing way possible?
Why the $19 billion price tag makes sense
On the face of it, the WhatsApp acquisition does not seem to be about just making money quickly, even if we don’t consider the advertising potential of WhatsApp. We already discussed how WhatsApp gives Facebook access to a user base that is expected to reach 1 billion in 2016, of which, 73 per cent are active every day. A more interesting idea was presented by Doshi. “Today, on the internet, almost every website allows you to log on using the Facebook API. Maybe they want the mobile numbers (which they will get through WhatsApp) as another log in,” he said. There is an existing precedent for this. Tencent QQ, a Chinese company that runs services ranging from gaming to mobile IM, allows users to access all its services through just their mobile numbers. Indian users will probably know Tencent through their mobile IM application WeChat, which they have launched in India through ibibo.
Agrees Narayan Murthy Ivaturi, Director (Global Sales & Strategy), Vserv.mobi, who calles the mobile number almost as good as a social security number. “It is your unique identity. There are endless opportunities with Facebook sitting on an almost endless gold mine of phone numbers. The mobile is the best source of demographic data and the potential for advertisers is immense,” he noted.
Of course, one cannot forget that the very nature of social media is itself changing. Facebook is no longer the darling of the 13-25 age group, as this section of the audience moves towards messaging apps. Then there are the people who do not use Facebook for any number of reasons, ranging from privacy, language, socio-economic barriers or just personal choice.
Most of these people, according to Madan Sanglikar, Co-founder and MD, ad2C, who might shun Facebook, will still be interested in WhatsApp. “Especially, since it is easy to use, more private and serves some practical purpose (that of sending messages for free). So, in a $19 billion move, Mark Zuckerberg has ensured that there is now the possibility of Facebook reaching out to traditionally ‘dark’ segments of the society,” he said.
To conclude, Venkky mentioned, “The most important thing for Facebook through this deal is that they now have Jan Koum on board. He is someone who has a proven understanding of the mobile space and this will only help take Facebook forward.” The presence of Koum, Brian Acton and their experienced team of engineers could provide fresh insights on how to take Facebook’s mobile strategy forward.