Is Whatsapp worth $19bn? By financial metrics, of course not. The company employs 52 people at last count and would need to increase its circa $50m annual revenue more than hundred times, something its business model is clearly unequipped to do.
And yet, for Facebook, the outlay is worth it for something more important: strategy. Here is the thinking behind the deal:
Reason 1. The next billion users
Facebook may have topped 1.2 billion active monthly users, but growth has been stagnating and (according to some reports) the social network is actually shrinking. The problem is developing countries. Facebook is essentially ubiquitous in the US and much of Europe, but traction is slow across Latin America, India and Asia.
On announcing the deal Facebook CEO Mark Zuckerberg referenced this specifically: “There are countries [such as] Korea or Japan where another messaging service is bigger, but if you look across the world, WhatsApp – across Europe, Latin America, India, a lot of places in Asia – is the clear leader.”
WhatsApp is how Facebook hopes to fill in its global gaps. “Once we get to being a service that has a billion, two billion, three billion people one day, there are many clear ways we can monetize,” he said menacingly.
Reason 2. The new SMS
Many comments have been made that Facebook already has a Whatsapp rival: Facebook Messenger and that there are numerous other popular instant messaging rivals it could’ve been bought for far less. This misses the point.
Whatsapp is not about wiping out instant messengers from the likes of Facebook, Twitter, Instagram, Skype and Google – those services all have ecosystems that Whatsapp cannot replace. Instead Whatsapp is about replacing SMS.
Like SMS, key to WhatsApp’s success is its lack of an ecosystem. It is lean, uncluttered and simply ties to your phone number. While the world switches from minutes and messages to data bundles phone numbers aren’t going anywhere for at least a decade. WhatsApp can become the SMS of the future, succeeding where MMS has failed miserably.
Reason 3. To stop anyone else buying it
Whatsapp has plenty of competition, the most credible of which are Line and WeChat with over 300m and 400m active users respectively. Line dominates Japan, WeChat dominates China. But for those exact reasons purchasing either is fraught with difficulty and raises an overwhelming number of governmental and privacy issues. It is the same for Kakao Talk (100m users – Korean), Nimbuzz (150m users – India) and Hike (30m users – India).
Who are the other big players? Facebook’s previous target Snapchat has a relatively small 30m active users and the other major players are Skype (now integrating Windows Live Messenger), Yahoo! Messenger and Google Hangouts – none of which a) can match Whatsapp’s numbers, b) are for sale, or c) even if they were for sale, come with a lot of extraneous baggage.
The exception was Viber which, with 300m active users, was seemingly a bargain for Rakuten when it was purchased for $900m earlier this month. But Viber’s success is predominantly in the west and as a Japanese business Rakuten was keen to get a foothold in those areas, the opposite of what Facebook needed. This is the same reason US-based Kik (130m users) and Tango (150m users) held little appeal.
Reason 4. Facebook is now a conglomerate
While Facebook previously had a reputation for crunching up and assimilating its purchases with Borg-like efficiency, the company’s previous record purchase Instagram shows a key change of tactic.
Initially that sale prompted many to expect the service to be folded into Facebook for better photo sharing and editing, but that would’ve proved a waste. Instagram users love Instragram because it isn’t Facebook. Crowbarring it into Facebook would’ve arguably just killed the service and gained Facebook few new users as most Instragam users were also likely on Facebook.
What Facebook is fast learning is not everything has to be swallowed under one all consuming brand. In fact quite the opposite is true with Facebook’s size now reaching evil overlord proportions which is actually alienating some demographics – particularly younger generations who cannot escape their parents and family members.
So while the threat of a ‘Login with Facebook’ hovers over WhatsApp, the Instagram experience suggests Facebook would rather own the major players with different attributes and retain what makes them a success than risk compromising them just to stamp a Facebook logo all over the world. It is the Pfizer method.
Reason 5. Engagement
“WhatsApp is the only app we’ve ever seen with higher engagement than Facebook itself,” admitted Zuckerberg said in a conference call to journalists yesterday after the deal was announced.
This is crucial because it isn’t just users Facebook wants it is highly engaged users passionate about the platform. This is a key difference between WhatsApp and Snapchat. You don’t typically send 20 SnapChat pictures a day, but it is not uncommon to send 20 WhatsApp messages during a day.
It is a scenario that also applies to Skype, Twitter Direct messages (thanks to its restrictions) and Hangouts requires a Google account. Only SMS and Facebook Messenger can claim similar engagement levels, but the former cannot be bought and the latter Facebook already owns.
Whatsapp was a warning shot
Combined Facebook, Instragram and WhatsApp will bring Zuckerberg close to 2 billion active users. Naturally there will be significant overlap (figures for which haven’t been disclosed), but the trio also give Zuckerberg a significant user bases in just about every major country across the globe. In announcing the deal the CEO declared his ambition of “connecting the world’s people”.
He now has the chance, but even under Facebook ownership WhatsApp should be remembered as a warning: it grew to 400m users and a $16bn valuation three years after launch. If Facebook gets its strategy wrong another rival will likely grow even faster.