Facebook could have purchased Sony for the price it paid for WhatsApp, but the benefits of the acquisition justify the price tag.
When Facebook bought Instagram for US$1 billion in 2012, internet geeks gasped and business executives leaning on water coolers the world over asked “why would Facebook pay US$1 billion for a company with no revenue?” It was bold, but necessary, to bring the mobile photographers of the world into its fold. Its latest supersized acquisition has yielded an even louder cheer of chatter, rather fitting for its hefty price tag, this time for a revenue-generating, mobile messaging success story. But at US$19 billion, is Facebook paying too much?
There has been a lot of talk about the decline of Facebook. In January, reports suggested that the social network had seen a 29 percent fall in active users among U.S. teens during 2013, threatening Facebook’s dominance as well as highlighting a broader shift of social media users to mobile. It was also said to be part of growing teen use of popular new messaging apps like WhatsApp and Snapchat. So let’s take a look at what Facebook is actually buying.
Capturing shifting teens
These fickle teens are exactly the kind of people Facebook is worried about losing. WhatsApp has managed to build 450 million monthly active users in five years, 70 percent of whom are active every day. This is about three times as many as Facebook had in its first five years of existence and almost ten times the number Twitter or Skype had. What’s more, 70 percent of WhatsApp’s users send messages on the platform every day, a number much higher than Facebook’s.
A business model bolt-on
WhatsApp has managed to do what Facebook hasn’t. It employs a subscription-based revenue model, charging its users US$0.99 a year after their first year of use. There is also a zero-advertising commitment and presumably no commercial exploitation of user data. This acquisition could help Facebook understand how to successfully execute on a business model that could replace its own.
Big data boost
Facebook has become the medium of choice for subscribers who want to make announcements about their lives, milestones or daily activities. But the daily messaging volume of WhatsApp is almost as high as the number of text messages sent over the entire global telecoms network. Daily connections are better captured by metadata from messaging apps than the ad hoc posting of status updates. This data could enhance Facebook’s ability to pick out people’s most important relationships from among their acquaintances, which could lead to better-targeted ads.
Facebook Messenger, the social network’s attempt to enter the instant messaging space is big in the United States but not in other countries. In buzzing social communities across India and South America, WhatsApp is much more popular. This is where we think there is a lot of intermediate value. The global shift to mobile is happening much faster in emerging markets and Facebook needs to be a part of it.
One more obvious benefit is that Facebook has beaten Google and other major competitors to WhatsApp. This should give Facebook an edge, at least for now.
But who loses? Well, the global telecom industry for one, which currently enjoys about US$100 billion in revenues for SMS services globally every year. The moral of the story? If you don’t create the alternative or innovate your business model, others will disrupt yours. This is a point made extensively in our forthcoming book The Risk-Driven Business Model: Four Questions that will Define Your Company.
AUTHORS: Karan Girotra and Serguei Netessine are Professors of Technology and Operations Management at INSEAD.
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