Is Facebook Paying Too Much for WhatsApp?
Posted on February 21, 2014
We could not miss the news of acquisition of WhatsApp by Facebook, so we covered it in the recent post on HBR Blogging Network. With $19 billion, Facebook could have purchased Sony or Gap or four aircraft carriers. Instead, it bought WhatsApp, a tiny startup that so far had accumulated barely $60 million in funding, mostly from Sequoia. This is nuts, you might say; although the world of mobile messaging is upon us, that is an awful lot of money.
But think about what exactly Facebook is buying:
Young users. WhatsApp acquired about 450 million monthly active users in 5 years, 70% of whom are active each day, which is about three times as many as Facebook had after 5 years and almost 10 times more than Twitter or Skype had. To be sure, these numbers translate into minuscule revenues and most of the users are probably on Facebook anyway. On the other hand, they are just the people Facebook is most worried about losing.
A new business model. Unlike Facebook and most other Internet giants of that generation, WhatsApp employs a subscription-based revenue model, charging its users $0.99 a year after the first year of use. Further, in a decidedly different approach from Facebook, there is a commitment to no advertising and presumably no commercial exploitation of user data. The acquisition could help Facebook understand how to successfully execute on a business model that could replace its own.
Enhancements to the existing business model. The daily messaging volume of WhatsApp approaches the SMS volume of the entire global telecom industry, and while Facebook has become the medium for big announcements of life events, daily connections are better captured by metadata from messaging apps. Undoubtedly this data could much enhance Facebook’s ability to pick out people’s most important relationships from among their acquaintances, which would presumably lead to better-targeted advertising.
Internationalization. Facebook Messenger is big in the USA but not in other countries. In key markets like India and South America WhatsApp is MUCH more popular than Facebook Messenger. And this is where, we think, the majority of the immediate real value is: the global turn to mobile is quite evident and Facebook wants to be a part of it as soon as it can.
If you list all these reasons for the deal, and throw in some competitive pressure from the likes of Google, the $19 billion number might not look so silly after all. Time will tell. But regardless of how this deal turns out, the one unambiguous loser, in our opinion, is the telecom industry, which currently enjoys about $100 billion year in revenues from SMS services globally.
Moral of the story: If you don’t create an alternative yourself, others will disrupt your business model for you. This is the point we repeatedly make in our forthcoming book “The Risk-Driven Business Model: Four Questions that will Define Your Company“.
User base and new business model are definitely big drivers of the acquisition. Facebook’s move is a big shift from the tech giants before it – acquire competition instead of competing. In a way this makes sense in social media space, but leaves one to wonder how far facebook will go to keep competition out of its way.
Facebook or other giants have to take a step on this, otherwise Wechat (biggest one in China now, owned by Tencent) would definitely dominate this area and leave little space for further expansion of others.
(In fact, Tencent was also trying hard to buy WhatsApp but failed.)