What’s Facebook up to?
The acquisition of Whatsapp gives Facebook access to metadata, enhancing its ability to pick out people’s relationships which could lead to better-targeted ads.
When Facebook bought Instagram for $1 billion in 2012, Internet geeks gasped and business executives leaning on water coolers the world over asked, “Why would Facebook pay $1 billion for a company with no revenue?” It turned out to be a bold but necessary move, bringing the mobile photographers of the world into its fold. The company’s latest supersized acquisition has yielded an even louder cheer of chatter, unsurprising given its hefty price tag. This time the purchase is a revenue-generating, mobile-messaging success story — but, at $19 billion, is Facebook paying too much?
There has been much talk about the decline of Facebook. In January reports suggested that the social network had seen a 29-percent fall in active users among American teens during 2013, threatening Facebook’s dominance as well as highlighting a broader shift of social-media users to mobile. The drop also was said to be part of growing teen use of popular new messaging apps such as Snapchat and Whatsapp.
That being the case, let’s take a look at what Facebook is actually buying.
These fickle teens are exactly the kind of people Facebook is worried about losing. Whatsapp has managed to amass 450 million monthly active users in five years, which is about three times as many as Facebook had in its first five years and almost 10 times the number Skype or Twitter had. What’s more, 70 percent of Whatsapp’s users send messages on the platform every day, a number much higher than Facebook’s.
Whatsapp has managed to do what Facebook hasn’t: It employs a subscription-based revenue model, charging its users 99 cents 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 a business model that could replace its own.
Facebook has become the medium of choice for subscribers who want to make announcements about their lives, milestones or daily activities. However, the daily messaging volume of Whatsapp is almost as high as the number of text messages sent over the entire global telecommunications network. Daily connections are better captured by metadata from messaging apps than by the ad-hoc posting of status updates. This data could enhance Facebook’s ability to pick out people’s most important relationships, 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 see substantial 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.
Who loses? Well, for one, the global telecommunications industry, which currently enjoys about $100 billion a year in revenues for short-message services.
The moral of the story? If you don’t create the alternative or bring innovation to your business model, others will disrupt it.
Serguei Netessine is a professor of technology and operations management at the international business school Insead, where Karan Girotra is an assistant professor of technology and operations management.
© The New York Times 2014
© 2014 Insead
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