Masterplan: Facebook on the global offensive !

February 23, 2014

By: Sameer Nargolkar

If it wasn’t apparent till now, the big news emanating from the world of business this week confirmed it beyond doubt – Facebook is on a roll and gaining momentum in its ambitious plan to become the world’s premier communications company. The intent is clear: to create a global behemoth. It is getting a foothold into almost every sub-industry within the modern day communication market.

Facebook will now pay $19 billion to acquire mobile messaging service market leader Whatsapp, dwarfing the $1 billion it paid for Instagram in 2012. The purchase is the biggest Internet deal since Time Warner’s $124 billion merger with AOL in 2001. CEO Mark Zuckerberg has been trying to get into the mobile messaging market for some time, offering to buy Snapchat for $3 billion last year. But the offer was rejected. Whatsapp, however, is a valuable asset in terms of monetization opportunity.

Trading-wise, investors appeared unimpressed with the deal, sending Facebook shares down by 3.7% on the day of the announcement. Yes, it is a risk. Zuckerberg has used up 10% of Facebook’s market value to shake things up as the company has experienced turbulence with users quitting the website lately. Despite criticism from some quarters, investors in the future could view the deal in the same way they do Facebook’s acquisition of Instagram, which now looks like one of the best and cheapest Internet transactions in history.

WhatsApp, with 55 employees and a $1 per year service fee, looks primed to explode to 1 billion users from the current 450 million as early as next year! In the context of per-user pricing, the rate doesn’t seem that far off what Google paid for YouTube. WhatsApp certainly fits the bill when it comes to having engaged users. The company has its users hooked, 70 percent of them accessing the mobile app each day.

The deal gives Facebook access to a wealth of user data, which opens up tremendous data mining opportunities. More remarkable is that WhatsApp handles more than 19 billion messages per day, a figure that is approaching the text message (SMS) volume of the world telecom industry, which is a US$100-billion market. Incredible!

If WhatsApp gets to one billion users and continues to charge them just $1 per year, that’s US$1-billion in revenue for Facebook and likely well over US$600-million in operating income. To add to that, WhatsApp is gaining 1 million users daily. Facebook has come to the realization that it needs a portfolio of apps to reach people with different use cases, demographics or ways of communicating. The deal prices WhatsApp at more than half the $31.5 billion market value of Twitter, which has 241 million users. Facebook is also taking out its main competitor in the mobile market in Whatsapp as the two icons line up side by side in any smartphone user’s home page.

Fans of Canadian brand Blackberry rejoice! Shares of BlackBerry Ltd. rose as much as 9% after Facebook agreed to acquire Whatsapp. This is because the price of the deal implies a valuation of about US$3.4 billion for BlackBerry’s BBM service, which has 80 million monthly users.

On a single day last June, WhatsApp carried 27 billion messages – 42 percent more than all the SMS texts sent worldwide on a typical day last year! Unlike Apple’s iMessage or BlackBerry’s BBM, Whatsapp has always been available across multiple operating systems, making it easy for an iPhone user, for instance, to chat with a friend with a Samsung Galaxy. It so appears that the value of these services lies in the number of people using them, once you pass a certain threshold of users, it acquires a momentum of its own. As Zuckerberg has noted, WhatsApp has become an inexpensive replacement for text messaging for many people, and is expected to contribute to, the Facebook CEO’s masterplan to connect the world. His logic is that the power of the largest global social networks will overtake the regional prevalence of the local social networks. We saw the same thing with online social networks.

With this acquisition, Facebook has bought its way into Europe and India but it still leaves out the rest of Asia, which is dominated by local players. South Koreans love KakaoTalk. The app is installed on 93 percent of smartphones in the country. China is dominated by WeChat, owned by the $140 billion giant Tencent. The app has more than 230 million users. Japan’s favorite messaging service is called Line with 300 million registered users. Facebook may not need to buy up all of these to take over the world of communication. If they set up just enough bases around the globe, it could pressure everyone else to sign up out of social necessity. They have done it before.

As the popular joke goes, Zuckerberg now has a larger intelligence database than the NSA !

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