Facebook splashed out a whopping 19 Instagrams ($19billion) to acquire the mobile messaging service, Whatsapp, only for the app to experience lengthy down time several days later. Of course, these occurances aren’t directly related (or are they (conspiracy theories)), but to many people this is an omen of what is to come for the popular app.
A little about the deal
Whatsapp was started in 2009 and currently has an amazing 450 million monthly active users.
It is experiencing super fast growth recruiting a whopping 1million new users per day.
The $19billion deal is formed of $4billion in cash and $12billion in stock, with a further $3 billion in restricted stock to be released over time providing certain criteria are met.
Perhaps overpriced, but those laughing the most are the investors who saw their $60million investment increase umpteen fold. It is said that their stake in Whatsapp is worth 3billion in the sale. I’m not even gonna attempt to calculate the ROI on that, but suffice it to say some happy faces preside in the offices of Sequoia and Whatsapp.
So now that you’re up to speed, happy days, some people got paid. So why might this be a bad thing for us, the users?
Whatsapp was founded by former Yahoo employees Jan Koum and Brian Acton. The pair grew to dislike the advertising models employed at the search and news portal and vowed they’d never have ads in their products, the idea being that by eliminating ads it allowed them to focus on the application rather than sales. Remember, if you pay for a service you are the customer, on the other hand if it’s free, it’s more than likely you are the product. For example Facebook sell you (your information) to advertisers.
Furthermore, did you know that if you start to write a status update on Facebook but don’t post it Facebook still stores it? Contrast that with Whatsapp; once they’ve delivered a message it is deleted from it’s servers.
These are 2 inherently different companies. One focuses on knowing as much as possible about you while the other focuses on simply creating a great medium for communication.
Add to that the fact that Whatsapp is tiny relative to its value. With a mere 55 employees this shows they’re all about being lean and it’s difficult to argue that Facebook isn’t about anything other than bloat.
Now, Mark Zuckerberg has gone on record as saying they plan to keep Whatsapp independent and Jan Koum has described the acquisition as a partnership. However, at the end of the day Whatsapp will become a subsidiary of Facebook. That is not a partnership, it is a parent child relationship. Let’s take a look at a couple of Mark’s other children:
Similarly to twitter, for many years Instagram had no model for making money. When you have a large user base and no revenue model, advertising is the simple solution. Instagram have already introduced plans for photo and video ads in our feeds. TV sell 15 second ad slots and it is no coincidence that their video duration is that length.
So yes, Instagram is independent in terms of it has retained it’s branding, but it is very much being guided by the mothership. To serve relevant ads they say “We will use information about what you do on Instagram and Facebook. For instance… your interests and other basic info on Facebook.” It is for this reason, irrespective of what they say, the scope for cross talk with Whatsapp and Facebook can’t be ruled out eg being able to send a Whatsapp message to a Facebook contact that isn’t in your phonebook.
My initial thought on hearing of the acquisition was that they purchased Whatsapp to do with it what they did with Beluga. Beluga was a group messaging application they acquired which became the foundation for what we now know as Facebook Messenger. But of course, Facebook messenger only works with your Facebook contacts right? Nope, not everyone realises it, but as of late last year Facebook Messenger has allowed you to message your phone contacts that aren’t on the social network. This to me is very telling about their long term intentions for Whatsapp regardless of what they say. The ground works are there for integration between the 2 apps down the line. Either Messenger will dissolve into Whatsapp or vise versa, don’t say I didn’t warn you.
At only a buck a year, Whatsapp doesn’t really cost much. Which is great for it’s users especially the early adopters on iOS that needn’t pay a recurring fee. However, this model means it’s difficult to grow revenue per user. As much as companies like Facebook would like everyone in the world to be on their service it just isn’t going to happen; social media just isn’t everybody’s cup of tea.
Let’s hypothesise that over the next 3 years both services are able to grow to the point whereby everybody that want’s to be on them have signed up. For the sake of argument let’s set that at an arbitrary, and perhaps farfetched, 2 billion users on each platform. With 2 billion users Facebook have many methods of increasing ad sales through better targeting and other methods of enhancing click through rate such as ad positioning etc. An example of this is the Super Bowl which has averaged 111million views over the past 4 years but have been able to charge more for ads year on year.
On the other hand if Whatsapp had 2 billion users they would be capped at making 1.4billion in revenue (not profit) per year after the app stores take there 33% commission. Of course this isn’t chump change but under the pressures of a publicly trading parent company, flatlining revenue could be bad news. If they can figure out other ways to monetise the service, increasing revenue per user, then great, however being owned by the giant ad company that is Facebook, it’s difficult to look beyond display ads as their solution; it’s in their DNA.
In a fight to stay relevant and secure its future, the social networking giant seems to be courting all the major independent social start ups, even if some do turn them down (namely Snapchat). The end game being, you can leave Facebook, but you can never leave Mark Zuckerberg. Mark claims they will prioritise growth and not revenue with Whatsapp, but somehow I don’t believe him. Facebook’s true colours will come out once the pressure is on.
To end on a bombshell; look at it this way. Facebook now have all of your information; twice (thrice if you include Instagram)!
Featured image from Jan Persiel