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Thursday, February 20, 2014

Facebook, Whatsapp and the elephant in the room

The media is all over itself with excitement. Facebok is purchasing Whatsapp for 19 billion dollars

The deal is huge in financial terms. It is a dramatic change in the market of Social Networks. The world's largest social network purchases the fastest growing mobile-based social network, which also happens to be a leading social network in usage by youth. 

And still, one cannot think about this deal without noticing the huge elephant in the corner of the room. Facebook, just like Google, has a business model that is mostly structured on selling ads

Whatsapp, unlike the aforementioned, has a business model based on  the good old custom of 'charge a fee for a service'. Whatsapp's model is one that has been considered by many as a relic of an outmoded economic system, since the early days of the first dotcom bubble, and the company's ability to thrive and grow in an astounding rate was a proof of the old wisdom of Ecclesiastes 1:9,  "what  has been done shall be done again", and a stated major cause for Facebook's interest. 

The difference in business models is significant to the analysis of the deal, because currently Whatsapp charges 0.99$ a year for its service, and as long as this is the only source of revenue, there is a clear cap on the revenues this app can produce. 

WhatsApp currently has more than 450 million users (active on a monthly basis). It has been assessed that the current growth rate means that WhatsApp is "on a path to reach over 1 billion people worldwide in the next few years". This means that Facebook is willing to spend 19 billion $ on a corporation who currently has earnings around half a billion, and is expected to rise in the next few years to about 1 billion US$. Remember that we are talking Revenues here, not Profits.  

Thus, accepting a working assumption  that Facebook has made a rational investment, we can safely assume that some change to Whatsapp's business model is expected to come. 

But if we remember that Whatsapp's open objection to ads is a matter of principle, the elephant is starting to get more and more noticeable. 

Lets refresh our memory in this principle-based objection to profiting from ads. The following is taken from Whatsapp explanation, on their website, why they do not sell ads: 
"When we sat down to start our own thing together three years ago we wanted to make something that wasn’t just another ad clearinghouse. We wanted to spend our time building a service people wanted to use because it worked and saved them money and made their lives better in a small way. We knew that we could charge people directly if we could do all those things. We knew we could do what most people aim to do every day: avoid ads...."
This choice was further explained :
"Advertising isn’t just the disruption of aesthetics, the insults to your intelligence and the interruption of your train of thought. At every company that sells ads, a significant portion of their engineering team spends their day tuning data mining, writing better code to collect all your personal data, upgrading the servers that hold all the data and making sure it’s all being logged and collated and sliced and packaged and shipped out."
So, on the one hand, we have Facebook, currently an ad-seller, with a proven track record of purchasing services that had no advertisements and introducing ads in them
On the other hand, we have Whatsapp, currently a service-for-fee provider, with stated intentions to remain that way. 

What other usage can Facebook have for Whatsapp ? 

Some point on other advantages the deal brings for Facebook. It gets to extend its franchise far beyond its primary site, and also gets an interesting play into developing markets. Are these worth 19 Billion US$ ? 

Others point out that the deal, for Facebook, is not about financial aspects. It is about Growth. Whatsapp is considered to be strong in developing markets, where Facebook is weaker. But how can the two social networks be connected ? After all, haven't people who selected WhatsApp already shown some aversion to Facebook? How will they react to the idea of Facebook coming to them ?

Connecting growth-as-a-target for Facebook with the failed Snapchat acquisition, the reality behind this deal begins to reveal, and the nature of the elephant in the room is becoming clearer.

The last piece in the puzzle will fall into place, if we remember that about a month ago, it has been reported that researchers claim that Facebook's viral development indicate that by 2017 the social network shall undergo a similar process to Myspace's demise.

Suddenly, it all looks clear. WhatsApp is worth any sum of money, if you try to make sure that your building of cards will not start to fall. I believe that WhatsApp has been purchased with the hope that it will invigorate Facebook. The question that remains open is how will this elephant behave ? What will Facebook do with WhatsApp?

The bigger question is how are Whatsapp users going to respond ?

Are users going to be as excited about Whatsapp, now that it will be affiliated to Facebook?

Are youthful persons, wishing to be in virtual spaces where they can express themselves free of a watchful eye of an adult relative, prefer WhatsApp over  competing services which do not carry the fear of a possible near future linkage to the social network where the parents have accounts ? 

For this purchase to succeed, something else must happen - users should remain faithful to Whatsapp and not move on to other ventures. How loyal are they going to be, sensing the elephant in the room ?