The WhatsApp | Facebook post (part II)

This post follows on from my first post that looked at the valuation of the WhatsApp acquisition.

The  why
From a WhatsApp point-of-view the why is perfectly simple, everyone gets rewarded for all the hard work that has been put in building a successful product with 430+ million users around the world. It is the end pay in a classic Silicon Valley fairy tale.

For Facebook I think that the why becomes more complex and multi-faceted. If we have a look at Mark Zuckerberg’s own statement around the deal, some aspects of his explanation stood out:

  • WhatsApp is a simple, fast and reliable mobile messaging service that is used by over 450 million people on every major mobile platform. More than 1 million people sign up for WhatsApp every day and it is on its way to connecting one billion people. More and more people rely on WhatsApp to communicate with all of their contacts every day” – this is a recognition that your Facebook friends are only a small sub-set of your social graph. This point is reiterated further down in his message with: “WhatsApp will complement our existing chat and messaging services to provide new tools for our community. Facebook Messenger is widely used for chatting with your Facebook friends, and WhatsApp for communicating with all of your contacts and small groups of people. Since WhatsApp and Messenger serve such different and important uses, we will continue investing in both and making them each great products for everyone“. WhatsApp also has a lot of growth in terms of its user numbers – which I think is an ancillary benefit
  • WhatsApp will continue to operate independently within Facebook. The product roadmap will remain unchanged” – this is interesting. I once compared Facebook to an early Xerox where the company essentially acted as a cash cow to fund innovation. In Xerox’s case it was an insurance business they bought, in Facebook’s case I think that cash comes from the IPO and Facebook advertising
  • I’ve also known Jan for a long time, and I know that we both share the vision of making the world more open and connected. I’m particularly happy that Jan has agreed to join the Facebook board and partner with me to shape Facebook’s future as well as WhatsApp’s” – A few things on this; Facebook is bulking up its brain trust, and it views WhatsApp as important to get into the developing world. What this means for investors is an aggregate decreasing ARPU number. There are some incremental gains to be made such as reducing the cost of computing at the back end of running WhatsApp and taking a potential competitor off the table. It also harks back to something I heard attributed to Zuckerberg where he speculated that he may not have another idea as good as Facebook. Zuckerberg no longer needs to worry about this as he has shown he can buy those ideas

If it’s not advertising what is it?
It was quite telling that the top comment on Zuckerberg’s posting about the deal was:

Chiranjeev Kumar Dear Mark Zuckerberg, You own Facebook, Instagram and now Whatsapp. Basically, you guys have more information than NSA, RAW & ISI combined.

Facebook already has a wealth of data on a number of people who aren’t on Facebook with shadow profiles of everyone who features in many Facebook users address books but who aren’t currently members. It can see if they are in more than one users social graph. WhatsApp offers the potential to enrich this database further.

A question of identity – In many countries like China, consumers have two or more email addresses, one of which is used for circumstances when they are likely to be spammed. A mobile phone number offers a greater likelihood of relating to a real identity, as the barrier to entry on replacing your mobile number is a bit higher.

Enriched with context – every bit of data that Facebook can get about activity that occurs outside of a Facebook page helps with advertising targeting, even if the advertising isn’t served up through WhatsApp. I suspect there is a large overlap between the current Facebook and WhatsApp user base. When I think about Hong Kong which has a 50+% WhatsApp penetration and high Facebook adoption, it is easy to see how this context could enrich consumer insight for Facebook. I used WhatsApp to deal with my estate agent, building contractors repairing the air-conditioning unit and even put in my pizza order!

WhatsApp has a number of low risk untapped sources of potential incremental revenue:

One-to-one brand relationships – WhatsApp has the potential to be an opt-in one-to-one marketing channel with a personalised and enriched relationship greater than that provided by a Facebook page. Similar services are already provided on WeChat, LINE and KakaoTalk to allow brands engagement with consumers.

For example here is what the consumer sees on WeChat:
Untitled
And here is what WeChat’s enterprise dashboard looks like:
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WeChat, KakaoTalk and LINE all make money from stickers. Stickers are used in Asia as communications short hand, or as a social lubricant when it would be harder to put words to reply to a message.
Stickers
At the moment WhatsApp hasn’t developed this content fully. I am not so sure that European consumers would pay for this content but some consumers will. All of this will chip away to make the deal look better value but are still comparative drops in the bucket to help raise the WhatsApp ARPU to numbers closer to Facebook.

Partners to enemies?
All of this still makes mobile telecoms operators like Vodafone cheap in comparison to their internet cousins and it isn’t currently clear what their response will be in the coming months. Facebook will have gone from being partner who helps sell more data, to competitor corroding the SMS revenue cash cow.


Looking at data published on Twitter by Benedict Evans you are looking at a volume of messages that threatens to exceed SMS volumes. And this doesn’t include rival services such as WeChat, LINE etc, just WhatsApp; at least some of those messages will be substitutes for using SMS.

More information
Mark Zuckerberg’s Facebook posting about acquiring WhatsApp
Facebook: IPO postmortem – a dispassionate analysis