$19 bn!! WhatsApp then?

Facebook have recently purchased WhatsApp for $19bn which marks their biggest acquisition to date. WhatsApp first emerged in 2009 and became the cheap way to send texts and media neatly avoiding high charges from the big telcos. Here we ask the simple question…why?

Florent Stroppa, General Manager Europe at OnMobile, comments:

Florent Stroppa

Florent Stroppa

“The acquisition of Whatsapp by Facebook further concentrates the power in the hands of four players: Google, Apple, Facebook and Samsung. In practice, mobile operators already have a relationship with Facebook and have common business interests in many parts of the world, including emerging markets. Whatsapp would have kept growing even without Facebook and was well under its way to reach 1 billion users. The mind-blowing value of 19B shows that mobile messaging is critical. Operators should not ignore this and they still need to rejuvenate their own core propositions

Significantly with the Whatsapp acquisition is it shows a clear intention from Facebook to go all-in in mobile. Instagram is the clear winner in the photo sharing space and Whatsapp is the clear leader in mobile messaging. With those two properties, Facebook will now have the two most valuable apps in two of the most important mobile functions: messaging and sharing pictures. While we may argue about the price it paid, Facebook is showing commitment to its long-term strategy to own mobility. I believe the multi-brand strategy that Facebook does with Instragram and Whatsapp is brilliant as it de-risks their future. Moreover this sets the tone for the mobile messaging market and I think we will continue see complete consolidation of the space. Less than a week ago Viber got acquired $900 Million by Rakuten and now Whatsapp is going to be acquired by Facebook. It is going to be increasingly difficult for the small players to survive. ”

Pamela Clark-Dickson, senior analyst for messaging at Informa Telecoms & Media

WhatsApp has made a stunning exit, having been snapped up by social-networking giant Facebook for an initial US$16 billion in cash and Facebook shares, with another US$3 billion to be paid over the next four years. The deal values each of WhatsApp’s 450 million monthly active users at US$42.20, and each of the company’s 50 or so employees in excess of US$300 million.

WhatsApp is able to command a premium by virtue of being the largest mobile messaging application in terms of monthly active users. WhatsApp was probably also in the unique position of not needing to sell, since it is able to generate revenue from its user base via a small annual subscription. Facebook’s CEO, Mark Zuckerberg, clearly made WhatsApp an offer that the company could not refuse. WhatsApp must also have seen Facebook as the best fit for its application, given that the company must have had other suitors – most notably, Google was rumored to have offered to buy WhatsApp US$1 billion in 2013. It remains to be seen whether, and how, Facebook will recoup its substantial investment in the app.

Clearly, mobile messaging and VoIP apps now have sufficient reach and maturity to excite the interest of the larger Internet companies: WhatsApp is the second mobile messaging app to exit within the last week, after Japanese Internet giant Rakuten acquired Viber Media on February 14 for US$900 million.

Facebook is emphatically delivering on Zuckerberg’s pronouncement in late 2012 that the future of the social network lay in mobile. The company now owns the world’s biggest mobile-instant-messaging application, as well as Instagram, which is one of the world’s biggest mobile-photo-messaging applications. Interestingly, Facebook will now be operating three messaging apps – Facebook Messenger, WhatsApp and Instagram Direct – all of which enable users to share photos

Enterprise messaging is another area in which WhatsApp could become more prominent. WhatsApp is already being used by government departments and enterprises in both developed and emerging markets as a means of communication between employees, and to customers and the general public. With the financial backing of Facebook, WhatsApp could develop additional enterprise-messaging capabilities.

Meanwhile, mobile operators are in an interesting position: Facebook, one of their key content partners, now owns an application that has been a major catalyst in the decline of SMS revenues and, for some, SMS traffic. The potential souring of the relationship between the operators and Facebook brought on by the acquisition will be mitigated somewhat by the fact that mobile subscribers will continue to demand access to both applications, resulting in sustained generation of mobile data revenues for operators.

Stephen Sale, Principal Analyst of Analysys Mason

Messaging apps are currently used by more than half of smartphone users worldwide and WhatsApp dominates this market with a 45% user market share. They have user engagement levels that are the envy of the industry. When WhatsApp recorded an all-time high of 10 billion outgoing messages in a single day in June 2013, this equated to more than 30 messages sent per person per day.

– We estimate that IP messaging volumes were over 10 trillion in 2013 and expect them to almost double in 2014 and will reach 37.8 trillion in 2018 (a graph is available of this upon request).  We forecast the number of users on smartphones to increase from about 1 billion in 2013 to almost 3 billion in 2018. These kinds of figures capture the attention of the major Internet players.

– Facebook needed to make a bold move to retain relevance among younger users, the core constituency of messaging apps. Facebook failed to anticipate the way that messaging apps have transformed social networking on mobile devices. Facebook’s own Messenger app has slipped in the rankings and WhatsApp Messenger has emerged as the global leader. WhatsApp has a user base of 450 million (with smartphone penetration rates as high as 80% in some countries) with a stronger bias towards the young than Facebook

Vanessa Barnett

Vanessa Barnett

Vanessa Barnett, Technology & Media Partner, commented: 

“This is a clear statement of intent on the part of Facebook.  $19 billion is a hefty price tag, particularly given that previously Facebook had only paid $1 billion for Instagram.  What can we take from this?  Well, we could sit here and talk of bubbles and the early 21st Century, or we could say ‘hey, you know what, there’s value in the technology sector and this is another sign of confidence’.  I’ll go with the latter.  We are seeing a growing number of sophisticated, well funded businesses in the technology sector coming to us for advice – particularly those who are harnessing apps/Internet technology for their business model.  Global confidence in the sector bodes well for the UK.  Watch out Silicon Valley!”

Martin Garner, SVP, CCS Insight

The $19 billion purchase price for such a young company without a fully developed business model is without precedent. To put this into context it is 21 times the price paid by Rakuten a week ago for Viber, a similar service with 300 million users, and 19 times the price it paid for Instagram in 2012 ($1 billion). The purchase price has undoubtedly been heavily influenced by Facebook’s defensive mindset and a desire to ensure WhatsApp didn’t fall into the hands of a competitor. At Facebook’s current market capitalisation of $173 billion, this acquisition represents 10% of its value. This will put significant pressure on Facebook to prove that the purchase price was justifiable, that user growth can be maintained (or accelerated) and that user engagement is ultimately monetised.

This deal highlights the biggest challenge to Facebook in mobile: the open and democratic nature of application coding, distribution and discovery. Apps and services like WhatsApp can very easily be identified and enjoy rapid user growth if they offer a compelling user experience. In this sense Android’s success has been to Facebook’s disadvantage. Facebook will continue to have to contend with a long line of new disruptors, at the same time as there are several powerful acquisitive players moving into the US Internet market from the Far East. But Facebook’s investors are unlikely to tolerate an endless spree of acquisitions at this sort of valuation.

A further challenge to Facebook will come in its relationship with mobile network operators. More than other web players, it has worked hard to build a constructive relationship with many of the operators. This is because all of its user growth is on mobile, much of it in areas where mobile is the only real option for using the internet. But WhatsApp typifies the OTT threat to the operators and has become one of the key threats to SMS engagement, especially among young users.”

Eden Zoller, Principal Analyst, Consumer Telecoms, Ovum

“The social messaging market is growing rapidly, with messaging volumes to reach 69 trillion with subscribers growing to 1.8 billion by the end of 2014 according to Ovum forecasts. An immediate benefit to Facebook in the WhatsApp acquisition is that it has enabled two strong social messaging players to be on the same team.  WhatsApp is a player which is strong in both mature markets as well as emerging markets across Asia and the Middle East, which present a significant growth opportunity for Facebook. At the same time, Facebook is growing its mobile footprint with close to a billion monthly active mobile users. This makes innovation in mobile services and capabilities an imperative, either organically or by acquiring best in class applications like WhatsApp. With the acquisition Facebook has gained access to WhatsApp’s large repository of phone numbers, which was a missing link for Facebook’s user information. The access to phone numbers now bridges the offline and online worlds of Facebook users. WhatsApp will also enhance Facebook’s mobile strategy and make the service grow faster and be stickier with mobile first users. Facebook will in turn provide WhatsApp with the funds and resources it needs to develop the service and become an even stronger competitor in an increasingly over crowded messaging market.

“According to Ovum’s Mobile Messaging Forecast, operator based mobile messaging traffic (including MMS, SMS, A2P SMS) will peak in 2014 with 7.7 trillion messages, declining in 2015 to 7.6 trillion messages. While OTT messaging is set to grow strongly YoY, Ovum’s Social Messaging Traffic and Subscriber forecast, estimates OTT messaging traffic to have hit 27.4 trillion in 2013 and growing with triple digit growth rates to 68.9 trillion by the end of 2014. SMS volumes were higher than social messaging volumes in 2012, but in 2013 messaging apps took a big leap forward and overtook traffic. We can expect strong growth in traffic to continue in the coming years.

 

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David Dungay

Editor - Comms Business Magazine