Initial reactions to Facebook’s acquisition of WhatsApp primarily centered on price. Which is understandable, given the valuation. Here is an incomplete list of 25 technology companies the market values less than Facebook values WhatsApp.
- Sandisk
- Broadcom
- Sony
- Workday
- Seagate
- Kyocera
- Analog Devices
- Computer Associates
- Dassault Systemes
- Symantec
- Activision Blizzard
- Netapp
- Yandex
- Autodesk
- Citrix
- Red Hat
- Akamai
- Nvidia
- Splunk
- Equinix
- Electronic Arts
- Level 3
- F5 Networks
- Teradata
- Pandora
On the one hand, the service boasts over 450 million users – 200 million or so more than Twitter. And the deal math essentially values each user at approximately $42 which is, after adjusting for inflation, less than what AOL paid per ICQ user ($49) in 1998. It’s also considerably less than Twitter’s per user valuation, which is around $127, according to Friday’s market prices.
On the other hand, unlike Twitter, WhatsApp has been distinctly reluctant to monetize users via advertising. Messaging is also a highly competitive market, one in which users have a wide variety of credible alternatives – which we’ll come back to. And while WhatsApp is technically a paid application, it’s free for the first year and the maximum revenue per user under the current model is $0.99 annually. As a side note on that subject, it’s worth noting that based on growth charts it would appear that 200+ million of WhatsApp’s users have signed up in the last year, meaning that they have not yet been forced to make a choice whether to purchase the app or turn to free alternatives. All of which suggests that the company was not acquired because of its revenue generation potential.
Instead, as most of the subsequent analyses have acknowledged, WhatsApp was presumably acquired for strategic reasons. One rationale sees WhatsApp as a hedge against perceived defections from and stagnation within Facebook’s core platform – primarily amongst younger users. Another argues WhatsApp represents a strategic bid to assist Facebook in the zero sum battle for a user’s overall attention. A third is to tap one of the largest sources of messaging traffic in the world for data mining and analysis in order to deliver more effective advertising results for one or both platforms. There are 19 billion reasons to believe, however, that the incentive here was a combination of all of the above, as well as a wide number of other factors, meaning that the impetus for the deal is not likely to be found in a spreadsheet. Which in turn is why the deal seems perfectly defensible to some and absolutely baffling to others.
If we set aside the numbers, however entertaining debating them might be, it’s reasonable to acknowledge that messaging is, by itself, a fundamentally important channel. It has become, almost by accident, the default communication mechanism for individuals all over the world. Regional dynamics – specifically lower cost SMS services and fewer network boundaries in the US – have led to asymmetrical adoption of SMS-competitors such as WhatsApp from country to country, but the overall numbers are inarguable: messaging is an enormous, and therefore strategic, market. Which helps explain why the likes of Facebook and Google have been courting players like Snapchat and WhatsApp.
Strategic though the market may be, however, the dynamics of messaging make it an odd market to parse. Consider the following characteristics:
Private
Messaging networks are, by and large, private. Snapchat’s visibility, in fact, is in part based on the self-destructing nature of its messages. Recent trends, in fact, suggest growth not only in private communications but anonymous ones such as Secret or Whisper. By contrast, Facebook and Twitter, for all that they have been brought in to discussions of messaging in the wake of the WhatsApp acquisition, are fundamentally different channels. They are typically public by default; Facebook has periodically irked users by exposing publicly content they wished to keep private. This distinction is particularly important for advertising business models. Layering advertisements into conversations one has with the public are disruptive but generally accepted. Injecting them into private conversations, many of which are one to one, is highly problematic.
Transience
While Facebook, Twitter and other social media sites are not exactly the Library of Congress in terms of their longevity, relative to WhatsApp and other messaging devices they may as well be cuneiform tablets. Twitter has recently made available a user’s entire history via an archive, and Facebook’s Timeline feature is an attempt to give the service relevance over longer periods of time. Messaging services, on the other hand, are typically for ephemeral, and thus largely disposable, content. No one would argue that these temporal limitations make messaging irrelevant; but it is difficult to compare throwaway messages to friends and family with to the more persistent timelines of other social media services. Distinguishing between degrees of transience may seem trivial, but it is in all likelihood the reason there are multiple competitive messaging services against comparatively fewer social networking alternatives. It’s simple for users to manage multiple messaging services for different groups of friends, where similarly fragmented usage would destroy the utility of a social network.
Network Effects
Questions of network effect are likewise important. Much has been made of the importance of the “address book,” the idea being that unlike desktop or web based applications, smartphone apps are much more likely to have access to up-to-date contact information, and therefore the most important network to a given individual. But while this advantages messaging apps over desktop and web rivals, it also means that smartphone-based alternatives have a near equal playing field. None of WhatsApp, LINE, Snapchat and so on have preferential access to my contacts, meaning that the switching costs between one service and another – while not non-existent – are theoretically marginal. With even a moderate group consensus, it’s possible to immediately switch from one messaging app to another – as indeed is occurring already in some quarters. When WhatsApp had three hours of downtime this weekend, the free alternative Telegram saw 5 million new registrants.
Technology
The choice of WhatsApp for Facebook is a bid for user volume. But what about the technology? Much has been made of WhatsApp’s impressively low employee count (55) given both the valuation and message volume handled, and understandably so. It’s interesting to note, however, that WhatsApp lacks some of the platform features common to competitors like LINE and WeChat, which has impacted WhatsApp’s popularity in multiple Asian geographies. Even compared to lesser known alternatives such as Telegram, it lacks basic features. Telegram, for example, is accessible from multiple devices including a desktop; WhatsApp, by comparison, is tied to a single device – and architected for same. The coming addition of voice calls, meanwhile, is a potentially interesting differentiator but the appeal to its messaging-centric audience is uncertain. There’s a reason, after all, that voice usage has consistently declined globally in favor of messaging systems, and it’s not strictly price.
iMessage
The most curious thing about analyses of the WhatsApp deal, however, is that they almost universally fail to mention iMessage as a competitor. If you search this piece by Ben Evans or this piece by Ben Thompson for example – both of which are recommended – neither includes iMessage as potential competition for WhatsApp. Which is technically understandable: iMessage is (at present, at least) limited to iOS, and is only really optimal in group messaging if the entire group is using iOS devices. But in terms of service potential, iMessage has a few key advantages over competition such as WhatsApp.
- Rather than make a clean break from SMS systems, it embraces (and extinguishes?) them.
- It is embedded in the operating system: no downloads are necessary.
- It is accessible using desktop clients.
- Every registered Apple user is a de facto user.
The network effects – and potential lock-in – to iMessage is something many non-iOS users have probably experienced. Either through limitations of the service (for group messaging, most obviously), or for deliberate purpose (limited SMS packages, for example), people carrying competitive devices may actively be excluded from conversations amongst iOS users.
The Gist
In sum, then, we have a market that is widely accepted as strategically important, but with a higher degree of efficiency than other markets such as social media. Users can and will engage and leverage multiple messaging services, with few able to manage the kind of lock-in characteristic of sites like Facebook or Twitter. For this reason, large investments in the space, while of theoretically high upside because of their effortless acquisition of new users, are likely to be comparatively high risk.
The fact that Facebook has publicly committed to running WhatsApp as a separate business may be a function of this risk. One advantage older, incumbent technology providers have had over younger rivals in recent years was their understanding that even mergers that make sense on paper are difficult to execute properly, and more likely than not to fail. This, more than the costs involved, is why large scale acquisitions in the technology industry are comparatively rare. It is intrinsically difficult to merge businesses. One wonders if WhatsApp being maintained as a stand alone business, or Google’s recent decision to maintain Nest as a separate entity following the $3.2B acquisition, is a sign that the technology upstarts are learning from the likes of EMC and VMware.
Speaking of Google, meanwhile, what will be most interesting to observe in the wake of WhatsApp’s acquisition is how the search giant responds. While not commonly credited with such, Apple already posseses a competitor in iMessage. Google, curiously enough, does not: while its Android Hangouts app handles both its instant messaging and traditional SMS, the two channels are kept entirely separate.
This is problematic for Google moving forward. For Apple, success with iMessage (Apple does not disclose subscriber numbers) is welcome, but non-essential. At its core, Apple’s value proposition to users is the devices it sells (a lesson Blackberry failed to learn, BBM or no). Google, on the other hand, depends as much on a given user’s attention as does Facebook. The more time users spend with the latter – or wholly owned subsidiaries like WhatsApp – the less time available for interaction with Google properties. Which explains Google’s persistent interest in messaging services. But not why they feel compelled to pay the kinds of outsized premiums for inorganic growth. One imagines that if Google, who is held up as Apple’s superior when it comes to services, could deliver something similar to iMessage in Android, it would be in a position to deliver at least comparable numbers to WhatsApp competitors based on the number of Android devices activated per day. And if it made this service available cross-platform on iOS in particular, as it has with its other Google services (which admittedly may not be technically feasible), it would represent a very formidable competitor indeed. Google’s lack of direct attention to the messaging opportunity has been, frankly, perplexing.
$19 billion dollars is a hell of a shot across the bow, though.
