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M.A.A
03-12-2014, 04:03 PM
Mark Pickavance looks at how Mark Zuckerberg splashed out $19bn on free messaging App.
Nothing gets the wolves of Wall Street snarling like an entirely unexpected takeover, not least when they’re one of the biggest in corporate history. Catching most people entirely off guard, Facebook reached far into its pockets and found $19 billion to buy messaging app WhatsApp. That left many in the city wondering if this deal was exceptional, on so many levels, or just the start of a purchasing war where the bigger players attempt to expand their businesses exponentially.
Whatever has just begun, £ 19bn might be chump-change by the time some internet-based companies are done. In the meantime, what does this all mean for Facebook and WhatsApp?
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The Deal
According to Facebook founder and CEO Mark Zuckerberg, WhatsApp was "incredibly valuable," when asked to comment about how he'd blown $19bn (£ 11.4bn). However, it's worth noting that the actual transaction is $4bn in cash, $12bn in Facebook shares and the residual $3bn in stock to WhatsApp founders and staff to follow in the next four years.

Mark Zuckerberg was predictably upbeat about his spending spree, "WhatsApp is on a path to connect one billion people. The services that reach that milestone are all incredibly valuable."

WhatsApp co-founder and CEO Jan Koum said, "WhatsApp's extremely high user engagement and rapid growth are driven by the simple, powerful and instantaneous messaging capabilities we provide. We're excited and honoured to partner with Mark and Facebook as we continue to bring our product to more people around the world."

What's fascinated many in the tech industry is that Koum had previously been approached by both Google and Yahoo, but rejected those opportunities on each occasion. For him this deal is reputedly worth about $6.8bn personally, given his stock holding in WhatsApp, so his excitement probably isn't faked.
What's been made apparent since is that WhatsApp won't be folded into Facebook, but remain a wholly autonomous company with its own staff and business location That's not entirely surprising, given that WhatsApp is just 50 full time people, so there's very little to gain from mashing it with the more numerous 6,300 employees of Facebook.

There is, however, the small matter of business regulators. They might decide that the merger isn't good for competition OT falls foul of some other rule. Under those circumstances Facebook has agreed to pay WhatsApp $2bn for the trouble - a 'Break Free' payment as it likes to put it. According to plausible rumour, Google approached WhatsApp a year ago with an offer of $1bn and was told to go away. It seems obvious now that the company was worth more than that, but was it really worth the amount Facebook is offering? The real questions are for Zuckerberg here, because he's either made a shrewd, fiscally sound move or he's just paid significantly above the odds for a free-to-download messaging app.
So which is it?


Jan Koum, CEO of Whats App and with this deaf a multi billionaire. In this photo he's using his fingers in an attempt to count how many new Bugatti Veyrons he can afford each week


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Why Might This Be Worth It?
The last major company that Facebook bought was Instagram in 2012, and many considered then that at $1bn it had paid over the odds. However, since then this appears to have turned out to be a solid investment for Facebook. Since it was bought, Instagram the photo-sharing operation has shown a massive 23% growth in active users, while Facebook has actually shrunk 3%.

As with Instagram, WhatsApp brings with it a massive injection of new users and new business opportunities. And why Mark Zuckerberg is keen to have these users and not any tatty populous is that because they're using WhatsApp they're part of a technological elite that are willing to buy services and exploit I new concepts.

They're also real accounts, not people who have been to a website once and never returned. According to WhatsApp records, 70% of its accounts are active daily. That's plenty of messages; in fact, it's been estimated that as many WhatsApp messages are sent each day as ordinary SMS ones, and the number is growing. Perhaps as importantly, WhatsApp is strong in geographic locations where Facebook isn't especially so and vice versa. In Latin America, Europe and Africa, this is the app of choice or at least second place. It's only really failed to penetrate in East Asia, where regional choices, like WeChat in China, dominate. Companies wanting to grow need to look beyond America's borders, and WhatsApp represents that unexploited opportunity perfectly.


With personal worth approaching S2Bbn, Mark Zuckerberg can pretty much do what he wants. And fast month he friended Jan Koum, after they met 12 days previously, and eventually did a huge S19bn deal

And Why It Might Not
Given the current user base of WhatsApp, Facebook has paid about $40 per user for WhatsApp, on a service that currently charges $1 per year. When you factor in the running costs of the service and delivering application updates, it could take a very long time to recover that expenditure. What the market obviously expected was that Zuckerberg would announce that WhatsApp would flip to an advertising model, monetizing those users to companies wanting location-based ads. However, he's already ruled out that idea: "I don't personally think ads are the right way to monetize messaging "" Our explicit strategy for the next several years is to focus on growing and connecting everyone in the world."

From an investor perspective, there are a number of concerning aspects to this deal, not least that Mr. Zuckerberg freely admitted that the purchase was only vaunted some 11 days before it actually happened.

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While it may have been that the board of Facebook had considered this option for some time longer than that, it does give the impression that WhatsApp was at some level a kneejerk reaction to not getting Snapchat and at worst an $19bn impulse buy. US investors reflected those concerns and others on the announcement, and Facebook shares went down accordingly before bouncing back with a 3% gain on the day. The general view circulating was that while WhatsApp is undoubtedly the biggest player is this global messaging revolution, the valuation was probably excessive.

It's up to Zuckerberg to show some very convincing plan as to how he's going to leverage the customer base of WhatsApp and grow the 450 million people into the billion that he believes the service can achieve. If he can do that and perhaps manage to extract $5 dollars a year from the average user per annum, then many in Wall Street will be congratulating his business acumen once more. Given that the company only has around 50 employees, its personnel overheads aren't exactly a massive fiscal component. However, its profits aren't anything amazing either, making just $20m in 2013. It's going to need to make much more than that paltry sum in the coming years, or Wall Street analysts will be giving Zuckerberg a very hard time indeed.

The Bigger Picture
This acquisition needs to be seen in the greater context of big companies making large strategic purchases. Microsoft bought Skype and Nokia, and Google continues to collect all manner of minor businesses, having already acquired YouTube. It's a territory grab, where those with the cash handy are loading the board with their pieces.

But there's also a message here about Facebook which, according to the most recent numbers, is starting to experience the same downturn in users as MySpace and other social networking sites have experienced in the past. A group of Princeton researchers has predicted that at the current rate of decline, Facebook will suffer the indignity of 0% user attrition between 2015 and 2017. While others have been less doom laden in their predictions, the ghost of MySpace is haunting these corridors, and explosive success followed by inevitable decline seems encoded in the DNA of social networking.

MySpace at its peak had about 100 million users, before plummeting to 35 million in 2011 after Facebook became the social networking location of choice. What's clearly in Mark Zuckerberg's mind is that unless he reinvents Facebook, entropy will inevitably drag his company down, as users migrate to something new, like they've done multiple times before. By binding in the technology of WhatsApp, he's hoping to create some messaging synergy between the mobile space and more traditional computer-based users. However, at this time he's not going to merge the solutions, which could be taken that he's unconvinced about the long-term viability of Facebook.

Given the track record of numerous social networking businesses, this might not be as crazy as it seems. It's worth remembering that Zuckerberg previously tried to buy Snap chat and was embarrassingly rejected, so he's been looking to diversify at some level for a while.What's on Zuckerberg's mind is getting bigger, not smaller, as the fish in his pond are oversized and looking increasingly hungry.

Final Thoughts
I'll be very honest here: until this story broke, I'd never heard of WhatsApp. In my defense, I wasn't the only one, because the majority of WhatsApp customers are outside the USA, meaning it wasn't on the radar of many Wall Street analysts either.

Why should I know about it, though, because I get unlimited text messages as part of my PAYG deal? This highlights how the value of messaging is declining, and the era when 02 could charge 12p a message are long, long behind us. With messaging free from so many sources, what is so pervasive about WhatsApp that remotely makes it worth any money, never mind £11.4bn7 probably not much, other than hose 450 million users, most of whom think it's worth using on a daily basis. And it's growing, unlike Facebook.

Just a few days after the takeover, WhatsApp had an outage something that before Facebook took over was almost unheard of. I suspect that since it became much higher profile, it got a large influx of new users, and that destabilized its servers. Or it was an unfortunate problem that was always destined to happen. In terms of the bigger picture, I suspect that the purchase of WhatsApp will likely encourage those with cash to splash, as the number of likely takeover candidates dwindles.

In respect of Facebook, how successful this major purchase turns out to be entirely depends on how Zuckerberg manages to make money out of the users and the inherent technology. And all this needs to be done without scaring off the fans who have propelled WhatsApp from the outset.
A possible fly in that ointment is the recent changes that Google initiated with respect to Hangouts, where it can now handle SMS messages on Android phones. At this time, what Hangouts doesn't do is deliver your SMS messages to other devices, though this is surely the next change coming. At that point, it'll have something very similar to WhatsApp, and it will be on every single Android device that updates its applications and any PC that uses Gmail and Chrome.

There's some similar synergy going on in Windows Mobile 8, so it's not a done deal that WhatsApp will replace conventional SMS messaging yet, even if it appears to be doing very well at this time.However, it's not synergy that Facebook was looking for when it bought WhatsApp but massive growth, specifically in the number of users it can market directly to. The real story here, though, and one that huge numbers like $19bn can easily mask, is that tech companies are about to become very aggressive, sucking up others to create some mammoth corporate entities.

A flavour of how wide some of these companies' ambitions are was revealed when Elon Musk, CEO of Telsa, confirmed that he'd been meeting with the merger and acquisitions team at Apple. Those holding web domains for iWheels or iCar might be in the firing line soon. That's one of many potential mergers and takeovers that have, with this one event, moved from being on the back burner to top priority. With a cash pile so large it could afford its own country, I'd expect Apple to make the next big deal. Unless Google gets in first. and the obvious choice for it is another messaging company: BlackBerry. Expect frenzied activity from this point onwards, as feeding time is truly upon us.