Why Facebook needs WhatsApp
Facebook’s multi-billion dollar acquisition of WhatsApp, the uber-popular mobile messaging service, has had tech and finance commentators buzzing in the week since the deal was announced. So, just why was the world’s largest social network prepared to pay US $19 billion – almost 20 times what it paid for Instagram – to make WhatsApp part of the Facebook family?
More users, more data and more growth
Like most social media business models, Facebook’s core offering is largely free for its primary users. Rather than subscriptions or membership fees, users pay indirectly for the services they receive with their personal data. With a huge user base sharing all manner of information about themselves and their friends, Facebook has a unique proposition to offer to advertisers.
WhatsApp gives Facebook a massive injection of new users and new data. The service has around 450 million active users right now and, according to Facebook CEO Mark Zuckerberg, is adding one million more every day. As Facebook develops more ad-driven products to drive its revenues, access to all that new information will be invaluable.
Facebook is currently home to a scarcely believable 1.23 billion active users. It stands far above its competitors in that respect. It’s often mentioned in the same breath as Twitter, but only 230 million active users call the micro-blogging service home, which is dwarfed by Facebook’s numbers.
But while Facebook’s reach is unparalleled, it has seen growth in mature markets start to level-off, perhaps inevitably. And it faces constant competition for eyeball time, especially in the fickle youth market.
WhatsApp brings users, but it also brings turbo-powered growth. In fact, the comparisons to the Facebook are evident with WhatsApp recording the kind of rapid expansion Zuckerberg’s baby enjoyed during its early years. With its current trajectory, it’s not unreasonable to predict that WhatsApp could one day surpass Facebook’s user base.
Acquiring tech, brains and know-how
The deal also allows Facebook to add new services that users are already embracing enthusiastically, increasing its reach in the growing instant messaging and mobile markets. It’s also a defensive move, keeping users interested in services Facebook owns, rather than allowing them to be drawn away by new, exciting alternatives. There were similar arguments put forward in the wake of the Instagram purchase last year.
In some ways, Facebook is following a similar acquisition strategy to Google: leveraging its superior financial clout, adding the web’s brightest stars to its stable to buy in new product offerings; add new technology; and grow its already huge footprint in the online space.
As well as Instagram (photo sharing), Facebook has also acquired Branch (conversation platform), Little Eye Labs (Android monitoring), Sportstream (sporting conversation analysis) and Onavo (mobile analytics) in the past 12 months. None of these deals have been on WhatApp’s scale, but they have all added people, know-how and patents to the Facebook team.
Acquiring smaller, specialist firms supports Facebook’s internal R&D activities: developing proprietary tools to leverage the user base. And while this may be the largest acquisition the company has made to date, WhatsApp certainly won’t be its last.
Becoming a serious CEO
A bold acquisition strategy often opens CEOs up to criticism that closing multi-million dollar deals is more about their bravado and their legacy than what’s best for the business. Acquisitions are certainly one of the areas CEOs have direct personal involvement and they can make or break a career.
Zuckerberg has been determined to shake off the image of “geek-made-good” and establish himself among the world’s top business leaders. He resisted the urge to cash out and retire with his billions and rode out a shaky start to the company’s stock market flotation. Deals like WhatsApp can be seen as another step in that re-branding.
It also represents a personal victory in Zuckerberg’s battle with his opposite number at Google, Larry Page, with whom there are a number of obvious comparisons. If reports are to be believed, Page intervened personally with a last minute bid to make WhatsApp a Google acquisition.
Another positive for Zuckerberg is the structure of the deal. Analysts have also noted that it was bankrolled primarily with Facebook stock, which is at a record high at the moment. This could mean that the massive price tag starts to look better value over time.
By David Renwick