Facebook and WhatsApp: Why the Expensive Purchase Makes Sense

Despite the overwhelming price tag of US$19.0 billion, the agreed acquisition of mobile messaging service WhatsApp – confirmed this week by social media giant Facebook – is a logical step in the right direction. The move has already been criticised for being too expensive, too forceful and too desperate, with many seeing it as a panicky reaction by the world’s dominant social network to its rapidly stagnating brand. However, the WhatsApp purchase is essentially the ticket price for entry into a surging mobile market via a platform that has global, cross-cultural appeal and which has registered rapid uptake in developed economies as well as among emerging market consumers. With mobile telephony the most highly penetrated digital segment globally, Facebook has guaranteed itself a presence among mobile consumers.

Global Mobile Telephone Subscriptions: 2008-2030

Mobile Telephony

Source: Euromonitor International from International Telecommunications Union/national statistics

Note: Figures over 2014-2030 are forecast

Why the WhatsApp Acquisition Makes Businesses Sense

The US$19.0 billion price tag makes WhatsApp the most valuable venture-capital-backed company in history, some way above the likes of YouTube and Instagram, and priced higher than multinationals such as Sony and American Airlines. However, there is business reasoning that justifies the purchase:

  • Facebook is able to essentially enter the mobile sector across all markets and become a major supplier of mobile services without the infrastructure or licensing costs. Growth in mobile broadband and smartphone uptake could eventually make WhatsApp a major competitor to actual mobile operators, with end-users able to access voice and other services via the messaging service. By 2030, there are expected to be 1.2 mobile subscriptions per every person in the world;
  • According to Facebook, WhatsApp has reached 450 million users faster in four years than any other online service, while user loyalty is high as some 72.0% of them utilise the service every single day;
  • The potential to intertwine WhatsApp with Facebook services or at least add a social networking dimension to the messaging platform would provide a reinvigorating boost to the Facebook brand, which has seen a migration of young users in developed markets to other social media services;
  • WhatsApp could act as a bridge to a variety of other m-commerce segments for Facebook, including mobile advertising (which WhatsApp has not yet utilised), mobile gaming and mobile payments. The purchase guarantees a customer base of almost 500 million mobile phone numbers, which is a more valuable stock than Internet-based sign-ins and prevents this from being a typical dotcom deal.

The Potential Challenge: WhatsApp is a Leader in an Already Crowded Marketplace

Despite the numerous positives behind the major deal, there remain considerable obstacles in driving growth in the WhatsApp user base:

  • WhatsApp certainly has the legs to expand across Europe and the Americas, where smartphone penetration is already high. However, the Asia Pacific market, which is the most populous area of the world and home to extremely dynamic economies such as China and India, is home to high competition among mobile messaging providers. Competing platforms popular in the region include Line, WeChat and Viber, and all are approaching or have already surpassed 300 million users. China has the world’s largest number of mobile subscribers and Internet users;
  • The traditional SMS segment may yet also provide a challenge to IP-based messaging services, especially if operators or smartphone vendors rollout out their own services in a bid to grab a share of the messaging market;
  • Facebook has raised privacy concerns among Internet users worldwide and present WhatsApp subscribers may be put off by the acquisition, seeing it as a potential sign their contact details could be shared with advertisers and other commercial structures.

Nonetheless, despite the challenges, another avenue for connecting users offers a new and exciting opportunity for a pioneer such as Facebook to work its magic in the mobile market. When Facebook broke through, the PC was king, now the social network is placing a bet on a mobile, small-screen future.