Observations on Facebook’s WhatsApp Business Model

16 billion is more than the sum Microsoft paid for Nokia, and Google paid for Motorola, combined. Those companies actually have tangible goods that did more than text message. 16 billion is almost three times NASA’s annual science budget that put a car-sized rover on Mars.

Facebook did not buy WhatsApp the messaging service. It bought the database, i.e. the personal information of 450 million users worldwide. Facebook will license that data to advertisers, who in turn will target their ads back at the database. Businesses like WhatsApp don’t provide a service. They provide an audience. The genius of the social media idea is that the users themselves create the value.

People need to start thinking about Facebook as an advertising network, rather than a tech company. FB paid $16B to expand their reach, shore up their declining millennial demographic, and obtain new engineering talent. To put this in retrospect, it’s sort of like NBC paying $4.4B to obtain exclusive rights to the Olympics or other broadcasters paying $27B to get TV rights to NFL games. It’s all about appeal to potential advertisers.

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WhatsApp is built on charging users $1 per year and having no ads, no user tracking, and no data retention. At $35 per current user (i.e. recouping the purchase price in 35 years), Facebook is either planning on changing all of that, or on increasing the annual fee (probably a non-starter given the lower income demographics of the customer base), or they think the customer base is going to grow from half a billion to 2-3 billion in the next few years (numbers based on assuming they don’t want to wait more than 10 years to get their money back).

The risk of changing WhatsApp into another data-mining, ad-serving company in the model of Facebook, is that the user base might respond by moving to a less annoying service — especially if someone else decides to base their competing service on subscription fees and user privacy. The speed with which people have started distrusting Google in the past few years suggests that attempting to transform a private ad free service into another privacy invading advertising service is fraught with peril.

Growing from 500 million to 2-3 billion customers might be possible, but probably only if WhatsApp succeeds in becoming the dominant player and all the other messaging apps die off. There’s also a real question as to whether or not all those users will stay on as paying customers once their free year runs out.

In short, Facebook is taking a huge gamble here, and they’re running a very high risk of taking a serious loss on the purchase price.

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