Analysis of the Facebook-WhatsApp Deal
and Google’s Response
Anupama Prakash
PGP Student
IIM Kozhikode
Another Wall Street Shocker: The Facebook-WhatsApp Deal
It was a deal that surprised some, shocked many, and left some gaping at the wall in sheer amazement. This is what
Mark Zuckerberg did to the analysts of the financial world and to the general public when he announced that Facebook
had decided to buy 5-year old WhatsApp for a whopping 19 billion USD!
• 450 million users
• 70% active daily users
• 1 million new user registrations/day
Immense growth in a rapid fashion for a firm
that hardly employs 50 odd people!
How is it possible?
Thanks to WhatsApp’s powerful features:
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Rapid text messaging
Engaging private and group chat options
Quick file sharing
Sleek user interface
Minimum system requirements and data
usage
Freemium Model (free usage first year, $0.99
from second year)
WhatsApp –
A Powerhouse in the Making
But WHY?? Take a look!
WhatsApp has a strong global reach
Asia
Latin America
Europe
Africa
“I expect WhatsApp to quickly
touch 1 billion users”
Another Wall Street Shocker: The Facebook-WhatsApp Deal
With the desktop market saturating and smartphone clientele
exponentially growing, Facebook has been looking to
establish a stronger presence in the mobile market
FB App and Messenger reach limited to FB Users.
Only Moderate Successes.
Facebook was desperately looking for a
turn-around in the mobile segment
Facebook –
Concerns and Present Needs
Another concern area of Facebook was its
User Attrition
Users frustrated with
privacy settings and
moving onto other
connecting platforms
Facebook’s Twin Goals
Increasing mobile
presence
Gaining a loyal
customer base
The 450 million “content” mobile users
of WhatsApp perfectly filled the void
Another Wall Street Shocker: The Facebook-WhatsApp Deal
Other Benefits
Revenue Model
WhatsApp’s present model:
• Only Subscription Fee
• No advertisement support/revenue
However, WhatsApp is not effectively collecting
the fee as it keeps giving an extension whenever a
user nears his/her second year
Facebook earns majority of its revenues from just US
and Canada. WhatsApp will now give it a good
complementary geographic presence.
By buying WhatsApp, Zuckerberg has also kept
Google out, a rival which had also been courting
WhatsApp for possibly an even higher price!
How can FB Overhaul the Model???
Integrate Facebook and WhatsApp,
data mine, and advertise!
Tap the phone numbers and customer
insights gained by analysing the data
sharing activity of users on WhatsApp
and use that for customized
advertising on Facebook
Another Wall Street Shocker: The Facebook-WhatsApp Deal
Deal Value – Revenue Angle
From the users point of view, $19 billion for 450
million users translates to ~$42 per user, which is
much lesser than the value of a Facebook ($128),
Twitter ($80) or a LinkedIn user ($60).
$42
$128
$80
$60
So if the users of WhatsApp can be fairly
relied on, the acquisition value can be
counted rational to an extent
But What About the Numbers?!
Deal Value – User Angle
Presently WhatsApp incurs only marginal
expenses in terms of:
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Marketing costs
Infrastructure costs
Employee costs
In terms of revenue, let us assume:
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Zuckerberg streamlines subscription
system
WhatsApp indeed reaches 1 billion users
If these assumptions hold true, WhatsApp
can make fairly good profits because of its
low cost business model
Deal Value – Payment Mode Angle
$15 billion of the deal amount was met using Facebook stocks which themselves were over-valued. So the
usage of over-valued stocks for the exorbitant deal value neutralized the overpayment effect!
Another Wall Street Shocker: The Facebook-WhatsApp Deal
Future Road and Challenges for FB
Zuckerberg possibly did not go into the deal keeping
numbers in mind. His strategic intent behind the deal:
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Gain a stronghold in the mobile market
Retain customers
Increase investor confidence in the company
The current challenge for Facebook is to:
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Monetize new customer base acquired from
WhatsApp effectively
Strategize ways to fight competitors like Line,
WeChat and iMessage (as switching costs are very
low in this business)
In the long term, Facebook should optimize its growth
strategy in term of acquisitions and innovations.
Being on the defensive and just absorbing Wall Street
Rivals will not help sustenance.
Ideal
Success
Model
Google’s Strategic Response
Google’s initiatives in the mobile segment
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Google’s Hangout app has impressed users with its
chat and voice call facilities
Hangout SMS lets users access their phone
messages using their Hangout accounts
Google is also taking steps to revamp Google+ to give
stronger head-on competition to Facebook
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Steps to further capitalize the photo-enhancement
features of Google+
Integration with its other platforms like Android
andYouTube
Google has also used its leadership in the
search engine arena to publish relevant ads
to users based on the subject matter being
searched for through “AdWords”
If Google can continue with its current innovation
plans and sync its existing platforms further, it can
definitely tackle Facebook – with or without
WhatsApp!