On 19th February, 2014 Facebook announced the acquisition of WhatsApp for a whooping sum of $19 Billion and the internet went crazy. The internet had to be put on sedatives to calm itself down. This post however is not about how to sedate internet, it is about trying to figure out why Facebook spent more money than the GDP of 82 countries to a buy an app that can be downloaded for free.
To answer the 19 billion dollar question let’s start by stating the fact that serves as the backdrop for this acquisition. Facebook wants to overtake Google in ad revenues! In 2013 Google raked in $50.57 Billion in ad revenues while Facebook tried to catch-up in 2nd place with $6.98 Billion in ad revenues. The chart below elaborates on the global digital ad revenue scenario.
This brings us to the real question. How would the acquisition of WhatsApp help Facebook grow its ad revenues faster than Google? There are 3 key factors that guide towards the answer to this question.
1. Mobile is the future
The fact based estimation below by industry expert Benedict Evans pretty much sums up the ascension of mobile to the top. For more proof read this too.
Given the rise of mobile, Facebook is consciously trying to become a mobile company. In Q4 ‘13 Facebook’s ad revenue from mobile surpassed that from PCs. Although Google has 48.76% market share of global mobile ad revenues as compared to 16.91% of Facebook, but Facebook grew mobile ad revenues 3 times faster than Google in 2013.
By acquiring the largest social messaging app with 450 million monthly active mobile users, Facebook aims to strengthen its strategy to grow faster than Google in mobile space through better understanding of mobile users.
2. Emerging markets and young people
In the coming years, highest growth in internet usage and smartphone penetration is going to come from two sources; emerging markets and youngsters. The unique thing about users from emerging markets and youngsters is that most of them have already or are going to experience internet first on smartphones/tablets, bypassing PCs. WhatsApp is a clear winner on all fronts here as it is adding new users at the rate of 1 million per day. WhatsApp is more popular in emerging markets and among youth, and for many it is the first point of entry to experience ‘internet’. WhastApp even works on inexpensive phones such as Nokia Asha, making it easy for youngsters in countries such as India and Pakistan to connect and chat while avoiding expensive SMS rates.
While Google has already made inroads in emerging markets and new/young smartphone users through Android, the acquisition of WhatsApp (and Instagram) does give Facebook a fighting chance to compete with Google on these two fronts.
3. Real-time insights for better ad targeting
Advertisers are willing to pay more money and that too more frequently if their ads reach the right audience at right time. To reach the right audience the ads need to be targeted accurately. To target ads accurately, companies like Google and Facebook need real-time insights from the users that are today swiping away on multiple screens. Google uses real-time insights from its search engine, YouTube, Google+, and Gmail/Gtalk among others to improve ad-targeting accuracy. Facebook on other hand has Instagram and user data of its own to generate insights for targeting ads accurately. Now add WhatsApp to that equation. With nearly 50 billion messages sent back and forth daily, imagine the level of real-time insights Facebook can generate to target its ads to where and when they matter the most. Consider a scenario in which a group discussion on WhatsApp about a camera purchase decision among friends enables Facebook to target an ad by Nikon to participants of that WhatsApp group when they login or refresh their Facebook page. Would that give Facebook an edge over Google to lure Nikon to spend more on advertising with Facebook?
It is clear that Facebook bought WhatsApp today to compete with Google in future. The race is on to gain share of digital and mobile ad revenues. The ROI of Facebook’s $19 Billion investment would depend on its ability to leverage the 3 factors mentioned above in this post. The key challenges it would face would include privacy concerns, sustained growth of WhatsApp as a standalone offering, and its ability to process Big Data into useful insights that translate into advertsing $$$.
This is just my interpretation of this event and I may be totally wrong. In-fact I would want to see Facebook do something crazier with this acquisition such as developing a wearable device that merges social messaging (WhatsApp), social networking (Facebook), and social picture sharing (Instagram) in one. Looking forward to receiving feedback on what you think about this deal? What do you think Facebook will do? How will its competitors react?