Presentation on theme: "Analysis of the Facebook-WhatsApp Deal and Google’s Response"— Presentation transcript:
1Analysis of the Facebook-WhatsApp Deal and Google’s Response Anupama PrakashPGP StudentIIM Kozhikode
2Another 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!But WHY?? Take a look!450 million users70% active daily users1 million new user registrations/dayImmense growth in a rapid fashion for a firm that hardly employs 50 odd people!WhatsApp has a strong global reachA Powerhouse in the MakingWhatsApp –AsiaLatin AmericaHow is it possible?Thanks to WhatsApp’s powerful features:Rapid text messagingEngaging private and group chat optionsQuick file sharingSleek user interfaceMinimum system requirements and data usageFreemium Model (free usage first year, $0.99 from second year)Another Wall Street Shocker: The Facebook-WhatsApp Deal- Anupama PrakashIIM KozhikodeIt 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 WhatsApp for a whopping 19 billion USD! On the surface, the acquisition value for a 5-year old company looked absolutely irrational, rather lunatic. However, a deeper analysis into the deal seemed to bring forth certain characteristics which probably had the potential to justify the deal value. Were these the characteristics that got a strategist like Zuckerberg interested in WhatsApp? Let us take a look.WhatsApp – A Powerhouse in the Making:Known for its powerful text messaging, engaging private and group chat options, quick file sharing and sleek user interface, WhatsApp is fast becoming a rage among the app-loving youngsters of the globe. In particular, WhatsApp is highly popular in the markets of Asia, Europe, Latin America and Africa. It is a common site in India to board a local train and see a youngster WhatsApping on his/her smartphone or even sporting a bag with a big WhatsApp logo. The increasing popularity of WhatsApp is also attributed to the fact that it works on a freemium basis. The first year’s usage is free, post which users will have to pay a subscription fee of just $0.99 per annum. Users would definitely not find that one creating a hole in their pockets.It is a combination of these characteristics that has made WhatsApp gain a strong base of 450 million users, with almost 1 million new ones signing up every day. The user base of WhatsApp has grown much faster than other social networking sites and apps like Facebook, Twitter or Skype. For a company that employs hardly 50 people, this has indeed been immense growth in a rapid fashion. But is this growth indeed worthy of $19 billion is still a question worth pondering.EuropeAfrica“I expect WhatsApp to quickly touch 1 billion users”
3Another Wall Street Shocker: The Facebook-WhatsApp Deal Another concern area of Facebook was its User AttritionUsers frustrated with privacy settings and moving onto other connecting platformsConcerns and Present NeedsFacebook –Facebook’s Twin GoalsWith the desktop market saturating and smartphone clientele exponentially growing, Facebook has been looking to establish a stronger presence in the mobile marketFacebook’s Present Needs:It is a known fact that Facebook for long has been trying to establish a stronger presence in the mobile market. Owing to the PC/laptop market slowing down, the smartphone clientele exponentially growing and Facebook’s app/messenger not turning out to be great hits, Facebook was desperately looking for the right turn-around in this market. The acquisition of Instagram for $1 billion in 2012 is a testament to this. Facebook further tried to acquire Snapchat for $3 billion, but Snapchat turned down the offer.Facebook has also been simultaneously fighting user attrition woes. Many of Facebook’s 1.2 billion users have been getting frustrated with the privacy settings of the site and moving onto other connecting platforms. Thus, Facebook was fighting it out to achieve the twin goals of increasing its mobile presence as well as gaining a loyal customer base. This is where WhatsApp filled the bill. The 450 million “content” mobile users of WhatsApp were a great value addition for Facebook, which is what drove Zuckerberg into the deal. In fact, Zuckerberg expects the WhatsApp user base to quickly touch 1 billion in number.Increasing mobile presenceGaining a loyal customer baseFB App and Messenger reach limited to FB Users. Only Moderate Successes.Facebook was desperately looking for a turn-around in the mobile segmentThe 450 million “content” mobile users of WhatsApp perfectly filled the void
4Other Benefits Revenue Model How can FB Overhaul the Model??? Another Wall Street Shocker: The Facebook-WhatsApp DealOther BenefitsRevenue ModelWhatsApp’s present model:Only Subscription FeeNo advertisement support/revenueHowever, WhatsApp is not effectively collecting the fee as it keeps giving an extension whenever a user nears his/her second yearFacebook earns majority of its revenues from just US and Canada. WhatsApp will now give it a good complementary geographic presence.How can FB Overhaul the Model???Other Benefits:Also, Facebook draws a majority of its revenues from the markets of just US and Canada, so the acquisition of WhatsApp can give it a good complementary geographic presence. In addition, by buying WhatsApp, Zuckerberg has kept Google out, a rival which had also been courting WhatsApp for possibly an even higher price!Revenue Model:But how will Zuckerberg monetize the incremental users acquired from WhatsApp? This question is crucial as the revenue model of WhatsApp is quite perplexing in nature. As a company, WhatsApp does not support advertisements and the only avenue for income is the subscription fee from users. But the company does not seem too interested in collecting the fee as it mostly given an extension whenever a user nears his/her second year. So the only potential seems to be in tapping the phone numbers and customer insights gained by analysing the data sharing activity of users on WhatsApp and using that for customized advertising on Facebook. This type of an integration between the two platforms can be a challenging, yet possible solution.Integrate Facebook and WhatsApp, data mine, and advertise!By buying WhatsApp, Zuckerberg has also kept Google out, a rival which had also been courting WhatsApp for possibly an even higher price!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
5Deal Value – Revenue Angle Another Wall Street Shocker: The Facebook-WhatsApp DealDeal Value – User AngleDeal Value – Revenue AngleFrom 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).Presently WhatsApp incurs only marginal expenses in terms of:Marketing costsInfrastructure costsEmployee costsBut What About the Numbers?!In terms of revenue, let us assume:Zuckerberg streamlines subscription systemWhatsApp indeed reaches 1 billion users$42$128$80$60But what about the Numbers?!Even though a lot of analysis has gone into the valuation of the deal, not much seems to have uncovered anything earth-shaky. $19 billion for 450 million users translates to roughly $42 per user, which is much lesser than the value of a Facebook ($128), Twitter ($80) or a LinkedIn user ($60). So if the users of WhatsApp can be fairly relied on, the acquisition value can be counted rational to an extent. Furthermore, if Zuckerberg can streamline the subscription system of WhatsApp and if indeed it reaches a billion users, the company can make fairly good profits as it incurs only marginal expenses in terms of marketing costs, infrastructure costs or employee costs (only ~50 employees).Another interesting observation is that the deal cannot really be considered an over-valued one as $15 billion of the deal amount was met using Facebook stocks which themselves were over-valued at the moment. So the usage of over-valued stocks for the exorbitant deal value neutralized the hyper effect!So if the users of WhatsApp can be fairly relied on, the acquisition value can be counted rational to an extentIf these assumptions hold true, WhatsApp can make fairly good profits because of its low cost business modelDeal 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!
6Future Road and Challenges for FB Google’s Strategic Response Another Wall Street Shocker: The Facebook-WhatsApp DealFuture Road and Challenges for FBGoogle’s Strategic ResponseZuckerberg possibly did not go into the deal keeping numbers in mind. His strategic intent behind the deal:Gain a stronghold in the mobile marketRetain customersIncrease investor confidence in the companyGoogle’s initiatives in the mobile segmentGoogle’s Hangout app has impressed users with its chat and voice call facilitiesHangout SMS lets users access their phone messages using their Hangout accountsGoogle is also taking steps to revamp Google+ to give stronger head-on competition to FacebookSteps to further capitalize the photo-enhancement features of Google+Integration with its other platforms like Android and YouTubeThe current challenge for Facebook is to:Monetize new customer base acquired from WhatsApp effectivelyStrategize ways to fight competitors like Line, WeChat and iMessage (as switching costs are very low in this business)The Road and Challenges Ahead for Facebook:With all analysed and written, the main idea that emerges is that Zuckerberg possibly did not go into the deal keeping numbers in mind. His strategic intent behind the deal was to gain a stronghold in the mobile market, retain customers and increase investor confidence in the company. Investors have also reacted positively towards the deal hoping for a success similar to that of Instagram.If history is anything to go by, the $19 billion value may even be viewed favourably in the future as many acquisitions of the past that were initially considered to be pricey buys were later re-rated as phenomenal successes. The best examples are Google’s acquisition of YouTube and Facebook’s own acquisition of Instagram.Right now, the challenge for Facebook is to make the most of the new customer base acquired from WhatsApp and strategize ways to fight competitors like Line, WeChat and iMessage, as switching costs are very low in this business. In the long run, Facebook should also think of its growth strategy in terms of optimizing acquisitions and innovation. Facebook currently is on the defensive and acquiring any firm which is growing as a potential competitor. On similar lines, P&G is a great firm which made acquisitions as one of its core competencies itself, however, P&G is known more for its innovation than for anything else. Hence if growth has to sustain, Zuckerberg will have to think much beyond identifying and absorbing Wall Street rivals. “Can he”, remains to be seen.Google’s Strategy:Facebook’s arch rival Google is also working towards establishing a stronger mobile presence. Google’s Hangout app has managed to impress the audiences with its chat and voice call facilities. Google has also introduced Hangout SMS which lets users access their phone messages using their Hangout accounts. Google is also taking steps to revamp Google+ so as to give stronger head-on competition to Facebook in the social networking space. Google is trying to capitalize further on the photo-enhancement features of Google+ and integrate it with its other platforms like Android and YouTube.Besides, Google already has an answer in the form of “AdWords” to the customized advertising plans of Facebook. Google has used its leadership in the search engine arena to publish relevant ads to users based on the subject matter being searched for. “AdWords” today forms a major chunk of Google’s advertising and overall revenues. Thus, Google already has an effective plan in place to tackle Facebook, with or without WhatsApp.- Anupama PrakashIIM KozhikodeGoogle 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”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.If Google can continue with its current innovation plans and sync its existing platforms further, it can definitely tackle Facebook – with or without WhatsApp!Ideal Success Model