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WhatsUp, Facebook?

[SINGAPORE] Facebook has tightened the screws on telcos with a US$19 billion buyout of WhatsApp, becoming a tentacled triumvirate of InstaWhatFace following its Instagram acquisition in 2012.

While the market reeled from sticker shock, the price tag makes sense in deranged Silicon Valley terms, analysts think. Its per-user valuation of US$42 is at home on the wildly varying spectrum of previous valuations.

Larger numbers are at stake, like the US$120 billion from global SMS revenue. Now, WhatsApp - the world's most formidable app with more than 450 million monthly active users - will team up with Facebook in an all-out assault on communication.

This will happen on at least two fronts. Facebook's own app, Messenger, targets the "informal email" channel - the one we use when an instant reply is not expected.

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Now, Facebook will close the loop with Whats- App, the SMS-substitute for when a swifter response is required. WhatsApp is a mobile play, and while Messenger is a mobile app, it is best used in its browser iteration. Both parties are coy about monetisation, insisting that growth takes priority. "We don't expect (WhatsApp) to have a detailed plan for monetisation yet and we're not in a hurry," Facebook told The Business Times yesterday.

Still, advertising and frivolous add-ons can be ruled out in the short term.

"You can still count on absolutely no ads interrupting your communication," a blog post by WhatsApp founder Jan Koum said yesterday. Mr Koum, who was born in Ukraine and once stood in line for food stamps, is believed to be worth almost US$7 billion, thanks to the buyout.

WhatsApp is also unlikely to hawk stickers and games, as Facebook's Mark Zuckerberg told analysts that WhatsApp would not be "adding lots of bloated features".

Now, WhatsApp's revenue comes from the 99 US cents that users pay annually after the first free year of usage. This is not expected to increase for now. "It hasn't been, and won't be, the top priority to optimise revenue in the short term," said David Ebersman, Facebook's CFO, yesterday.

What looms, however, is a relentless geographical and technological expansion for WhatsApp on Facebook's muscle. "When (WhatsApp) goes into a country, they don't rest until their service is faster than SMS and as reliable," Mr Zuckerberg said.

In the coming months, WhatsApp will refine message delivery speed, application reliability and its impact on smartphone battery life, WhatsApp's Mr Koum said.

If this sounds unsexy and reminiscent of the telco sector, it is because Facebook is gunning for its market. WhatsApp handles 53 billion messages a day - almost the size of the world's SMS volume.

Now, WhatsApp's next target is one billion users - not far off with its rate of one million new users a day. Once achieved, there will be "clear ways that we can monetise", Mr Zuckerberg said.

This will come at telcos' expense. SMSes might be under siege, but it still brought in US$120 billion in revenue last year which will be sorely missed if WhatsApp successfully monopolises global messaging.

This is not to say that a firm like SingTel will take it lying down. The telco, which quietly scrapped WhatsApp-challenger LoopMe last year, was working on what it swore was "something that is just as good", according to top executive Allen Lew last November.

"I think (SingTel) would like their own service to compete directly with WhatsApp, to address the fact that a service like that is piggybacking on its network," said Clive McDonnell, chief equity strategist for Standard Chartered Singapore.

With 501 million mobile customers across 25 countries, SingTel's scale makes the venture worthwhile. "It makes excellent business sense, but the catch is, we don't know if it can take off . . . We don't even know what the service will look like," Mr McDonnell said.

With Facebook's weight behind WhatsApp, SingTel will have to squint extra hard at its own potential offering, whatever it may be.

Even so, WhatsApp will be unable to recreate the fat margins of telco yesteryear on 99 US cents a year. Instead, the value will lie in data, analysts believe.

"There is . . . potential for Facebook to leverage WhatsApp data to help drive improved monetisation on other Facebook products," a Macquarie report said.

These are nebulous ideas, but few dare say that this deal makes no sense. The US$1 billion Instagram buyout now looks like a good deal, two years on.

In 2010, a Time magazine profile of Mr Zuckerberg noted his disconcerting tendency to stare elsewhere mid-conversation, looking "off to one side as if he's hearing noises offstage". Today, the market gives him much leeway, perhaps conceding that Mark Zuckerberg is indeed looking elsewhere - seeing possibilities that the rest of us can't.

 

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