Many eyebrows were raised, when Facebook announced that it would be taking over WhatsApp for an astounding $19 billion – a deal that did not take even two weeks to be formed. We have here focused on certain factors that make this move a smart one on the part of Facebook, from a long-term perspective.
It’s the corporate acquisition deal from the IT and social media sector that everyone is talking about. When Mark Zuckerberg finally decided to shell out $ 19 billion to Jan Koum’s wildly popular instant messaging application, WhatsApp – several business records were broken. It was by far the most expensive acquisition in the history of Facebook – comfortably beating the $ 1 billion paid for Instagram, two years back. Overall too, the Facebook-WhatsApp deal was more than double the value of the Microsoft-Skype agreement (which involved $ 8.5 billion). What made WhatsApp indeed worth so much to Facebook? Let’s take a look:
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Tackling the problem of dwindling interest among young users – According to cumulative research figures covering the last three years, the total number of Facebook users in the 18-25 age group had gone down by an alarming 3.5 million. In fact, it had been projected that FB would lose as much as eighty percent of its current user-base, by the end of 2017 (a Princeton study). The money shelled out for acquiring WhatsApp was necessary for steadying the existence of Facebook, which was on somewhat shaky grounds.
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Effort to reach out to young audience worldwide – A pattern can be detected in Facebook’s recent market activities and acquisitions. It went for Instagram in 2012, had a failed bid for Snapchat, and now it has the ownership of WhatsApp. Clearly, young users – who are the primary subscribers of these IM/image-sharing mobile apps – are the principal target audience of Mark Zuckerberg’s empire. WhatsApp was in a position to bargain for the deal value and raise it so much – simple.
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No extra cost for monetization – The $ 19 billion paid by Facebook is, for all practical purposes, a one-time spending. Unlike what was the case with Instagram, Zuckerberg’s team does not need to spend more money on devising a monetization/business policy for WhatsApp. Users who are using WhatsApp for more than a year are already charged $ 1. Provided that the app would be bringing in about a million new users daily, Facebook can be confident of getting a handsome return on its investment over the long-run.
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Was WhatsApp’s popularity becoming a threat? – Any random iphone application development company in India or abroad could not have challenged Facebook – but WhatsApp was probably already doing so. The monthly users of the instant messaging app is around 460 million, and approximately 71% of that figure use WhatsApp every single day. The actual daily usage figure of Facebook (about 62%) is way lower. With this acquisition deal, chances of WhatsApp becoming ‘the new Facebook’ have been effectively quashed.
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Giving people more interaction reasons – Apps like Instagram and WhatsApp offer specific services to users – like texting, and photo and video-sharing. Now compare that with Facebook – which, in itself, do not provide any extra motive for people to use it. The FB chat has a more than worthy rival in Gmail chat/Gtalk, while Facebook mail is already a flop. Now that WhatsApp legally belongs to Facebook, individuals are likely to be more interested in interacting with the latter. Only status and photo-uploads were no longer enough!
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Mark Zuckerberg did not want another ‘Snapchat scenario’ – The attempts of Facebook to take over Snapchat were frustrating, to say the least, for Zuckerberg and his colleagues. The final price offered was a whopping $ 3 billion – and even then they had failed to woo over Snapchat. Facebook did not want another failed bid with WhatsApp, which was, in any case, way more lucrative than Snapchat. Maybe the deal could have been concluded at a couple of billion dollars less, but Facebook did not want to take a chance.
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The revenue-to-profit model is simple – WhatsApp is a ‘small’ company, with 50-odd employees – a far cry from social media giants like Facebook and Twitter. On FB, maintaining the staff and chalking up viable business expansion plans are both expensive and time-consuming affairs. Such would not be the case with WhatsApp, and the mind-numbing revenue figures would almost entirely be available as actual profit. It’s a cash-cow that Mark Zuckerberg has purchased – one that does not need much maintenance either.
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Opportunity of penetrating the international markets better – Facebook is holding firm in the United States and Canada, but there are places across the globe where it is yet to really catch on. For instance, the engagement rate of average internet-users is on the lower side in most Latin American nations and, to a lesser extent, even in India. Interestingly, these are the places where WhatsApp is extremely popular (ironically, its position in the US is not anything to write home about). The $ 19 billion agreement allows both Facebook and WhatsApp to become ‘global brands’ in the truest sense.
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Facebook’s attempts to adopt futuristic policies make the acquisition worthwhile – In 2006, when Google bought YouTube for $ 1.65 billion, most business experts were of the opinion that the deal was ‘overpriced’. They have since been proved wrong, given the exponential rate at which YouTube’s regular fan-base has expanded across the world. At the other extreme, there was Yahoo – which committed the blunder of acquiring hardly anything, at a time when it was in a market-dominant position. Facebook does not want to go the Yahoo way – it has the money to acquire potentially rewarding apps and software, and Zuckerberg is not shy to use his financial power to secure FB’s future.
Other things aside, the very fact that WhatsApp had become the fastest growing organization in the world (leaving Facebook itself way behind) justifies that FB would try to acquire it, even at an exorbitant price. Since Zuckerberg has categorically stated that ads won’t be run on WhatsApp’s interface – he clearly has the confidence that the app would be reaping handsome profits from its users worldwide. It took only eleven days to strike up the $19 billion deal between Facebook and WhatsApp, and it sure seems to be a smart piece of investment by the Mark Zuckerberg and his team.
We only hope WhatsApp won’t have a ‘Log in with Facebook’ box on its welcome screen!