Analysis of the Facebook-WhatsApp Deal and Google’s Response

1. Analysis of the Facebook-WhatsApp Deal and Google’s Response Anupama Prakash PGP Student IIM Kozhikode

2. 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! But WHY?? Take a look! • 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! WhatsApp has a strong global reach Latin America Asia WhatsApp – A Powerhouse in the Making • How is it possible? • Thanks to WhatsApp’s powerful features: • 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) Europe Africa “I expect WhatsApp to quickly touch 1 billion users”

3. Another Wall Street Shocker: The Facebook-WhatsApp Deal Another concern area of Facebook was its User Attrition Users frustrated with privacy settings and moving onto other connecting platforms Facebook’s Twin Goals Facebook – Concerns and Present Needs With the desktop market saturating and smartphone clientele exponentially growing, Facebook has been looking to establish a stronger presence in the mobile market Increasing mobile presence Gaining a loyal customer base FB App and Messenger reach limited to FB Users. Only Moderate Successes. Facebook was desperately looking for a turn-around in the mobile segment The 450 million “content” mobile users of WhatsApp perfectly filled the void

4. 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. How can FB Overhaul the Model??? 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

5. Another Wall Street Shocker: The Facebook-WhatsApp Deal Deal Value – User Angle 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). • Presently WhatsApp incurs only marginal expenses in terms of: • Marketing costs • Infrastructure costs • Employee costs But What About the Numbers?! • In terms of revenue, let us assume: • Zuckerberg streamlines subscription system • WhatsApp indeed reaches 1 billion users $60 $42 $80 $128 If these assumptions hold true, WhatsApp can make fairly good profits because of its low cost business model So if the users of WhatsApp can be fairly relied on, the acquisition value can be counted rational to an extent 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!

6. Another Wall Street Shocker: The Facebook-WhatsApp Deal Future Road and Challenges for FB Google’s Strategic Response • Zuckerberg possibly did not go into the deal keeping numbers in mind. His strategic intent behind the deal: • Gain a stronghold in the mobile market • Retain customers • Increase investor confidence in the company • Google’s initiatives in the mobile segment • 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 • Steps to further capitalize the photo-enhancement features of Google+ • Integration with its other platforms like Android and YouTube • The current challenge for Facebook is to: • 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) 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” 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