WhatsApp — Network effects worth $19 billion?

WhatsApp has the potential to leverage extremely sticky network effects for untapped revenue potential

Back in early 2014, Facebook had 945 million mobile users, but was still willing to pay $19 billion for WhatsApp – a mobile messaging service with hundreds of millions of users. [1]  Many analysts questioned the rationale behind this acquisition, but due to the network effects that WhatsApp brings to Facebook, I actually think the acquisition was a steal for the following reasons:

1. Couldn’t afford another Snapchat Situation

Rather famously, in late 2013 Facebook attempted to buy Snapchat for $3 billion, but was turned down.  In current valuations, Snapchat is valued anywhere from $16 – $20 billion dollars, but even more problematic for Facebook, their business model – especially their Stories feature – is beginning to challenge the platform dominance of Facebook.  The Stories feature has become a direct competitor to the Facebook News Feed, and it is the millennial generation (a highly coveted demographic among social platforms and their advertisers) that are making the switch from Facebook to Snapchat. [2]  Why is this happening? Well, it is a very simple network effect driven transformation — users go to the platforms where the rest of their social network can be found.  I’m pretty sure Facebook is wishing they offered MUCH more than $3 billion to get in front of this attack on their own social community/network.

Furthermore, Snapchat appears to have opened Facebook’s eyes to the difference between a social mobile platform  and a social mobile messaging app. Even though more time may be spent on a mobile platform (checking statuses, pictures, etc.), a messaging app is accessed more often as it needs to be referred to every time a message is exchanged.  I’ll come back to this when I talk about monetization potential, but the bottomline is that more often interaction means more opportunities to show your user what you want them to see.  Additionally, a messaging app stores a history of active engagement with the app, not the passive engagement you see on many social platforms where information is often just being viewed or consumed, on messaging apps, almost every time you open the app you engage with the platform and add information/data to be sent to another person in your network.

 

2. Disruption Protection

Andreesen Horowitz’s Benedict Evans captures this point well when he said, “(this acquisition) shows the continued determination of Facebook to be the ‘next’ Facebook. It’s striking to compare the aggressive reaction to disruption shown by Google, Facebook and other leading web companies today with how some of their predecessors a decade ago stumbled and lost their way.”[3] When it comes to successfully leveraging a direct network effect to increase the number of users on your platform, your operating model is completely tied to your ability to not lose your user by either internally developing the cutting edge new features/platforms OR acquiring the companies/technologies/ideas that could disrupt your network.

Benedict goes on to say, “That’s the right way to think about value, I think – not ‘OMG $16bn!”, but “is this worth 10% of Facebook?’ The deal values WhatsApp users at $35 each (very close to what Google paid for YouTube, incidentally), but the current market cap of Facebook values its MAUs at $140 or so.” Essentially, taking a step towards quantifying the pricetag an incumbent in the social media platform space should be willing to pay to acquire an up-and-coming technology. Or put in other words — the price they are willing pay to stave off disruption and maintain the benefits of their direct network prowess.

 

3. Monetization value capture potential

For a long time, Facebook had been quiet about any plans to monetize both their internal Messanger tool and WhatsApp, but recently, Zuckerberg has been more open about Facebook’s approach to monetization, comparing it to their past approaches with the general Facebook platform:

“If you go back to 2006 and 2007, there were a lot of people that were encouraging us to just put banner ads and inorganic content into the experience” Zuckerberg sad. “And what we decided was that over the long-term, the ads and monetization would perform better if there was an organic interaction between people using the product and businesses.”[4]

Essentially, Facebook eventually hopes to see users “opt-in” to a chat-like interaction with sponsored companies/organizations, much like what they did with the introduction of “Pages” on the main Facebook platform. A major driver behind these interactions would be the data that Facebook has collected on users through both Facebook and WhatsApp accounts.  However, this flies in the face of WhatsApp previous stance on using users personal data (see video), and it is worth watching closely how users on the platform may respond. However, if this approach gains traction, then companies would be willing to pay top dollar to have an intimate, and direct, connection into the mobile existence of their target customers.

 

As incumbent in a network effect based space, it is hard to put a dollar amount on keeping your network at bay… but, when it comes to WhatsApp, I think Facebook might somehow feel that $19 billion dollars ends up feeling like a steal…

  1. http://www.theatlantic.com/technology/archive/2014/02/whatsapp-and-the-erosion-of-the-network-effect/283980/
  2. http://techcrunch.com/2015/02/19/crazy-like-a-facebook-fox/
  3. http://ben-evans.com/benedictevans/2014/2/19/whatsapp-and-19bn
  4. http://techcrunch.com/2015/07/29/ease-them-into-it/
  5. Video : http://money.cnn.com/video/technology/2014/02/20/t-whatsapp-facebook-users-data-mobile.cnnmoney?iid=EL

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3 thoughts on “WhatsApp — Network effects worth $19 billion?

  1. Thanks for the post! Like you mentioned, Facebook has done a great job continuing to build the WhatsApp user base, thereby creating strong direct network effects. It will be interesting to see how the indirect network effects play out. Unlike other platforms Facebook owns (main Facebook page, Instagram), the company cannot simply plug in sponsored adds on Whatsapp. I believe the company is taking a longer time to start monetizing the app because it has to figure out the right way to interact with users on a messaging platform. There are plenty of other messaging apps like you mentioned and users tend to have more than one, so if Facebook messes up with its monetization play, it can quickly start losing the strength of the direct network effects. I’ll definitely be watching to see how this story plays out over the next few years.

  2. It’s so fascinating how many players in different industries Whatsup has displaced: from mobile carriers monetizing texts, to contributing at the fall of RIM by annihilating the value of the BBM (Blackberry messenger). It is now continuing to disrupt the mobile carriers by offering phone calls, but – as many people – I’m struggling with the value capture.

  3. Nowadays it seems that companies are desperate to get as many users as possible and as you describe “being where people networks are” seems to be the reason. I am concerned though with the fact that monetization doesn’t seem a simple task. Users have grown in an environment where these apps were from free and I doubt an invasive kind of advertising would do the trick. I believe the future lies in sponsored content rather than ads, and that world is still evolving so it will be interesting to see how that works out.

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