This week Facebook bought WhatsApp, the
instant messaging mobile application for a staggering $19 Billion dollars
(approximately £11.42 Billion). Given the firm was only founded five years ago,
this is considered quite a high price and adds to the growing scepticism
surrounding the technology industry of over-valued companies, similar to that
occurring before the dot-com crash of 2000.
On the otherhand WhatsApp’s valuation can be justified by the
fact that it is the world’s fastest growing social network, as 1 million new
users join the network’s existing 450 million user base every single day,
dwarfing that of Facebook at its peak. In addition it’s at the forefront of
smartphone-based messaging mobile apps that is sweeping the world. The others
within this small group are mostly regional competitors. These include the
Japan’s Line that boasts 340 million users and China’s WeChat with 272 million
active users. These start-ups took full advantage of the popularity of data
plans that emerged due to the success of smart phones in 2008.
So what exactly is WhatsApp?
It’s an application available on all the major mobile-phone
platforms such as Apple and Android, that allows users to send unlimited text,
audio, video and picture messages to other users around the world over the
internet, without incurring expensive carrier charges. Essentially WhatsApp
replaces traditional text messaging and users of the service need no login with
the only requirement being a phone number. To date, WhatsApp has never engaged
in any advertising campaigns, relying solely on word of mouth for user growth.
Currently WhatsApp main income source is subscription fees, which it annually
charges to users at £0.69 after a year-long free service. The application’s
unique selling point is that it offers the ability to engage in-group
conversations and is deemed as a lot more hassle-free than their Facebook or
Twitter alternatives. The founder, Yan Koum has avoided the introduction of
advertising onto the platform, as he believes it will curb users away. However some
users are doubtful whether or not this approach will continue due to Facebook’s
increasing reliance on advertising from their core elements. On the other
hand, one of the services’ disadvantages is that you need the Internet to use
it, unlike text messages that rely entirely on carriers. However this is not
too problematic, for users in developed nations, as most people there, live and
work within urban areas with strong signals, with most in 3G and 4G enabled
areas.
Facebook
Recently, Facebook reportedly attempted to acquire Snapchat, in
November of last year for a $3 Billion cash offer, even though the firm
continuously made losses. This successful deal
on the other and, represents Facebook’s biggest acquisition to date and the
highest start up buyout in history. Surprisingly the takeover deal was only
initiated 11 days before the announcement and was completed on Valentines
Day with the assistance of Morgan Stanley and Allen and Co. Initially the
market reacted negatively, as following
the deal Facebook shares fell by 5%, before quickly recovering slightly. The
£11.4 billion deal was represents approximately 10% of Facebook market
capitalization and comprises of £2.4Billion in cash, £7.18 billion in Facebook
shares and £1.8 billion in restricted stock to WhatsApp employees, an incentive
for them to stay with the firm. Facebook’s founder, Mark Zuckerberg said “I’ve also known Jan for a long
time, and I know that we both share the vision of making the world more open
and connected.”
Why pay so much?
In acquiring the messaging service, Facebook will get access to
WhatsApp young, teenage audience, which it has been losing, according to Pew
Research Centre. The paper concluded Teenagers have been maintaining lower
profiles on Facebook and instead are spending more of their time on WhatsApp
and Snapchat. This buyout may help Facebook regain their original target
audience back to their social network of 757 million active daily users
What’s next?
However WhatsApp users will look elsewhere if Facebook ownership
means messaging services continue to stop working, which occurred on 22
February for 3 hours, only 3 days after the announcement. In the
meantime, Jan Koum will be joining Facebook’s board after a job rejection from
Facebook only a few years ago. "We're excited and honoured to partner with
Mark and Facebook as we continue to bring our product to more people around the
world." Koum has insisted that WhatsApp will remain in their Mountain View
Headquarters in California and will remain independent from Facebook’s existing
messaging service.
Only time will tell, whether Facebook’s huge investment in
WhatsApp will actually pay off, as WhatsApp’s hostility towards
advertising, dramatically reduces the firm’s potential income streams. However
one thing for certain, is WhatsApp incredible growth potential, at current
projections it will reach the 1 billion user landmark by 2016.
By Richmond Amoah
