5 Key Reasons why Facebook overpaid for WhatsApp (and doesn’t understand the messaging service space)

The $19 billion acquisition of global messaging platform WhatsApp by the world’s favourite social network Facebook has sent Shockwaves from Silicon Valley to VCs and tech watchers around the world. Nevermind the quick arise of sites such as http://thingsthatarecheaperthanwhatsapp.tumblr.com where comparisons are drawn between the GDP of countries such as Iceland and Jamaica with the WhatsApp price tag, Marc Zuckerberg is overpaying and this is why:

1.    WhatsApp user engagement should not be compared with Facebook’s (or of any other social graph service)
Much has been made of the 70% user engagement level of the service, which is higher than Facebook’s which in itself clock in a pretty damn impressive 61%. However, comparing WhatsApp’s instant messaging service – in reality an infrastructure service – with the engagement on a social graph network such as Facebook or Google+ is comparing apples and oranges. The relevant comparison would be iMessage, SMS messaging and other infrastructure services. Not everyone releases these statistics, but numbers from a year ago suggests Kakao Talk has higher engagement and LINE somewhat lower engagement than WhatsApp.

2.    The users of WhatsApp does not want to pay for messaging
Facebooks CFO David Ebersman contributed to Facebook’s analyst call that messaging is a ”really valuable service that people are willing to pay for”. Uh-oh. WhatsApp has specifically attracted the users who are NOT willing to pay for messaging but instead are seeking refuge from telecoms who sucked SMS and MMS charges from its subscribers back in the day. Looking at the flutter of games and services cluttering the competition, LINE, WeChat etc it becomes clear that WhatsApp has offered a cleaner service targeting the über-scrooges amongst the mobile consumers. The people who wants it clean, with no ads.

3.    WhatsApp’s users does not like ads and don’t want to be monetized
There will be no ads introduced to WhatsApp – at least if we are to believe the promises made by WhatsApp CEO Jan Koum. Marc Zuckerberg believes the users can be monetized in other ways, without getting too specific about this. Looking at the monetization runs of Instagram, it has so far not been highly original or profitable (well, it’s early days). When you have users who are attracted to the platform which distinguishes itself from its competitors by not getting sidetracked by making money, you are going to have a hard time making money. Either way, for the next five years WhatsApp will concentrate on attracting even more users who doesn’t like advertising.

4.    The service does not have its own graph
WhatsApp does not store your network of connections, but instead uses the contact list on your phone. As such, it does not have a contact list of its own, unlike Twitter, LinkedIn and now parent Facebook. Whenever one of your contacts changes their phone number, you will have to edit their information or lose touch. Old school or not – WhatsApp does not have the lock-in that a graph provides – which puts it at a distinctive disadvantage against competing messaging services.

5.    Hypothetical revenue estimates
South Korean competitor Kakao Talk estimates its 2014 revenues at 200 mUSD with 130 million users – an ARPMAU of  $0.13. Theoretically, if WhatsApp achieved similar revenue per user as Kakao Talk ,WhatsApps revenues could have reached 600 mUSD for 2014. Kakao Talk is a fully monetized platform with games and stickers, whereas WhatsApp is staunchly against anything jeopardizing its simple design and clean service. The revenue will stay hypothetical. A key difference between Instagram and WhatsApp is the latter’s lack of a graph of its own. The acquisition of WhatsApp is a defensive land grab, there is no way these users will ever be monetized in a way justifying the price tag without deserting WhatsApp’s principles and their contract with their users.

Facebook demonstrates its willingness to invest, but has not demonstrated a vision or deep understanding of the mobile messaging service space. WhatsApp is the largest player in terms of users, but is also furthest from getting anywhere near monetizing its user base. If Facebook thinks messaging is ”a really valuable service” to quote Facebook’s CFO one more time, they certainly need to rethink their strategy for messaging one more time.

En kommentar på “5 Key Reasons why Facebook overpaid for WhatsApp (and doesn’t understand the messaging service space)
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