February 20, 2014
Facebook’s purchase of WhatsApp shows that the market for messaging is far from dead. But it’s just gotten worse for the telcos. We’ve already discussed the underlying reasons in a report — but the fact that Facebook put $19 billion on the table, of which $4 billion is in cash, for a global messaging service with 55 staff should scare telcos, with their millions of employees and high-cost structures. Over-the-top communications tools like WhatsApp, Line, KakaoTalk, WeChat, and Viber (which itself was bought a few days ago by Rakuten) have pushed telcos further and further away from any meaningful customer engagement.
To be sure, WhatsApp is about much more than instant messaging; it’s about content sharing — which is an emotional activity. Such emotional activities are critical to closer customer engagement. As the online giants use ever more granular user analytics to cement their position as marketing powerhouses, telcos’ hopes of developing new revenue streams from analyzing user behavior are slipping away faster and faster. This is what makes the deal so dangerous.
Of course, it’s tough to justify the deal simply on the basis of WhatsApp’s revenue model of $1 annual subscriptions. In my view, the deal is really about:
- Bringing a major competitor into your family. Otherwise, someone else could have lured WhatsApp into theirs. The deal, which accounts for about 10% of Facebook’s market capitalization, could be seen therefore as an insurance cover.
- Buying growth, especially on the mobile side and among younger audiences. 450 million people use the WhatsApp service each month, and that number is growing by 1 million users per day. Of course, Facebook and WhatsApp users overlap — and not every WhatsApp user will be happy at becoming a member of the Facebook family; some will abandon WhatsApp.
- Helping Facebook to revive user engagement. 70% of WhatsApp users use the service every day, compared with only 61% for Facebook. Monetizing WhatsApp users will be tough, though. Facebook has a good relationship with advertisers, and analyzing WhatsApp usage behavior will be key to tailoring ads more accurately to users. But the question is whether WhatsApp users will accept this.
I see a clear risk for telcos: Ultimately, they may be left selling flat-rate data plans and throwing in unlimited SMSes for free. The heyday of big profits from high SMS margins is coming to a close. There’s little reason to assume that telcos are regaining ground in the battle for closer customer relationships, given the painfully slow progress they’re making with RCS or in developing their own network-agnostic over-the-top messaging apps.