Less than two years ago I wrote about Facebook's $1billion acquisition of the photo sharing App Instagram. The transaction raised some eyebrows at the time in terms of the purchase price for a company that had no revenue streams. Facebook faced some serious questions at the time about its intentions and refused to rule out a change to an advert-driven model or to start charging for use. Neither of those changes have happened and the growth of users has actually accelerated. Just before Christmas the company announced that they had passed the 150 million active monthly users mark and the growth shows no signs of letting up.
This in itself poses a problem for the management of Facebook. On one hand the objective of growing the user base is being hit, but on the other hand they are making absolutely nothing from these users. Investors will soon start to question this strategy, with every user costing Facebook additional cost, albeit a few dollars per annum. What is clear is that when the day comes when ads or charges are introduced, users will jump ship to a new app. How can we be sure of this? Well, the answer can be seen as the background of the success of the social media giant's latest acquisition.
If observers thought paying $1 billion for a start-up with no revenue stream was crazy, then what have they made of the announcement this week that Facebook have paid nineteen times this amount for another relatively new app developer. The acquisition of messaging service WhatsApp for $19billion seems like bad investment but is there a method in the madness.
The messaging company has grown beyond believe since it's launch and now has 450 million monthly users. Recently the company had decided to start charging new users $1 per annum, but even with that subscription model (and with all users paying this amount), the 40:1 sales to acquisition ratio is eye-watering.
The popularity of the app has been fuelled by the changes in our consumption of data. Mobile phone networks have had to change their pricing models to gain market share and many now provide unlimited data whilst retaining a charging model for simple texting. Various phone manufacturers developed their own closed user group messaging services such as Apple's I-message and Blackberry's BBM but users wanting to converse across technologies faced charges for sending the most simple messages.
Small software set-ups started developing applications that would allow users to exchange messages through an app interface and the huge growth in wi-fi networks. Viber and WhatsApp were two of the most popular, especially among the younger generation who cannot survive without their phone for more than a few seconds. Mobile traffic started to move from 3G networks to wi-fi networks especially as shops and transport networks started installing wireless networks that were free and easy to access. Handset sales went up whilst minutes on the network fell almost in direct proportion.
Facebook have their own messaging product, launched a number of years ago to try and compete with MSN. But many users felt this was a dangerous step, worried about the privacy of their data, especially as Facebook started to serve contextual advertising. WhatsApp give them an instant user base of nearly 45% of their existing active user base. The careful integration of the messaging service into the existing Facebook platform may be seen as the key of how to start charging some of their 1 billion users, which is a question that many investors will be asking in terms of getting a return on the huge investment.
One thing is for sure - these two deals do prove that a picture is only worth 19 words.
Written by Stuart Fuller, Director of Commercial Operations and Communications, NetNames.