WhatsApp – A Facebook Coup

Like many when you see a fairly new company like Facebook pay $19 billion for a company, you have to wonder why? Are these giant corporate takeovers not reserved for the older corporate giants of the industry like Google (who was reported to also have been bidding for Whatapp) or Microsoft? Companies with billions of dollars just sitting around collecting interest.  In the new corporate world things change quickly and age means nothing. However when you look at WhatApp and what it does and where Facebook plays this acquisition starts to make a lot of sense.  The potential revenue numbers are large and the business model seems to fit nicely into what Facebook is becoming:  A provider of mobile application services.

A text message is based on a technology called Short Message Service (SMS).  It was basically created in the early days of the wireless industry to allow users to send short text message via their phone.  On the surface it would seem  to have been a pretty un-dramatic service.  Though in the early days it was a pretty big deal.  I even admit it reminded me of a text service in Microsoft DOS called “NetSend” which allowed a networked PC to send a simple text message to another PC.  The difference was that the telecommunications carriers who provided the SMS service were able to monetize that services in a big way.  It is projected that each year over 8 trillion text messages are sent which amount to over $110 billion in revenue.  In short this apparently crude service is ingrained in global culture and is very big money.  It is rather amazing that it has grown and lasted as long as it has.  However with new services and device,s there are what appear to be storm clouds ahead for SMS.

What is interesting about this very large piece of pie is no one carrier can say they own ten percent of the global market.  They may have large share in their local market, but not global.  The reason is quite simple: government regulations.  Companies like AT&T and Verizon carry a lot of sensitive information (Edward Snowden aside) that no regulatory body would ever allow global consolidation in this industry.  It is an issue of national security.  So despite the large numbers SMS today is very fragmented by carrier.  That is why companies are now looking at something called “over the top”.  With the advent of smartphones and mobile internet applications and services it is now possible to get apps that provide a SMS type service but bypass the traditional Telco networks to deliver the service.  In short use the internet to carry these services, once it’s one the web it is open game.

So why does Facebook need to get into this space?  Because at its core Facebook is a mobile company. If we take a look at the numbers above one can tell if Facebook, even at a reduced cost to end users, if they were able garner a ten percent market share it would mean billions of dollars to the bottom line for Facebook. This is the advantage of internet based mobile services as they are not tied to a carrier network, so therefore not subject to the same scrutiny by government regulatory bodies. WhatsApp is not the only provider of this type of internet based service.  There are several other companies making a name for themselves such as WeChat, KaKao Talk and Line.  The marketplace for this type of service is coming alive and is growing rapidly.

In the deal WhatsApp gets access to over 1 billion Facebook users and pretty much every smart phone loaded with the Facebook app will be able to now load and/or include WhatsApp.  This could be a disruptive force for the wireless industry as SMS revenues that once were banked upon could slow down and maybe even start to retreat.  This is where the Telco’s are guilty of resting on their laurels,  Having spent time at a telco I can say this type of long-term big picture thinking is not in their DNA.  The Telco’s are not innovator above the network layer.  There one bit of credit of late has been, and they may not have liked the terms Steve Jobs provided, but they understood the much larger market opportunity and ceded control to Apple, which led to similar terms for Google.  In short it was , “Telco’s you provide the network and voice and data plans, but everything riding over the top let us handle”. Yes indeed let us handle the innovation, just give us a pipe to innovate through.

I believe text messaging is here to stay but what is becoming increasingly apparent is that it will morph into something different – it may be WhatsApp, but it may be something else.  With the current ad campaigns to stop teens from texting while driving (as well as my sister-in-law) , I think you will see voice commands become increasingly important in this realm.  Facebook could invest in creating an enhanced voice command service like that for WhatsApp.  In would be a game changer.  Voice Command to me is like touch screen.  Touch screen had been around for a while prior to the iPhone, but the iPhone made it cool and usable.  I believe we are close to having elegant voice control systems, not the crap you have to go through when making a doctor’s appointment or pay a phone bill.

My hope for this acquisition is that Facebook is not only looking at the current disruption it could create in the marketplace, but looking at ways of  innovating on top of this exciting platform in new and different ways.  The tech industry is definitely a risk reward game.  The bigger the risk, the greater the reward.  There is no question Facebook is taking a great risk so early on in its life as a public company, however as detailed, the numbers add up to a great reward.  More importantly this can happen in a disruptive manner that will change the landscape of what has been a relatively stagnant space for twenty years.  In the automotive space that is a short lifespan, but in technology it verges on ancient.  Finally is all these dealings I have been greatly impressed with Facebook founder and CEO Mark Zuckerberg.  He has a calm sense about him in these dealings and is able to rationalize the purpose of eth acquisition in simplistic and understandable terms.  In many ways he reminds me of a young Bill Gates, minus the cheeseburgers and temper.

Good Night and Good Luck

Hans Henrik Hoffmann March 4, 2014

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