Thursday, February 20, 2014

Why is Facebook buying WhatsApp for $19Billion?

Feb 19th 2014, Facebook agreed to Pay $19 Billion for WhatsApp

While the whole world goes ga-ga about this eye popping, earth shaking deal. The deal makes perfect sense!

Let me explain.

There are few points I want you to consider first. Few weeks ago there was two big headlines

1. Facebook turns 10!

But along with the headline, there were tonnes of articles regarding how Facebook is making money off the people posts, and issues relating to privacy.

2. Facebook will lose 80% of users by 2017, say Princeton researchers

Here are some of the interesting snippets about Facebook from the media.

3. Facebook knows when you are about to fall in love

4. Facebook deal on privacy is under attack

One of Facebook's masterstrokes in this campaign has been to devise a set of metrics to help marketing executives measure the financial impact of advertisements they buy on the social network. It has formed a partnership with Datalogix, the sales analysis firm, to use information from loyalty card schemes to work out how much business every £1 spent on Facebook advertising generates offline. In 70pc of cases, that £1 translates to £3 in real-world sales – much more persuasive than how many people have "liked" a brand's Facebook page.

"Facebook is sitting on a huge repository of very valuable information about its users. One of its challenges is working out what it can actually use," Aho Williamson says. "Privacy will continue rearing its head as Facebook tries new things."

Privacy concerns have dogged Facebook since its early days as a website for Harvard students, but those concerns have intensified.

The social network is continually embroiled in controversy about how much data it is collecting, particularly in Europe, where privacy laws are much tighter than on the US company's home turf.

Many users have become much more careful about self-censoring, after being bombarded with advertising that transparently mines the content they post to friends. Women who announce their engagements on Facebook can rely upon advertisements for wedding dresses. 

Give it a year and the wedding dresses are pushed out in favour of maternity wear.
Some users find this second-guessing invasive, but from Facebook's perspective it is doing users a favour by offering content users are likely to find interesting.

"Our goal is to reach a point where the ads are as relevant and timely as the content your friends share with you," Zuckerberg said on a conference call with analysts last week.

As you read these articles together, it becomes clear that Facebook is heading to a mid-life crisis.

Now, let's look at WhatsApp.

WhatsApp is 5 years old and with its rapid growth and success is facing an infliction point.

With 450 Million users, Adding Million new users per day! 1 Billion messages sent via WhatsApp per day! 200 Million  photos per day!

WhatsApp is burning cash faster than a bush fire. To sustain this hyper growth, WhatsApp needs tonnes of cash for the next few years till they can figure out how to make money!

For WhatsApp, the choice was simple: Go IPO or sell out.

Its tough to launch a multi-billion dollar IPO and it takes time, during which WhatsApp could run the risk of running out of cash. So I guess WhatsApp choose to sell itself.

Coming back to Facebook and my personal observations and experience.

I have been an early adopter of Facebook and in last two years, I have seen a dramatic change in how I use Facebook.

Earlier, Facebook was a communication platform. I used Facebook to communicate with all my friends and relatives. Slowly, as Facebook tampered with its privacy settings, I stopped sharing things on Facebook and urged all other to stop as well. Over a period of two years, my Facebook wall has become a "read-only" page for me, and 90% of the postings on my wall are from organizations and not from my friends.

I checked this observation with my friends in Bangalore and with students at Manipal University, and all the observations were the same pattern. Young people and middle aged people are abandoning Facebook!

Also See: 

Teens Loathe Facebook Because of All the Old People and Baby Pics

Young users see Facebook as 'dead and buried'

"Facebook is not just on the slide - it is basically dead and buried," wrote Daniel Miller, lead anthropologist on the research team, who is professor of material culture of University College London.

Students in Bangalore and elsewhere in the US & Europe & India are not using Facebook as a sharing/communication platform. Only older generation (aged above 60) are still active on Facebook.

In short, Facebook is on a rapid decline.

Another major problem brewing at Facebook is total lack on innovation internally at Facebook. In last 10 years, Facebook has not added any new innovative products - which is not tied to the core site. The Facebook mobile app was a belated and knee jerk reaction. Facebook's lack of focus on mobile platform in terms of launching new products is a major worry.

While I can see a rapid decline in my Facebook usage, usage on WhatsApp is a different story. In a typical week, I see about 600+ messages on WhatsApp and all these are from my friends.

So in short, WhatsApp is replacing Facebook. So as users abandon Facebook and move to WhatsApp or similar apps (such as WeChat, Line, Viber etc), it becomes clear to me that Facebook must expand beyond social networking to social messaging and purchasing WhatsApp is one surefire way to extend Facebook's life span and survivability.

To survive Facebook must add other products into its portfolio. Just the social networking site is not enough. Facebook lacks internal product innovation and to survive and grow, Facebook will have to buy innovation.

To survive, Facebook will have to buy several mobile apps and platforms.  Instagram was $1 Billion pill - but it was not enough.

For a company looking for survival, $19 Billion is a small price to pay for getting another shot at elixir of youth. 

Buying WhatsApp is just one such acquisition. I am sure there will be more to follow!

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