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Facebook's WhatsApp purchase may not be as expensive as you think

Part 4
Facebook's WhatsApp purchase may not be as expensive as you think (Part 4 of 5)

Must-know: How will Facebook benefit from its WhatsApp deal?

WhatsApp will benefit Facebook

WhatsApp offers several benefits to Facebook, including a large and sticky userbase in the direct messaging arena, smartphone engagement, and high international penetration across various demographics.

FB Rev by GEOEnlarge Graph

Facebook’s user attrition has been driven primarily by privacy-related concerns. With the acquisition of WhatsApp, which represents a private way to engage, Facebook can plug that gap in its userbase. Note that Facebook already has an avenue for direct messaging under its “Facebook Messenger” platform. However, as management noted:

“Our communication product like Facebook Messenger and Chat are used mostly for chatting with your Facebook friends and often sending messages that aren’t necessarily real-time… So, Messenger, what we’ve seen, evolved from Facebook Chat, which was more of instant messaging, not SMS and it’s widely used today for chatting with your Facebook friends, and a lot of the messages are not real-time, right? Someone will send someone a message and then almost like a more informal email and then expect a reply later in the day.”

User behaviour on WhatsApp, on the other hand, does reflect that people treat the service more as a real-time messaging platform.

Note that another major social media company, Twitter, has also been trying to strengthen its direct messaging engagement and market share. Twitter management stated on its latest earnings call:

“The conversational use case is a daily habit for many of our users. I talked frequently about Twitter being this global town square. And when you’re walking through the town square and observing something, you often want to whisper to the person next to you about the thing you’re both observing. So that notion of private messaging that we’ve brought forward and seeing it increased 25% in just one quarter is in service to enhancing that back and forth between the public and private conversation. We believe that by building features that enhance those conversations and messaging, we will help attract more users to the platform and deepen the engagement of those we already have.”

Facebook’s acquisition of WhatsApp gives it additional leverage over Twitter in the battle for more direct messaging market share.

Plus, smartphones are playing an increasingly important role in the future growth of the social network industry. Facebook is betting that WhatsApp’s function will make it a near-essential add-on to smartphones, and this—combined with smartphone user growth as well as user behaviour that’s shifting more and more towards mobile—makes WhatsApp a strategic investment. Zuckerberg noted on the call, “When we’re talking about where mobile is going to be, not today, not next year, but in 2020 or in 2025, and as we look forward to the next five, 10 years, five billion people will have a smartphone. And we hold potential to have five billion users potentially given us money through the subscription model.”

Lastly, while Facebook has a strong userbase and engagement internationally, the U.S. and Canada still made up nearly 50% of its total revenue last quarter (4Q13). WhatsApp’s market share and penetration is very strong internationally. As Facebook management commented, “It doesn’t get as much attention in the U.S. as it deserves, because its community started off growing in Europe, India and Latin America. But WhatsApp is a very important and valuable worldwide communication network.” This represents a way for Facebook to diversify its revenue sources away from the U.S.

WhatsApp’s strong presence in direct and private messaging and international markets as well as smartphone penetration make it a highly strategic investment for Facebook. Read on to the next part of this series to see why WhatsApp may not have been all that expensive for Facebook.

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