Why is Facebook’s acquisition of WhatsApp bad for Twitter?

Why is Facebook’s acquisition of WhatsApp bad for Twitter? (Part 1 of 2)

Why is Facebook’s acquisition of WhatsApp bad for Twitter?

Facebook acquires WhatsApp

On February 19, Facebook (FB) announced its purchase of the mobile messaging service WhatsApp for $19 billion in cash and stock. Market Realist published a series of articles last week analyzing each part of the story. We talked about the following topics:

  1. Details of WhatsApp’s acquisition by Facebook
  2. WhatsApp future growth prospects
  3. Why WhatsApp should remain ad-free acquisition
  4. How Facebook will benefit from its WhatsApp deal
  5. Why $19 billion might not be an absurd price for WhatsApp

Here, we’ll analyze the impact of this acquisition on another major social media company, Twitter (TWTR), and find out why this is bad news for Twitter’s growth prospects.

Facebook-Twitter_9Enlarge Graph

This standalone messaging platform is important for social media companies

Standalone instant messaging apps have emerged as a popular tool for users to interact privately amid concerns of privacy issues that have emerged with Facebook and Twitter. Lately, a trend has emerged in the social media world. Users are shying away from the more public side of the spectrum (sharing updates and messages with everyone) and getting into the more private side (sharing with a select and private group). Although the Facebook Messenger and Twitter Direct Messaging services are private, they’re not necessarily real-time. That’s where WhatsApp comes into the picture by helping users interact with other users real-time, just like SMS. Standalone messaging apps have become quite popular in the last few years. According to the above chart, WhatsApp and WeChat are already ahead of Twitter in terms of monthly active users.

Twitter is coming under pressure

After acquiring WhatsApp, Facebook could become an even more powerful player in the direct messaging business. Facebook could support WhatsApp financially, as it has the capital-raising ability, and provide expertise in management, technology, and resources to develop WhatsApp even more. Twitter will come under pressure to either develop its own standalone direct messaging application or acquire an application similar to WhatsApp. However, it won’t be easy for Twitter to implement any of these strategies. If it tries to develop a normal standalone direct messaging app, it will end up facing stiff competition from established players like WhatsApp, LINE, and Kakao. And the latter option is even more difficult for Twitter, as it’s much smaller than Facebook. Twitter’s market cap of around $30 billion is dwarfed by Facebook’s $175 billion, so it will be really difficult for Twitter to buy an established player.

Somehow, Twitter will need to find a way to enter into standalone instant messaging sooner than later—and that too in a big way. It will also need to provide some kind of innovation to differentiate itself from current players in this market. Only innovation and differentiation will entice users to migrate from existing instant messaging apps. Otherwise, the gap between Twitter and competitors will just grow bigger.

To learn more about Twitter, see the Market Realist series Why Twitter is like the cronut—in demand, but hyped and overvalued.

The Realist Discussions

  • 35fd3et3f34t3r

    I would like to clarify something very important that the author has somehow forgotten…

    1.) TWTR does not compete in the Instant Messaging. Hence, I have no clue as to why this author is trying to compare WhatsApp/Line to Twitter. Twitter allows everyone in the world to have its own personal PR department. Otherwise, it provides a microphone to anyone that has something to say. Currently, Actors, politicians, executives and companies use the service. How many times do you see ESPN, CNN and Fox quote people from their Twitter feeds? Hundreds of time a day. How many times have you seen WhatsApp even be mentioned on those stations? ZERO. They are entirely different market segments.

    2.) Giving any credibility to WhatsApp and Line is a disservice to any investor. Ask your self this one question. Whats the purpose to use WhatsApp/Line? To avoid the $10 per month IM fees. Hmmm, seems like all phones already have built in IM apps, that are provided by AT&T, Sprint, etc,. What happens to WhatsApp when those $10 monthly IM fees are removed? POOOF! No one will use WhatsApp/Line. Ooooh, snap! A couple days ago AT&T just announced that data plans will no longer be charged international IM fees

    3.) TWTR is in its infancy as far as its long term growth is involved. So when this author tries to sound smart by bringing out user growth rates, it is a red herring. The only thing one should look at is revenues. So lets look at TWTR’s revenue growth. This past quarter, TWTR announce 126% YoY revenue growth. How does that compare to the gorillas in the social media? Lets look at the big one, Google. For the past 10 years, Google has never, I repeat, never come close to doing 100% revenue growth, let alone 126% revenue growth.

    4.) Lets face it, Ad revenues will be the only thing of importance. Google gets all of its profits by Ads that target searches. The searches that Google provides, mines for old news (hours, days and even years old). Twitter is currently the worlds only real time news and event system. As owner of that system, it will build a search engine for real time news and events. In doing so, it will get Ad monies from those targeted real time searches. In a world of fast food and instant gratification, TWTR is leading the revolution for real time communication.

    In a couple years from now, Twitter will be exceeding $100 billion in market cap. It is a conservative valuation, as Facebook is currently at $170 billion and Google is at $400 billion.

    Forget the red herring.