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What's up with Facebook's WhatsApp deal?

February 26, 2014

Why did Facebook pay $19 billion for WhatsApp?

With a mantra of "no ads, no games, no gimmicks" and strict rules guarding customer data used in its messaging services, many guesses have arrived in the last few days about how WhatsApp will be monetized in the future.

WhatsApp currently works on a subscription model, charging $1.00 per year with the first year free. Like its Instagram purchase, WhatsApp will operate independently of Facebook, focusing near-term on building its user base without an immediate plan for making money.

Here are a few core theories on what drove the acquisition:

Mobile domination: With Google also said to be interested and teen usage slowing on Facebook, the acquisition was seen by many as a defense measure. Facebook gains the leader position in privacy-messaging services, one driven by communications among smaller, closer groups than the mass approach of Facebook or Twitter. Its users are younger and more mobile-engaged than Facebook's. If such tighter-communication networks take over, Facebook protects itself. If a varied social experience becomes the future, its mobile portfolio includes Facebook, WhatsApp and Instagram.

Critical mass: The premium paid partly reflects WhatsApp's 450 million member base, of which 70 percent are active every day. One million new users sign up every day. John Delaney, an analyst at IDC in London, told Bloomberg News, "Once you pass a certain threshold of users, it acquires a momentum of its own."

Photos: On Pando Daily, Sarah Lacy argued that dominating mobile photos was a core driver. WhatsApp processes 500 million photos a day, well above the 55 million Instagram processes daily and Facebook's 350 million.

Subscription-based model: Some believe the era of free to cheap apps will soon be over. With its dominant position and soon-to-be added services, such as voice messaging, the subscription price could be leveraged exponentially higher.

Rich data: Besides the mobile phone number and address book, WhatsApp doesn't use any customer data and doesn't store the messages sent over its platform. But if leveraged, the existing data could be particularly useful for targeted ads on Facebook and Instagram, since it's based on personal communications between confidants rather than general statements on a Facebook timeline.

Intelligent advertising: Instagram introduced ads last year and many believe WhatsApp will as well one day. Writing for the Guardian, Benjamin Robbins, a co-founder of mobile-consultancy, Palador, said it's "not realistic" to expect to make money without ads — and personal information and usage patterns will lead to more "intelligent" ads. He wrote, "What we need isn't more high ideals or more blatant boring broadcasted advertising, but a healthy mix that demands a more intelligent blending of the two."

FINANCIALS:     [NASDAQ:FB] [ ]

Discussion Questions:

What are the implications for retailers and consumer brand marketers in the combination of WhatsApp and Facebook? What do you see as WhatsApp's greatest potential for marketers?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What's the likelihood that WhatsApp will include some form of advertising over the next three years?

Comments:

We should be turning the question around to ask, what is WhatsApp's greatest potential for Facebook? FB was willing to spend $19 billion to acquire a greater presence in mobile. This acquisition, along with Instagram, put FB among the leading companies in mobile. With this position, FB will be able to gather more information about users and better target ads.

Retailers need to be experimenting with mobile. Another BrainTrust topic this morning was about Target partnering with manufacturers to create mobile games. Retailers don't have to spend a lot of money to establish a mobile presence. They do have to make sure that their websites are optimized for mobile and understand how consumers are using mobile devices to learn about their stores.

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Max Goldberg, President, Max Goldberg & Associates

WhatsApp will be another promotional tool for marketers. One tied to Facebook, my belief is that WhatsApp's commitment to no ads, safe info, etc. is gone. Facebook is a marketing platform and so is everything tied to it. So for marketers it is just another social tool to leverage - but not for the younger target market - seems that they are leaving Facebook because their parents are signing on....

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

The greatest potential for marketers with Facebook's acquisition of WhatsApp will be the ability to reach a large international audience via mobile. How that starts to take shape will be interesting though, as culturally it's hard to see the similarities between Facebook, who will sell information just about anytime/anywhere, and WhatsApp who seems more focused on its customers privacy.

While I think Facebook overpaid, I don't know WhatsApp's revenue and renewal rate. With a million users signing up every day, for $0.00 in the 1st year, the upside is predicated on future growth. Clearly Facebook was worked some models and think using a rich stock price to fund this acquisition makes sense. But it will be interesting to see how this plays out given Facebook has surprised on both the up/downside before.

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Bill Davis, Director, MB&G Consulting

I'm with Tom. Facebook is a marketing platform and there's no reason to believe that they'll want to exclude their new mobile acquisition from the mix. Consumers should ask themselves whether a given company wants to serve them better, or take their money...you decide.

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Cathy Hotka, Principal, Cathy Hotka & Associates

WhatsApp is a real-time messaging system that is phone-centric. That means that the social graph is derived from the phone book of the user.

From a retailing point-of-view, that means...what? That's issue number 1 - clear thinking about the implication of this phenomenon. Forget Facebook, forget marketers, forget whether they paid too much (especially since the consensus is strongly on the side of Facebook getting a great deal) - think about how this thing is being used and what its capability is from the customer's point-of-view.

What does it mean if a customer can create broadcast groups? What does it mean if you can set a status that says: Shopping at Macy's. What does it mean if a shopper can send a video or photo in real time to a shopper broadcast group from Macy's asking: What do you think! What does it mean if Macy's integrates it's indoor navigations or beacons to WhatsApp's ability to broadcast locations - something like: "hey family/friends etc: I am in this department, etc.

By the way, how did you like the speed and magnitude of this acquisition? That's issue 2; decisiveness in this era of change - pretty impressive huh!

Vahe Katros, Consultant, Plan B

With Facebook shares trading at $70 currently, I won't necessarily jump on the "they overpaid" bandwagon just yet. Time will tell for sure. The potential reach of WhatsApp and the head start it could give to CPG and retail brands to go mobile in an effective manner would definitely provide brand value. This reach is accelerated in growth markets globally that are adopting mobile the fastest right now.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

Much ado about nothing. The consumer has so many services and apps being thrown at him that few if any will stick. For each service there will be a smaller and smaller adoption rate until such time as social networks become personal, hosted on the cloud. WhatsApp is totally transitional and has no real potential for marketers. However, that doesn't mean that the effort to make a marketer think that anything is the latest and greatest won't diminish. How else can one suck marketing dollars out of the CPG coffers? Much will be a flash in the pan.

Ed Dennis, Sales, Dennis Enterprises

As both a WhatsApp and a WeChat user, I see the monetization happening with WeChat and the ease for that to occur within WhatsApp. WeChat allows the user to have "subscriptions" to desired marketers, i.e. fashion blogs, other special interests. Those marketers pay WeChat for the access. As a user, you can have multiple subscriptions or zero. Total consumer control vs. any kind of banner or push ads. Brilliant move by Facebook: now they own core platforms in community broadcast, photo sharing, and private/confidant messaging.

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Mike Osorio, Senior VP Organizational Change Management, DFS Group

The only reason Facebook executed this buy is to increase revenue. It is therefore necessary to bundle this new product to their paying customers. Their customers pay for advertisement and information. To wonder if this will also apply to the WhatsApp arm of the business is a wast of time and a lack of any basic understanding of what Facebook does.

Left unchanged, WhatsApp can and will provide consumer likes and habits info to all with an interest. Something Facebook's clientele likes to pay for. Time will tell if this is a good investment or not. A look at the price paid indicates it may be quite some time for a return and growth.

'gjarnoldjr'

Ads are at their apex. Feeds for paying for products are a big revenue source for many of these sites. The next wave.

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Joe Nassour, Chief Technology Officer, RetailTactics

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