Mobile Fix: How can Facebook make money from WhatsApp?

Following Facebook’s $19 billion acquisition of mobile messaging service WhatsApp, Simon Andrews, founder of Addictive!, asks how the world’s largest social network is going to make the money that justifies the purchase…

When a tech acquisition is all over the newspapers and TV, you know that tech, mobile and social are truly mainstream.

Spending $19 billion on anything will get you a lot of attention. Spending it on a service that most people don’t know that well – because its 450 million users tend to be young and in emerging markets – invites some skepticism.

But Facebook has the cash – it is giving away around 10% of its value to buy WhatsApp – and has a highly successful means of monetizing eyeballs, so getting a big chunk of extra eyeballs makes sense.

It also has ambitions to grow in emerging markets and this deal certainly helps there:

55 per cent of those surveyed by Jana in India said they used WhatsApp the most among mobile apps; less than 1 per cent said Facebook was their primary app. And it was a similar story in Brazil (63 per cent favoured WhatsApp versus 5.6 per cent for Facebook) and Mexico (76 per cent versus 5 per cent).

And when Wall Street values Facebook at around $140 for each user, getting that extra chunk at just $35 per user make sense too.

But how is Facebook going to make the money that justifies this buy? Advertising is something that WhatsApp have never done and their ‘manifesto’ suggests they don’t want to.

And blending ads with messages it less easy than mixing them into people news feeds.

Weve and others have shown you can monetise messaging, but WhatsApp don’t have much info on their users – but one imagines that Facebook will be using their customer audience technology to work out just how many people use both services. Linking a Facebook profile to a WhatsApp user instantly makes them more valuable – if advertising is an option. (You can use your Facebook profile on WhatsApp but it only imports the basic profile.)

But maybe WhatsApp will become the Facebook lab for learning about the new business models – like stickers – that other Messaging apps are pioneering.

VC firm Sequoia talk of four numbers that explain the deal; 450 million users, 32 employees, the $1 a year they charge users and the 0 marketing spend. Equally impressive is the return Sequoia are thought to make on the $60 million they invested – $3.4 billion.

As well as being a billionaire, one of the funders will be feeling good about being bought by the firm that turned him down for a job back in 2009.

Wired has some good background on the firm and the team. And Ben Evans – now working with Facebook board member Marc Andreessen – shares some typically smart thinking.

GAFA

This deal supports our view that Google, Apple, Facebook and Amazon essentially control the tech world. They have the power and the cash to ensure future innovations get snapped up, rather than become a significant competitor. Google has done more deals than anyone else over the past three years and whilst it has bought Waze, Nest and Robot companies, WPP – in second place – has spent a lot less, buying agencies.

Twitter, Yahoo and Microsoft are all players but don’t shape the ecology like GAFA do.

StartUps

Given a business with just 32 people can grow into a global leader in just five years and command a value of $19 billion, perhaps we should retire the idea of a bubble? Marc Andreessen talked at this week’s Goldman Sachs conference about tech still being in a depression.

He argued that advances in mobile and chip-making technology signalled exponential expansion of the market. He said tech isn’t overhyped and could have “decades” of growth ahead of it. Echoing economist Carlota Perez’s research, he said world-changing technologies like the web usually settle into a more mature deployment phase after an initial period of hype and investor frenzy.

Thomas Friedman, the author of the hugely influential The World is Flat, is equally bullish on startups – suggesting they are the best hope for the US economy.

And here in London, Mobile Monday held an interesting event looking at startups finance and acceleration, which we wrote up here. Our view is that the big funding investments tend to overshadow the real innovation.

Our take is that too many people focus on the quick win of an accelerator place and funding. The reality is that these are lottery wins – great when they happen, but not something to rely on.

Smart entrepreneurs get their team right and build a business around solving a problem. Getting people to pay for your solution validates your idea and demonstrates you have the grit and persistence to make a success of your business. And that story could well open the doors to the accelerators and the funding.

This is an edited and abridged version of Mobile Fix – click here to read the full article on Addictive!’s website