Does $19 billion sound like a lot of money to spend on a simple chat app? The highly touted acquisition has made the rounds of news journals, chat shows, business sites and social media. Many pundits cry dot com gloom-n-doom once again, and most of them are ignoring the upside. Here are 3 three reasons why Facebook’s acquisition of Whatsapp makes good business sense.
1) The deal only cost the company $4 billion in cash. Plus stock, yes. While it’s technically accurate to call this a $19 billion deal, we’ve got to remember that Facebook only had to fork over 21% in cash. The rest is given as a stake in the FB ownership. And even though doing so dilutes the value for shareholders, the company puts itself at less risk by holding onto as much cash as possible.
2) It builds the subscriber base. The failure of MySpace (not dead yet, but one foot in the grave) showed us that taking the existing subscriber base for granted, while failing to innovate and acquire, leads to extinction. Facebook’s worldwide subscriber base has, for the last four quarters (Q1 to Q4 2013), been 1.11, 1.15, 1.19 and 1.23 billion respectively. Having Whatsapp on board at Facebook is both offensive and defensive — it ensures that the users who are there primarily to keep in touch don’t abandon Facebook for a competitor like Whatsapp, which has a better chat system than Facebook’s Messenger.
3) It helps Facebook penetrate the mobile space. Facebook started life as a web site, then it become more portal-like, with apps and games. But their revenue model was just maturing as more users began spending time on their mobile devices. Meanwhile, Facebook has struggled to create a mobile user interface that works well and is easy to navigate. Add to that their mobile ad revenue is now more than 50% of total revenue, so embracing the mobile market makes sense. Whatsapp is only mobile and, whether it becomes integrated with Facebook Messenger or remains separate but compatible, the acquisition ensures subscribers stick around to generate traffic and attract advertisers for Facebook, Inc.
By spending as little cash as possible, boosting their total subscriber base and getting their mobile game on solid footing, Facebook gives themselves a good chance at success. Monetization will come if they keep their subscribers happy and execute their ad-selling strategy smartly. Sure there are risks, but perhaps the leadership has learned a thing or two from the dot com bubble.
They’ll keep selling ads as long as we keep coming back. I don’t see myself closing my Facebook account anytime soon, do you?