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WhatsApp In It For Facebook?

Just a few days ago, news broke that Facebook (NASDAQ: FB) plans to purchase mobile texting app WhatsApp for US$19 billion. WhatsApp has 450 monthly active users and 70% — or about 315 million — use the app on a daily basis. Facebook stated in an announcement blog post that WhatsApp continues to add approximately 1 million users per day.

With such stats, it’s obvious to point out WhatsApp’s popularity. But, what exactly is its draw for users? Here’s a few that might come to your mind, especially if you’re a WhatsApp user: Sending photos and videos that you take on your phone is simple and quick; it lets Android and iPhone users talk in groups, which doesn’t work well with standard text messaging; a group chat is easy to set up, and once you create the group, it’s always there.

Also, conversations with people overseas are instantaneous and free; you don’t need to remember a password or sign in after you’ve set up an account; it’s always on, but the app doesn’t bug you unless you have a message; it lets you know your messages have been delivered and seen; and perhaps crucially, there are no annoying ads.

WhatsApp’s app charges users less than a dollar per year — after a free first year — and doesn’t display any advertising (which was probably obvious from the paragraph just above). That makes for a decent income stream even at the low user price especially considering WhatsApp has spent no money on advertising and only has 55 employees.

But, that also makes it clear that mobile monetization wasn’t the motivation behind the acquisition given the lack of ads. So, why would Facebook want or need to make this purchase? And more importantly, why would Facebook pay nearly 20 times more for WhatsApp than it paid for Instagram?

Source: Facebook presentation materials.

Value of WhatsApp

Facebook makes its money from advertising. But WhatsApp co-founder Jan Koum stated in his own blog post that remaining ad-free was part of the deal terms.  What other use could Facebook have for WhatsApp?

Cross-integration with Facebook’s own app? No, Facebook claims in its post that WhatsApp will remain its own independent entity with the staff, offices, and no integration with the social networker’s own Messenger app.

The answer to WhatsApp’s potential is a four-letter word: data.

Data potential

Facebook utilizes user data to create targeted ads that lead to a higher click-through rate, and more money, than a randomly generated ad would achieve. It’s safe to assume that there’s a strong percentage of WhatsApp users who also regularly use Facebook Messenger. And in those cases, the data potential isn’t as great. But even so, there might be clear silos in terms of how users are engaged with WhatsApp as compared to Facebook.

Consider how a writer with The Associated Press approaches Facebook:

WhatsApp is my respite from Facebook. For me, the world’s largest social network has become a junkyard of updates from people I don’t really know and ads for products I don’t care about. It’s all about people jostling for publicity and craving approval, seeking likes and comments from near-strangers.

But WhatsApp is the best stand-in for a conversation you have over dinner with people you love. It’s intimate. It’s personal. I rely on it.

I grew up eating dinner every night with my parents and two sisters. These days, the five of us live in three different cities. Even so, we have a running conversation, sometimes with dozens of chats, photos and videos a day. We send pictures of food we’re eating or cooking. (A lot of those. We like food.) We’ve traded city views from the tops of mountains, thoughts on TV shows and movies we’re watching, information on flights we’ve booked, and simple messages saying “hi” and “I miss you.””

That’s not necessarily data that could be captured by Facebook.

Furthermore, there are signs pointing to Whatsapp’s popularity in developing markets where Facebook hasn’t achieved a strong foothold. Facebook wouldn’t divulge any demographic specifics during the announcement but such traces exist.

For instance, Jana Mobile conducted a small survey that found that WhatsApp was the most popular mobile messaging app among customers in Brazil, Mexico, South Africa, and India. Elsewhere, TechCrunch made a map using some older, publicly available usage data that shows WhatsApp handily beating Facebook’s Messenger across Europe, South America and Asia. The only place WhatsApp hasn’t caught on is the United States, where wireless carriers make data more expensive than texting charges.

The WhatsApp purchase could help Facebook gain more data in the regions outside USA, which the company can use toward better monetizing and targeting its own products in the name of boosting a key growth metric: average revenue per user.

Here’s a look at how the average advertising revenue per user compares between the U.S. and Canada, Europe, and Asia:

Source: Facebook 10-K filing. “Rest of the World” includes Africa, Latin America, and the Middle East.

Is WhatsApp worth $19 billion?

There’s some sticker shock built into this deal since Facebook only paid US$1 billion for Instagram and offered up US$3 billion in an attempted bid to purchase Snapchat. The WhatsApp sales figure works out to about $42 per monthly active user — or over $60 per daily active user. But WhatsApp was in the position of power.

Facebook needed to purchase WhatsApp if the company didn’t want to abandon any hope of achieving a strong mobile presence overseas. WhatsApp was already too well adopted before Messenger became a decent enough app to act as a real contender. And Facebook stepping in for the buy keeps the acquisition out of Google’s (NASDAQ: GOOG) hands, which also helps keep Gmail’s line below Facebook Messenger on that chart at the top of the page.

But monetization will remain a problem in the near future since Facebook doesn’t consider this a priority. The announcement call reinforced the fact that Facebook wants to help WhatsApp continue to grow its userbase without any interference with monetization tactics such as advertising or subscription price raises-both of which would likely drive users straight to one of the numerous free WhatsApp competitors. Facebook sees the potential for WhatsApp to hit 1 billion users, which would help take care of that monetization issue even at the low subscriber price.

Foolish final thoughts

One of the reasons Facebook hit rocky ground post-IPO was that many investors didn’t understand how the social networking site monetizes — or the fact that monetization isn’t always Mark Zuckerberg’s top priority. The WhatsApp purchase offers a way to gather substantial user data among groups not as likely to use Facebook. But it will take time to see how Facebook will utilize that data for its own monetization purposes-and hopefully to make the deal worth the US$19 billion price tag.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Brandy Betz and first published on fool.com. It has been edited for fool.sg.