The economics of social media and why the Facebook-WhatsApp deal makes sense

whatsapp

There is a lot of head-scratching going on today as people try to make sense of why Facebook would pay $16 billion for a company with 32 employees and little to no profitability.

Christopher Penn wrote a smart piece about the Facebook’s need for user growth and I think he is correct but that is only part of the answer. Yes, WhatsApp offers a host of new, young and highly-engaged users to Facebook — The Wall Street Journal reports that the percentage of WhatsApp users who log onto the service at least once a day sits at 70%, even higher than Facebook’s 61%.

But there is a bigger play here. First let’s look at the economics of social media platforms and understand that it is built on two strategies:

1) Obtaining more users, and then increasing the amount of personal information collected about those users that can be turned into targeted ads, and

2) Getting users to spend increasing amounts of time on these platforms so they can see more ads.

I think you have to view every announcement and investment Facebook makes through this lens. Perhaps we can then consider the acquisition in a new light — it’s all about the data.

Here is the largest untapped goldmine of personal data in history — text messages. But until now, this treasure has been locked away behind a curtain of privacy maintained by mobile service providers. This is an obvious trove of riches too big for Facebook and other companies to ignore,

I once predicted a strategy where a company (like Google) would offer an endless supply of new, free mobile devices to any one willing to turn over access to their text messages. It still could happen. But better yet, what if a social media company owned the text messaging company?

That’s what Facebook is after. The data.

WhatsApp processes 50 billion messages a day.

A day!

Can you get your head around the incredible amount of information being processed here? Data is the key to the Internet Kingdom. That is the real value Facebook is after.

Here’s the sticky part. WhatsApp built its business on the idea of offering instant messaging with complete privacy.The app lets uses send text, pictures and videos to anyone for free, but once delivered, messages are deleted from the company’s servers.

Today, Facebook offers insight and trends to brands by accumulating user data in an anonymous way. Could they also have a plan to use these valuable text messages the same way, even if the messages are deleted? Could they be “scanned” first? Could the data eventually be tied to a user’s Facebook persona to improve ad targeting before the text message is deleted?

Here’s a small example. Let’s say a new movie preview comes out and the studio pays Facebook for an analysis of the buzz coming through WhatsApp text messages. Facebook scans the messages for volume and sentiment before deleting them and delivers a real-time report to the studio before the moviegoers have even reached their cars to go home.

Is that fair game? Would it still live up to the privacy expectation of WhatsApp users?

As Facebook faces the inexorable public company pressure of increasing usage and revenues quarter after quarter without end, it undoubtedly will have to look at more creative and aggressive ways to access, process, and monetize our personal information.

I think that is the thinking behind this blockbuster acquisition — data. How about you?

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  • Does this have any implications for a small services firm that is considering a Facebook Ad campaign? If the data ultimately exists, and is mined, could a smaller firm benefit?

  • Ella Buitenman

    I do agree. It’s all about the data.

    What frightens me is that WhatsApp is used by healthcare professionals as well.

    So what happens if Facebook decides to get rid off the entire privacy thing and gets their hands on all kinds of data?
    I’m positive that it’s possible to tie the different data knots together.

    From a business point of view I think it’s all very logical. I can’t think of a social media platform that doesn’t monetize user data or doesn’t plan to.
    But no, I don’t think it’s fair game. On the other hand… I just don’t like Facebook and the way they (don’t) deal with things. 🙂

  • Mark, Only you could take yesterday’s late news and turn it around so quickly and intelligently. Nice work. Jack

  • My view on this post was simply conjecture. WHo know what Facebook will ultimately do with it but this is my best guess!

  • As Mark Zuckerberg famously said, “privacy is over.”

  • Thank you sir.

  • My friend, I LIKED this post!!! LOL. I was asking a serious question in that I would like to know, even in your conjecture, would this be something a small firm would gain from, or is the data available to the big boys only?

  • Holly McIlwain

    Why would Facebook pay $16 billion for a company with little profitability? I had the same thought about the data being used to benefit ad sales. Mark, you wrote a real goodie here. Thanks Y’all.

  • Well if we are playing in the world of conjecture, then yes. I would not see anything preventing FB from gathering and sharing market data on a local level. They would be foolish not to mine that resource.

  • A big reason is to keep that data from falling into the hands of Google! A defensive move.

  • Holly McIlwain

    hmmm… I missed that, makes sense. I think they didn’t want businessgrow.com to get it either. (Smile)

  • What was the last major deal Facebook made before yesterday? Hmmm…Oh yes, Instagram. For a paltry 1 large. That seems to be working out very nicely. That was a steal, and everyone’s head was shaking at the time.

    What’s App added a new 1 million users (as they do each day), well probably more with the news, but they are a growth juggernaut. On their way to 1 billion users in no time. Facebook will monetize this in a methodical, but steady pace. First year free, then $1 per year thereafter, might turn into $1 after 90 days. They have a plan.

    The two co-owners of What’s App are former Yahoo employees that were not big fans of Ads. Ads are likely in the future of What’s App, but nothing like the Facebook platform.

    If you want something cheap, take a look at FB stock at $69.00. It won’t be there for long.

    Nice piece as always Mark.

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  • I think you’re spot on @businessesgrow:disqus and completely agree that this is a data-driven acquisition. Facebook’s goal is to make money and that comes from their ads. Marketers are no longer willing to accept impressions on a wider scale, if they are going to invest, they want to focus on their niche and hit very specific customer pain points. By doing so, they can minimise costs and maximise return on investment. The only way Facebook can do this is by having access to that data. Whilst WhatApp isn’t driving profitability, the value of that data is a goldmine to Facebook and their business model. Thanks for sharing your amazing insights as always Mark 🙂

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  • Perhaps. But WhatsApp doesn’t currently store meta data on users or usage, so they’d have to rearchitect the system and totally change the T&Cs. Doable, but perhaps not easily.

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