In the last decade there has been a movement away from communicating via SMS, which we call texting. Although unlimited texting plans are universal in the United States, in other countries, rates for texting are very high and it is an unpopular system. Enter WhatsApp, the international texting app with over 450 million users. The app lets you send unlimited text and picture messages anywhere in the world. The service is free for a year, and then charges $1 per year, putting its revenue at about $300 million last year alone. Despite its global popularity, the world was pretty surprised last week when the company that manages the app announced that it would be acquired by Facebook for $19 billion.
That figure, needless to say, turned a few heads. It is an awfully high price for an app without much revenue. To help put things in perspective, that price places it above companies like Southwest Airlines. It truly is symbolic of a new era when a mobile app that charges only $1 per person and serves only to send messages, is valued higher than a company that blasts people to different countries in enormous flying machines.
By conventional business logic, the deal seems more than a little bit crazy. Perhaps Facebook intends to integrate WhatsApp with Facebook messenger and try to apply its advertising strategy to the app. But the owner of WhatsApp has already stated that there will be no changes to the app at all, including its price and lack of ads, and that it will still be managed by the same team. So what does Facebook want from them, and what does it mean? Facebook has been experimenting with monetizing for some time now.The company is always trying new strategies to generate income from its services, yet most of us have never paid a dime to them. So clearly, value is being measured in a more abstract way with digital and social media businesses. The simple fact is that WhatsApp is a popular service that is a huge hit in two key areas where Facebook has consistently struggled: adapting the movement towards mobile devices and maintaining popularity with both young people and those in the developing world. In Facebook’s case, its value comes from the mere fact that hundreds of millions of people use it every day. And with all that activity comes a lot of data. So what could it gain from the purchase?
With the world at unprecedented levels of connectivity, big data is frequently pointed to as “the next big thing.” With WhatsApp, Facebook greatly expands its user base, and obtains access and ownership to all that data that is sent every day. With modern data analysis tools, this information can become a gold mine. The company could hypothetically continue to expand the reach of WhatsApp to top a billion, as well as gain access to an enormous supply of data to sell to marketers. This is all assuming, of course, that Facebook can find a way to make that data useful. Only time will tell if the fact that people text each other about pizza means they are more likely to notice an ad for a local pizza delivery service.
With all this in mind, it is impossible to make a definitive statement about the buy. It is certainly wildly risky, but it is not as insane as it may appear. Unlocking the possibilities of data is something that Facebook has done successfully before, but it remains to be seen how much useful data you can really get by analyzing people’s conversations or if people will even be willing to use a texting service that sells their private data for profit.
Henry Parrott is a junior in the School of Foreign Service. TECH TALK appears every other Friday in the guide.