Friday, February 28, 2014

Why $19Billion for WhatsApp could be a bargain for Facebook and what does it mean for Africa?

Facebook, the world's largest online social network acquired WhatsApp the world largest mobile messaging service for $19 billion. WhatsApp’s price tag is by far the company's largest acquisition, bigger than any that Google, Microsoft or Apple have ever done. It puts WhatsApp's capitalization (founded five years ago in 2009) higher than that of for example SONY founded in 1947.

It is this high price tag that has been the subject of most media published in the last days. The consensus seems to be that it is a brilliant move by Facebook but some called it "pricey" or some called it "over priced" like that journalist on French TV news who said that we are going back into a new bubble! 

I join the minority of people who think that $19 billion could be a bargain!

In this posting I would like to explain why and what the potential impact could be for Africa.

I can understand that for traditional economists such a high valuation does not make sense for a company that was barely making any money (they had $8.257 million on their bank account in mid 2013), that was in business for less than 5 years, had only 55 employees and never spent 1 dollar in marketing! Robert Reich, former United States Secretary of Labor declares that WhatsApp is everything wrong with the U.S. economy!

To explain that valuation we need to understand how new technologies are disrupting traditional business as we move into the Personal Data Economy. (Explaining this new economy does not mean any endorsement on my side, see this interesting blog post: "The Cost of Identity in The Personal Data Economy"). 

The Personal Data Economy and its supporting innovations

Businesses are dependent on marketing (since the mid-1950s) to find the right products for their customers, ideally for each customer individually: one-to-one marketing. For long time the notion of one-to-one marketing has been largely a myth and the holy grail for marketers particularly in consumer packaged goods industry. One-to-one marketing is almost here and this change is driven mainly by three new technology based innovations that emerged less than 10 years ago: online social networks, mobile Internet devices and Big Data.

Indeed the leading online social network organizations like Facebook, Twitter, LinkedIn, etc. did not exist 10 years ago. I remember people' sarcasm wondering why would anyone want to publicly tell their friends how they feel, what they do, what they think, what they like or not, share personal pictures or videos, etc. Well 10 years later, Facebook has 1.23 billion users (more than 17% of world's population)  who are active on their website every month doing exactly that.

Clearly, the incredibly large number (more than a billion!) of Facebook users is exceeding anything we have seen in this industry before.

One reason for the large number of online social network users is the fast emergence of mobile Internet devices like smart phones and tablets. Global unit shipment of smart phones and tablets started to exceed PCs since end of 2010.

In developing countries in particular, more people use mobile devices to access Internet than PC.  In India that inflection point happened in mid-2012. 

                                                  Source: StatCounter Global Stats, 11/12

It is clear that in the future the majority of people will use mobile devices to access Internet, even more so in developed countries due to the lower cost of those devices. And because online social network's appeal is based on the capability to share thoughts, events as they happen, mobile devices that you carry with you are becoming the access interface of choice.

Online social media collect trillions of diverse data from billions of users every day. Here are some numbers: YouTube: 100 hours of video every minute of every day, Twitter: 100 million tweets per day, Instagram: 40 million pictures per day, SMS: 100,000 SMS/sec, Facebook: 30 billion pieces of content per month. That is Big Data! And all this content is recorded and stored by these social network companies.

The real value of those online social networks is not in the service they deliver, but it is in the data they collect, reason why they offer the service for free. As Andrew Lewis said in a community weblog: "If you are not paying for something, you are not the customer, you are the product being sold!". The information contained in the social networks is a real treasure for marketers. It contains a myriad of information about each individual user making it possible to profile them into categories that can then be targeted by customized advertising: close to one-to-one marketing. 

New technology can analyze billions of pictures and automatically classify them (and thus the people represented on the picture) in relevant categories that can then be sold to marketers for content monetization. For example, they can be categorized as People (e.g. infant), Interests (e.g. golf), Travel (e.g. beach), Sports (e.g. basketball), Landmarks (e.g. Eiffel tower), Entertainment (e.g. Rock'n Roll), Activities (e.g. wedding) and more. The following people will likely receive offers for newly weds in their mail or on their Facebook page.

Those technologies can be quite accurate and capable of distinguishing very similar but yet different pictures. Here is an example of automated categorization of skying vs. figure skating pictures.

The market of techniques and technologies to analyze and transform complex unstructured data into actionable information is booming. Sentiment analysis technique can detect favorable or unfavorable opinions toward specific subjects such as organizations and their products from analyzing large number of documents or social media data. An enterprise can then combine this unstructured data analysis with its traditional data analysis and utilizes both types of information to discover significant business insights that could not otherwise have been obtained. For example, trends in the numeric data can reveal a slowdown in sales in a particular region during a certain time period. Analysis of the related documents, using sentiment analysis can discover customer complaints and product reviews, can help determine the cause of the slowdown. 

In summary, affordable mobile Internet devices have accelerated the use of online social networks allowing people to share information about themselves or things of interest to them at a pace never achieved before. New Big Data analytic technologies allow to extract insights from this large volume of data that can be leveraged by businesses to make better decisions and deliver one-to-one advertisement to their customers,  dramatically changing the way business is done is many industries.

Big Data  is the next frontier for innovation, competition, and productivity that puts the one-to-one holy grail of marketers within reach. It is in this context that we must analyze WhatsApp's acquisition by Facebook.


What has been driving WhatsApp' success?


WhatsApp is a different social network than Facebook and it brings another profile of users. How can we explain its success?

Mobile phone saw the fastest growth ever for a technology and in particular in Africa. But phone calls were still expensive for the poorest and telecom companies started offering SMS (Short Messaging Service) for a cost of typically less than one hundredth of a one minute voice call. So SMS became most popular with poor populations.

But the cost of a SMS was still very high, it was actually a rip-off! If you consider that a one minute phone call represents about 500,000 bytes of information depending on the codec you are using, an average SMS of 20 characters only uses 20 bytes, i.e. 25,000 times less, yet the telco company would charge you only 100 times less!
WhatsApp became popular because it allows their users to send text, multimedia, voice messages for free, by using the Internet to send data instead of the cellular network. They do it using a "chat app" build for the mobile phone. It allows free unlimited texting (although the cost is 99 cents per year after the first year of service), anywhere, without advertising. It also lets users communicate with people overseas without incurring charges for pricey international texts and phone calls.

Examples of other chat apps vendors are GroupMe, Line, WeChat, Kakao Tech. Almost 19 billion messages were sent per day using chat apps in 2012, compared to only 17.6 billion SMS messages. Users of chat apps were found to be about six times more sociable than texters using SMS, sending around 32 messages on average every day, compared with just five SMS texts.

In addition to its free messaging service, WhatsApp lets users chat with their phone contacts, both one-on-one and in groups. The service allows people to send texts, photos, videos and voice recordings over the Internet. They have just announced that they will add voice calls.  So while WhatsApp offers similar services than Facebook, a major difference is expressed by a WhatsApp user: "Facebook has become a junkyard of updates from people I don't really know. WhatsApp allows me to chat with my friends only when I want, saving me from logging on to Facebook and being inundated by its news feed and it's always on". 

The success of WhatsApp is also due to the availability of low cost feature phones that incorporate access to Internet (3G/EDGE or WiFI when available, non-HTTP/non-web socket data channels) and are capable of supporting third-party software like WhatsApp through platforms such as Java J2ME. This led to fast penetration of WhatsApp in emerging markets like India, Africa or Latin America. A recent survey found that 55% of mobile messaging users in India use WhasApp. Last year Nokia announced a low cost ($72) mobile phone with a WhatsApp button to access the free texting service. The cost of those feature phones is easily offset by WhatsApp free texting services replacing the "high" cost of SMS.

At the time of its acquisition by Facebook, WhatsApp had 450 million users and was adding users at a rate of 1 million a day! Their users are extremely active, sending more than 600 million photos a day -- more photos than Facebook users upload. A whopping 70% of WhatsApp users are active every day. By way of comparison, 62% of Facebook users are active daily. People around the world send 19 billion WhatsApp messages per day, including 200 million voice messages and 100 million videos.

Why did Facebook acquire WhatsApp?


In business, the biggest challenge is to find customers willing to buy your products or services. There is a cost (market research, marketing, promotion, sales force, etc.) associated with that challenge: it is the Cost to Acquire Customers (CAC). That cost then needs to be put in balance with the ability to monetize those customers, i.e. how much money can that acquired customer potentially spend with you over his/her lifetime: the Lifetime Value of a Customer (LTV). Many businesses fail because their CAC exceeds their LTV. CAC obviously varies across industries and could vary from few dollars to thousands of dollars per customer.

The price of $19 billion to acquire information of 450 million WhatsApp users is a CAC of about $42 per customer. That is a bargain in many industries, particularly compared to some of its competitors. LinkedIn's share price values that professional social network at $153 per user. Twitter trades at $140 per user, and Facebook itself is at $123. But the cost is actually lower than $42 because WhatsApp can provide Facebook with more than 450 million phone numbers as they have access to the phone numbers in the address books for those 450 million people. Here is an excerpt of WhatsApp agreement you sign before using it: "... you acknowledge and agree that you will have to provide WhatsApp with your mobile phone number... You expressly acknowledge and agree that in order to provide the Service, WhatsApp may periodically access your contact list and/or address book on your mobile device.."

More importantly WhatsApp market penetration has been significantly faster than that of Facebook in its 4 first years of existence.

The fast growth rate of Whatsapp was a major threat for Facebook and the acquisition cost was growing accordingly. So there was not much of a choice and others before like Google tried to acquire WhatsApp but the synergy was probably best with Facebook as we will see. Facebook can now merge the list of their customers with those of WhatsApp and combine the information collected about their users in Facebook with WhatsApp's information making their data even more valuable. 

But there are more reasons for that acquisition. 

First we have seen that the future is the use of Mobile Internet Devices for access to Internet. This is why the mobile advertisement market is growing at 40+%. WhatsApp users are exclusively using mobile devices providing Facebook with access to that market. 

Second we have seen than WhatsApp market penetration is particularly high in emerging markets where Facebook is lagging even if they are growing. WhatsApp acquisition extends Facebook's market leadership to emerging markets.

Third, the growth projection for WhatsApp is that they could reach 5 billion users within the next years. Their pricing strategy of 1 dollar per year which should be easily accessible even to the poorest people makes this a potential $5 billion revenue per year, probably an illustration of the "Fortune at the Bottom of the Pyramid" book by Prahalad.


What could be the impact of this acquisition in Africa? 


As WhatsApp becomes popular in Africa, it means that it will become more than extensions of people's social lives. In this High Tech business, constant innovation is required to keep ahead. WhatsApp needs to constantly create new value for its users in Africa. For example, combining social network-style services with existing mobile money systems. It has to go beyond replacing SMS to provide a range of connected services like games, virtual content, video/voice calling, e-commerce and more.

It should not ignore the local advertising culture and invest in raising awareness with a traditional media campaigns (billboards, media ads, etc.) which are still efficient in Africa. That is how Line a messaging company in Thailand was able to take over market leadership from WhatsApp.

Africa is the next frontier for many businesses. The "Fortune at the Bottom of the Pyramid" and the fast economic growth rate of the past decade has put Africa in the center of attention of many global companies looking for new growth markets to compensate for the anemic Western world market. However, the lack of data in the continent is a challenge. Shanta Devarajan, the World Bank’s chief economist for Africa, struck a dramatic tone in his address to a conference organized by Statistics South Africa, calling the state of data collection on the continent “Africa’s statistical tragedy.”

WhatsApp may soon become the largest private data data collector in Africa. While they have a "no advertisement" policy, Facebook doesn't. Consumer goods companies can't wait for it.
But WhatsApp can also become a cheap and efficient tool for data collection, I mean a tool to reach people and ask for information. Several companies entered that business in Africa: Open Data Kit, Camfed, EpiSurveyor, TextIt. However for it to work WhatsApp will need to open their system (through an API) which is not the case today, probably to protect itself from spammers. 

Another potential mover is the recent announcement by IBM to make its Watson cognitive system that famously won the contest against Jeopardy champions,  available in its research lab in Nairobi. So more data collection capabilities combined with access to advanced Big Data technology may break the data-analysis chicken and egg problem in Africa.

Communication is required for any economic development to take place. There is strong evidence that big data can play a significant economic role to the benefit of not only private commerce but also of national economies and their citizen. WhasApp can deliver both improved and affordable communication and data collection to the benefit of Africa if used appropriately.

Seeya later alligator...


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