Robert Tercek: WhatsApp, Facebook, and the Next Billion

aNewDomain.net — What an anticlimax. Just two days after every technology pundit in the world has sounded off about Facebook’s stunning $19 billion deal to acquire WhatsApp last week, new reports surfaced about a system-wide outage.

WhatsApp was offline for about three hours on Saturday.

To many observers, this ill-timed crash confirmed what they had already suspected: $19 billion is a crazy price to pay for an app.

To some people $19 billion may seem crazy but I happen to think this deal actually makes sense for Facebook. This is how Facebook stays in the game.

The general reaction to this deal is, Wow, Facebook overpaid. But I see it differently. It’s like this: Wow, Facebook understands that the mobile future is happening right now and it actually managed to move fast enough to seize the opportunity.

Most big public companies, thinking conventionally, could never make a bold move of this magnitude. That’s how they gradually become irrelevant in fast-moving markets.

I am impressed that Mark Zuckerberg was able to marshal his board to make a deal this huge. I am even-more impressed that Zuck is so committed to winning that he is willing to throw his own mobile messaging app under the bus in order to stay in the game for the next round.

First, let’s consider the big picture. Zuckerberg is a talented, visionary CEO. His board of directors includes some of the smartest thinkers in the technology industry. These are not people who casually dispose of 10 percent of the company. Consider this deal in light of its long-term goal for the business.

Zuckerberg has been clear and consistent in his public comments during the past 18 months that he is focused on scaling Facebook from three to five billion users. What a minute — think about that number. Three to five billion. No company on earth has that kind of scale. That’s his ambition.

Unlike his mentor, Bill Gates, Zuckerberg does not appear to be wedded to his own invention the way Gates was glued to the desktop computer and Windows. Microsoft’s abysmal performance in mobile so far can be attributed to a lingering company-wide obsession with the desktop. Zuckerberg won’t repeat this mistake.

Zuck is so committed to achieving his three to five billion objective that he is willing to jettison the very stuff that defines Facebook as we know it … in order to stay in the game. He’s clearly not wedded to the Facebook of the past, and he will discard the current version if it prevents him from reaching the big goal. We’ve already seen him do this several times in the past, notably in 2007 when Facebook quickly copied Twitter by introducing the news feed, and again a year later when it opened the platform up (thereby taking a scorched-earth approach to all up-and-coming rival social networks).

Launching the Feed, F8, and Facebook Connect were big bold plays that could have backfired but instead they transformed the company, leading to greater growth, greater reach, and becoming further entrenched in its market. When you consider the WhatsApp transaction, you must include in your calculus Facebook’s history of making big bold transformative moves.

Second point: this deal is all about survival. The average lifespan of a social network is about seven years, give or take a few years. Think back to early proto-social networks like Homestead.com and GeoCities in the late 1990s. Then think of SixDegrees and Friendster. Then consider MySpace. None of these things lasted more than seven years (yes, I know, they linger on endlessly in a zombie-like state, but they have become irrelevant). Facebook at 10 years old is already long past its sell-by date. By social networks standards, Facebook is old.

Mark Zuckerberg is obviously keenly aware of the short life span of other social networks, and that’s why he has always been willing to unload the old version in order to get to the next level. Facebook iterates on the main service constantly. This is what he means by the motto, “Move fast and break things.”

I am impressed by how coldblooded he seems to be about discarding whatever worked last year in order to build the new thing for next year. Love him or hate him, you must admit, he’s a great CEO.

So now in light of those two main points, here are some thoughts about why this deal may actually make sense.

1. Facebook Just Bought Its Next Billion Users

Mobile is growing very fast. Yes, I know, we’ve all heard this message a million times before. Get used to it. Mobile data is the story of the decade. You are going to keep hearing about mobile for the next six years. That’s because we are in the process of a historic shift that is now underway in every corner of the globe.

When we look at the global mobile uptake of the past decade, we see a growth curve inside a growth curve. The number of new mobile users is growing, and in addition all current mobile users are in the process of migrating to smartphones and high speed data via 4G LTE. That’s compounded growth on a global scale: by the end of this decade, nearly everyone on the planet will have a smartphone connected to a high speed mobile network. That’s six or seven billion give or take a few hundred million.

If you want to grow your business to three to five billion users, you need to be riding this growth curve. That’s the only way you will get there.

In the U.S. we are a little jaded about the advances in mobile Internet because we’ve had our iPhones for five years and LTE for nearly two years. We tend to take high speed mobile data for granted. But the American view is distorted. Most people in the world have barely begun to experience persistent high speed mobile data.

In other countries, LTE is just rolling out now. The big Internet story for 2014 is the global rollout of 4G LTE around the world. This is the fastest network rollout in history: there are more than 200 LTE deployments underway right now. In Africa, Latin America, and South Asia, the old 2G mobile networks will likely leapfrog to LTE.

Increasingly, mobile subscribers will access their LTE network via cheap smartphones. Prices for these phones have plummeted under $100. There is already an open-source Firefox OS smartphone that sells for less than $25, and that price will surely continue to drop in the future. For many users in developing parts of the world, their Firefox smartphone connected to 3G or LTE will be their first contact with the web.

One billion new smartphones will be sold this year, raising the total audience to 1.75 billion. Again, most of those sales will occur in South Asia, Africa, and Latin America. The upshot? The next two billion users on the Internet won’t be coming from laptops or desktop computers. If you want to reach three to five billion new users, you need to optimize your products for smartphones in emerging markets.

That’s exactly what WhatsApp is for.

These big trends mean that we are about to see Asia, Latin America, and Africa go through the same massive digital transformation that happened in the northern countries from 1995 to 2006. Every week, for instance, the web is abuzz with stories about how entire economies in Africa are reorienting toward mobile payments. This is just the beginning of that transformation. It will continue into the 2020s. So it’s quite possible that we will see another 500 million or one billion new Internet users added this year, almost all of them in the southern hemisphere.

If you consider WhatsApp’s growth over the past two years, you can see clearly that this is one of just two or three apps that is growing at the same rate as mobile. Meanwhile, as many other commentators noted, Facebook penetration in these markets is pretty superficial. Without WhatsApp, Facebook could have missed this fast growth opportunity, and we all know that Zuck has his eye on three to five billion users.

So by acquiring WhatsApp, Facebook just bought a path to its next billion users.

2. Facebook Is Losing the Teen Market. This Is Their Bid to Buy It Back

Social networking was cool for kids until their parents got Facebook accounts. Then it became very uncool very fast. Messaging apps are private, which means no reprimands from parents, schoolteachers, and other busybodies.

It’s no surprise that messaging is insanely hot right now. I believe that mobile messaging is the future of social networking, or at least the next iteration of this dynamic new medium. There are a lot of cool messaging apps that combine gaming, commerce, and other types of engagement: this is a pretty fluid space for innovation.

By taking WhatsApp off the table, Facebook has now removed a strategic threat (and a possibly fatal weapon in the hands of a competitor).

If you compare this deal to other recent deals and offers in the mobile messaging category, the price is not totally out of line with other price-per-user valuations (Vine, SnapChat). WhatsApp got a big number because it brings a huge number of active users.

So, in a way, Facebook just bought back the millions of teenagers who had abandoned the service (speaking figuratively, of course).

3. The U.S. Is No Longer a Growth Market for Social Networking

In the U.S., we are saturated with social apps of every imaginable sort, and we have been for five years. This is not the growth market for Facebook. Facebook already has huge exposure to the U.S. market, so it needs to create opportunity abroad if it wants to keep growing. But in other countries, the consumption habit, the device and therefore the product is very different from the social networks that were optimized for a browser running on a laptop or desktop computer.

The future of social networking will be determined in China and South Asia, not the U.S. This is a numbers game. Demography suggests that the future of social networking will occur where the most people are.

But Facebook is not going to win in China. No chance. It is blocked there. Facebook’s local Chinese rival is TenCent, a powerhouse, and its mobile app is WeChat, which is growing at a rate comparable to WhatsApp with roughly equal number of users.

There is going to be a showdown in South Asia between TenCent-WeChat and other messaging apps for the youth audience. Facebook could not afford to be sidelined in that battle. To compete with TenCent across Asia, Facebook needed something equivalent to WeChat. And they need it right now because current Facebook mobile apps are not comparable. Hence, purchase WhatsApp in order to have a dog in the fight in South Asia (e.g. China).

4. Facebook Is Now a Mobile Company

One year ago, this may have seem laughable to critics but this message is Facebook gospel now. I heard it directly from Facebook’s head of product when I interviewed her at CTIA last year. I was incredulous. She convinced me it’s true.

Facebook’s mobile transformation in the past 18 months is impressive (matched only by Microsoft in 1997, when Bill Gates turned the company on a dime to reorient the entire business toward the Internet). In 2011 Facebook had little in mobile. Today, the majority of its revenue comes from mobile. Mobile advertising revenue has transformed Facebook and the company is now reoriented toward the smart phone.

In the past year, revenue at Facebook doubled, and the bulk of that growth came from mobile advertising. The company’s future growth trajectory is clearly oriented toward mobile. Hence, the WhatsApp acquisition. In particular, WhatsApp users had begun sharing more photos than almost any other mobile app. Photo sharing is Facebook’s core franchise. It had to be protected, at almost any cost.

5. Spend that Paper Money While You Can

Facebook stock nearly quadrupled in value in 2013. There’s no guarantee that the share price will remain that high forever. Why not convert some of that volatile paper into valuable assets? Only $4 billion of the WhatsApp deal was in cash. The rest was purchased with highly-inflated stock. This is a game that is well understood in Silicon Valley: companies like Cisco managed to buy growth for more than a decade by using stock to acquire hot young companies with great talent.

A final note: Mobile messaging apps was a category that Blackberry pioneered. As recently as 2011, this category was dominated by BBM. Last year, Facebook could have acquired Blackberry for a mere $4.7 billion. And then it would have had a great phone company, a strong brand, corporate users, an operating system, a ton of useful patents for mobile phones, an app store, and content ecosystem…and the BBM messaging app. No thanks. It’s shocking to see how fast value can be destroyed in this market. I think that people who study mobile understand that dynamic. That’s why Facebook is willing to place big bets and move swiftly.

6. Net/Net

There are some gaps in my analysis of this scenario that still need to play out. The first big gap is that buying WhatsApp is no guarantee of success. Teens are fickle and they may switch to some other app next year or the year after, rendering this acquisition moot. My rejoinder: if that happens, don’t be surprised if Zuck makes another bold move. Again, what we know about Zuckerberg is that he won’t hesitate to kill today’s product in order to get to the next level.

The second criticism of my analysis is that the product is not a good fit because WhatsApp famously eschews all advertising. To make money, WhatsApp charges a flat .99 per install. To me, this is a non-issue. The deal is not about the .99 per user fee. This is about acquiring a lot of users in one shot plus a hell of a lot of momentum, and thereby clearing a path for Facebook to penetrate markets where its current products get no traction. Facebook can do a lot of interesting things with WhatsApp without adding advertising. Keep an eye on WeChat — it has embedded games and commerce and continues to press the innovation. My hunch is that we’ll soon see WhatsApp sprout in-app commerce features similar to WeChat.

A third criticism of my analysis is that the price-per-user numbers don’t make sense. FB has no way to get the estimated $40 per user back. I don’t think that’s the right yardstick to measure this deal. This is about survival and having a seat at the table in the next round of the game. If Facebook did not do something bold with messaging, it was about to be shut out of the mobile growth game.

With this acquisition, Facebook now controls the Nos. 1, 2 and 3 apps in mobile (in the developed world). That’s quite incredible.

Robert Tercek is one of the most-prolific creators of interactive entertainment. During his 25-year career, he has created hit titles for Sony Pictures Entertainment, MTV: Music Television and Oprah Winfrey. Today he provides strategic advice to leading technology companies, entertainment studios, telecommunications providers and cutting-edge startup ventures. He is in high demand as a keynote speaker on the subject of “Inventing the Future.” He is also the Chairman of the Board of Directors at the Creative Visions Foundation in Malibu, California. He is a fellow of the Royal Society of the Arts and a member of the Academy of Television Arts and Sciences. See more of Robert’s work at http://roberttercek.com.