Loads of analysts are taking a look at the $19 billion ($16b in cash & stock; $3bn in restricted stock) acquisition of the 55-person messaging company, What’s App. It’s a lot of money. And despite the stories of a deal brokered over chocolate-covered strawberries at Mark Zuckerberg’s kitchen table, no one expects such a purchase decision was made lightly.
Some of the most valuable analysis I have found are here:
“Knowledge@Wharton asked two Wharton experts — Kartik Hosanagar, professor of operations and information management, and Lawrence G. Hrebiniak, emeritus professor of management — whether they believe the move ultimately will pay off.”
“Similarly, the size of a virtual network is dictated by its carrying capacity, only that capacity is measured by utility instead of physical resources. An online social network can only grow as big as it remains useful, and the usefulness of a social network can be measured as the ease with which users can connect and share with friends and (sometimes) potential friends.”
“When Facebook acquired Instagram for $1 billion in 2012, it, too, was assailed for a supposedly bad investment. But today, with Instagram thriving and beginning to sell advertising, that deal looks like a bargain.”
Some key points most are touching on:
- What’s App is growing faster than Facebook and doing so internationally. Fast growth is always good for public companies. Also, Facebook may face increasing competition from services anchored elsewhere. The explosive growth of China’s WeChat being a great example.
- Daily use of monthly actives is higher on What’s App (70%) than on Facebook (61%). Messaging services are that much more essential to their users than even Facebook with a greater frequency of use.
- Facebook seems to have learned that their future may be as a “house of brands” vs. a single monolithic service provider under the Facebook “app.” Their launch of Paper, their cultivation of Instagram and now their purchase of What’s App seem to indicate that they do not expect every service they own to be rolled up under the Facebook name and interface. This clearly is a “hedge” against phenomena like the 11 million young users who have allegedly moved off Facebook since 2011.
- At $1 a year in fee, What’s App has a different business model and source of revenue. As Knowledge@Wharton reported: “Despite the strong revenue numbers, Saikat Chaudhuri, executive director of the Mack Institute for Innovation Management at Wharton, warns that Facebook has to be careful that its growing ad load doesn’t alienate customers. “Ultimately, Facebook will need to find more subtle ways of engaging beyond News Feed ads,” he says.”
- Between What’s App, South Korea’s Line, China’s WeChat, the trending growth of messaging services is clear. Facebook simply would not want such a service to become Google’s (the other recent suitor for What’s App).
There’s another factor to consider that supports What’s App as a good hedge or investment in the future and it has to do with the importance of trust in advertising.
What it may mean to advertisers: leveraging trust
Remember the research around close ties and weak ties? This explains the dynamic happening between users in social networks and how it maps to some enduring characteristics of what we all get from our closely held relationships (the 5 or so people closest to us) and those that are more casual and extended (think 300+ friends on Facebook.)
All friends are not created equal. We trust our close ties and the recommendations they make more than our weak ties. That makes sense. Our family and closest friends know us better. When they tell us we might like the Ford Fusion or the service experience at Lowe’s or the quality of the independent insurance agent in our town, it means more than a comment by our 290th friend on Facebook. Conversely, weak ties are great for exposing us to more new things. That’s how many of us break out of the rut of homophily (only being exposed to the narrow set of similar things that our closest friends will provide)
Facebook is a lot more about weak ties. What’s App is more about close ties.
The marketing world continues to try and learn how to drive authentic customer advocacy. How do you get customers sharing meaningfully about their positive experience with a brand? How do you get more people to share valuable content via Twitter, Facebook, LinkedIn and more? How do you trigger people to share about a brand via their trusted social graph?
Meanwhile, brands are often abusing the same social network channels by publishing un-engaging content (clutter & spam) or reducing everything to a promotional offer (cultivating deal-hungry, here-today-gone-tomorrow customers). There are limits to how much advertising can be pumped into social networks before we poison the well as what happened early on with email marketing (spam). And even then, our, on average, 300+ friends are not the most trusted network. Our close ties hold stronger trust.
The challenge for a network like Facebook is farmed up by Jeff Stibel, Chairman and CEO of Dun & Bradstreet Credibility Corp., in HBR Blogs,
“The most important element is clutter in the form of a sloppy interface, advertisements, and unwanted connections. The site’s utility goes down every time a user gets annoyed, and that annoyance is the biggest threat to Facebook’s survival. Too many users equals too much clutter. Think of the ant colony: if you threw some Candy Crush invites into the nest, or subjected the ants to the chatter of members of other colonies, they’d probably go postal… right before the colony completely collapsed.”
What’s App connects a smaller group of people who know each other more closely. When a brand delivers a relevant offer to one user and she passes it along to her messaging address book, it will perform better. It will be more instantly relevant. It is more trusted coming through a close tie. It will drive action at a higher rate.
I spent some time with the folks from LINE, a What’s App competitor late last year when I was in Asia. They were very bullish about their advertising prospects in comparison to Facebook. They owned the bottom of the funnel and can measurably drive people to retail or ecommerce in ways that Facebook could only dream of (this is them talking). Brands connecting with users via LINE send out a relevant offer to a customer/follower and that person goes into store at a much higher rate. I am sure Facebook sees the value of close ties and the possibility to drive real commerce not just engagement via What’s App.
As Jeff Stibel summarized when discussing the premature reports of Facebook’s demise,
“Determining what users find most relevant, and providing that and only that, is both Facebook’s greatest challenge and its greatest opportunity for making it through the breakpoint. If it succeeds, Facebook’s network curve won’t look like what happened to MySpace or polio, rather it will stabilize like other successful networks.”
(thanks to Mobile Brain Bank for the terrific image from their study)