03 March 2014

With WhatsApp, Facebook buys into your Address Book

Written by at 23:30

Facebook buys WhatsAppAs if to spite with a bigger price tag, recently announced their intention to acquire WhatsApp, one of the most popular mobile messaging services. Countless articles, arguments and analysis have been published in the following days, so my article will probably sound like a collection of old ideas. And before you read further, another disclaimer: I have never used WhatsApp – between e-mail, texting, iMessage, Facebook Messenger, I have quite enough communication channels – and after this deal I’m even less likely to try it out.

Even if I haven’t used the app, I’ve heard stories from friends and colleagues about how they use WhatsApp; a common theme (besides being cheaper than texting) is sharing photos with smaller, private groups, photos not meant to be shown to all Facebook connections. This is both a sign of Facebook’s growing complexity (you already have private groups or lists for sharing there, but nobody seems to be using them) and that the social network is increasingly perceived as a public place, not an intimate gathering. A move that Facebook itself encouraged in order to target public data for ads, and is now backfiring in unexpected ways.

If there’s one good thing to note about the deal, is that the core missions of the two companies are very much aligned: enabling people to connect and communicate more easily through technology. This aside, their executions diverge considerably: where WhatsApp is simple, mobile-only, notoriously ad-free, gaining money through paid subscriptions (which at 1$/year is borderline symbolic), Facebook started on the web and grew into a cacophony of services powered by ads. It may be comforting for some to believe the promises that WhatsApp will continue to run quasi-independently from the new mother-company – after all, the WhatsApp cofounder got a place on the Facebook board of directors, right? But Mark Zuckerberg controls more than half the votes, so he can do pretty much everything he wants, regardless of what the board thinks – including pushing this overpriced deal forward.

I suspect the main reason behind the deal is the amount of data it provides to Facebook, from countless phone numbers and connections between their owners (Facebook Messenger also keeps insisting to read the address book, but I deny every time) to millions of photos and text messages. The way I see it, the deal puts Facebook-the-business in a lose-lose situation: keep the service and loose the data or break the service and loose the users!

  • Allowing WhatsApp to operate independently means Facebook can’t access the increasing flow of data on its users. Granted, the messaging service does turn up some revenue, unlike most of other apps and startups, but a couple million paying customers is a drop in a bucket compared to the billions Facebook paid; it would take about a decade, even at current growth rates, to recoup the original investment;
  • Changing WhatsApp to either feed all their data to Facebook or display ads would probably result in massive user backlash and migration to rival services. Barely a few days after finding out about the deal, people are signing-up for alternative messaging aps like Telegram and Threema promising better encryption and privacy – and in some key regions like Asia WhatsApp isn’t even the top player.

The problem for WhatsApp – and generally for any other mobile messaging app – is that it doesn’t control the social graph the way Facebook does on the desktop, not does it have any killer feature that other competing aps cannot quickly copy. These apps simply piggy-back on top of the phone address book, so switching to another service is as easy as downloading a new app. Since the entry barrier is so small, not only can people switch in a matter of minutes, but they can also convince their friends to join them. Striking the right balance between data collection and user acceptance will be difficult to say the least.

In the same context I read an interesting article talking about “the acquisition trap”. The basic idea is that most acquisitions fail because the company doing the buying views the transaction as a ‘quick fix’ to a specific problem and doesn’t learn to master the process that made the acquired company successful. In the case of WhatsApp, I think what it should be passing on to Facebook is their simplicity and focus, something the social network has long lost in their quest to gather data and control all the possible social channels. Some of these issues turn up looking back at Instagram and how it evolved since being acquired: the Facebook photo experience hasn’t improved in any significant way and Instagram itself didn’t evolve; it predictably introduced ads and video posts and launched a photo messaging product that barely anyone is using – adding unneeded complexity to a perfectly functioning product. Another fresh example: just after being acquired, WhatsApp announced it will add audio calls to messaging. Translation: more complexity! What’s worse is that WhatsApp is successful in many places where unlimited broadband is not widespread, so it’s unlikely those users will afford to use the data-expensive voice calls instead of text messaging.

I can see some interesting parallels in the current situation with both Google and MySpace:

  • The MySpace analogy is rather obvious: MySpace fell because it was too public and filed with ads and people wanted something simpler and more private; now Facebook is heading in the same direction, forced by the necessity to monetize its massive network, while mobile messaging aps are providing a simpler, private experience.
  • Google’s strength was being able to index and rank the open content on the Internet and ultimately sell ads based on that data; with the rise of (desktop) social networks, Google found itself faced with the problem of not being able to access a large portion of that content. Their response: Google+, either a failed attempt at a new social network to draw attention from the competition, or a successful attempt at collecting better data on their existing accounts for more refined ad targeting. Facebook’s strength is (was?) controlling the social (friend connections) and interest graph (likes) and selling ads based on that information. But mobile is grabbing more and more attention away from Facebook faster than it can react and the time spent in another app is literally invisible to Facebook. Their tactic so far has been a mix of “buying or copying” the competition. Over time, both alternatives were hit-and-miss: they acquired Instagram and WhatsApp, but lost SnapChat; Facebook Messenger is quite good, but Poke and Camera failed to get any significant traction. The landscape is changing so fast that anticipating future trends is difficult and Facebook doesn’t have the luxury to organically grow new apps and risk their failure, while the market moves in another direction.

I saw someone comparing this acquisition to the moment when Google bought YouTube in 2006, but there are fundamental differences between the two products. Using Ben Thompson’s map of the social networking space to better explain it, YouTube is (and always was) a public, asymmetric network: with many content creators, but even more consumers – basically all the TV channels you could imagine in a single place. Attaching ads to this type of content is relatively natural because people are already accustomed to seeing ads on TV, in cinemas, in newspapers. Lately Facebook has moved into this section of the chart, morphing into a sort of local gossip newspaper featuring your friends and promotions from the brands you liked – again a natural way of monetizing. WhatsApp sits in the complete opposite corner of the map, an ephemeral one-to-one communication tool; injecting ads into this private space would feel very intrusive, like having ads interrupting a phone call. Gmail faced important complaints as they introduced ads to the email inbox and people have mixed feelings about those ads even years later. Even if Facebook chooses to restrict itself to mining the data in the WhatsApp conversations and private sharing, a simple analogy would be the NSA eavesdropping on all communications – and we all know how well that went.

More than anything else, this acquisition shows how vulnerable Facebook is right now. Third party mobile aps have massive potential to attract users away from Facebook into their own ecosystem and buying one competitor will not solve this fundamental problem, quite the contrary: app makers and their investors will push even harder into this space, either to land an equally massive acquisition offer or to genuinely build alternative platforms, as the Asian competitors are planning. Facebook’s tactic of buying the social trend of the year is not sustainable neither long, nor short term. The users will migrate slower or faster to new places, next year’s rising star will probably ask more than Facebook can afford and in the end Facebook will be left with a couple of disparate and poorly integrated products without significant revenue. Let’s see what the investors have to say about it…

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