Why Facebook paid $US16 billion for WhatsApp – and why Telstra, Optus and Vodafone should be worried: Control Shift

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Over the past week, many analysts have been scratching their heads over Facebook’s decision to purchase WhatsApp for an eye-popping $US16 billion.

The rise of mobile messaging apps, including WhatsApp, Google’s Hangouts, BlackBerry Messenger (BBM), Kakato Talk and Snapchat is a trend I discussed in Control Shift late last year:

A growing number of consumers are realising that paying a mobile carrier 25 cents per SMS text message is a waste when the same functionality – or more – can be achieved through an app…

The growing use of [these] modern, mobile versions of these instant messaging services is a trend businesses should watch closely. It could very well emerge that, like social media, mobile messaging becomes an effective way for businesses to communicate with their customers.

Facebook’s decision to purchase WhatsApp, and its announcement at the Mobile World Congress (MWC) that it will soon offer voice call services, needs to be understood in a larger context.

Back when everyone used featurephones, mobile communications services such as voice calls, text messages (SMS), picture messaging (MMS) were provided by mobile carriers. The underlying data was bundled in the price of the value-added service.

With smartphones, however, there’s a separation between those value added services and the underlying data. The same (or better) functionality as a carrier’s text or voice call service can be gained through an app and a cloud-based service for free. It’s a choice more smartphone users are making.

After all, why pay an additional $20 or $40 for talk and text on your mobile plan each month for talk and text when you can download a free app that does the same thing, and eats up just a few megabytes of your data allowance each month?

So for a growing number of users, mobile carriers such as Optus, Telstra and Vodafone are left providing access to data, while services such as WhatsApp, BBM, Google Hangouts, Apple iMessage, SnapChat and Skype provide the value-added voice and text message service.

The endgame

Now, just imagine that, at some point in the future, one app comes to dominate this marketplace. Practically everyone comes to use a single app, rather than their carrier, for their voice calls and text messages.

The owner of that service then becomes the gatekeeper and determines which businesses can use their service to send their customers text messages or calls, even as ordinary customers continue using its service for free.

Consider how a mobile carrier currently charges your dentist to send you a six-month reminder message saying you need a check-up. If those messages are sent through an app instead, the owner of that app is in a position to charge the dentist for sending a large volume of text messages to its users.

Likewise, it’s in a position to allow most users to call or text each other for free, while charging businesses for receiving a large volume of calls to a single account – for example, to run a call centre.

In short, when one free messaging service dominates, deciding who can have access to that service is potentially quite lucrative.

It’s a high stakes game

Facebook was far too late to this race to become the dominant platform – too late to establish a base matching WhatsApp’s 450 million users, even with a billion people using its social network. With this deal, it has vaulted itself into the top spot in the market.

The deal was also partly defensive on Facebook’s part, as Google was reportedly looking to purchase WhatsApp for $US10 billion, potentially folding it into Google Hangouts.

Had that deal happened, Google would have had the dominant mobile messaging platform (Hangouts/WhatsApp), the dominant smartphone operating system (Android) and the dominant app store (Google Play).

Meanwhile, given the tight link between Google Hangouts and Google Plus – it would also have had claim to having 450 million social media users. That would be a significant blow to the core of Zuckerberg’s business.

BlackBerry could now be in the catbird seat

A company unexpectedly found sitting in the catbird seat as a result of this deal is BlackBerry, which has around 80 million users on its BlackBerry Messenger (BBM) mobile messaging service.

Most people think of BlackBerry as the maker of smartphones with keyboards, and dismiss its future prospects accordingly.

However, this view ignores the fact the company also owns a number of cloud-based services with strong growth potential, including BBM. And, as I argued in Control Shift last year, with the right management, there is strong growth potential in many of these services:

The truth is, even if BlackBerry decides to stop producing handsets, there are still a number of assets owned by the company that have a strong potential for growth – with the right management.

Despite a misstep, BlackBerry has rolled out its BlackBerry Messenger system to iOS and Android, with the number of users growing.

BlackBerry Enterprise Server, while it’s set to face a new competitor in Samsung Knox, remains the mobile communications platform of choice for many businesses and governments.

The company also still owns QNX, an operating system that powers many of the world’s embedded computers. There is a reasonable possibility you used a device running QNX today – perhaps a car stereo or an auto component – without even realising it.

It should come as little surprise to read that shares in BlackBerry shot up 8% as soon as the deal between Facebook and WhatsApp was announced.

As it turns out, with its secure messaging service and enterprise customer base, BBM is sitting on some prime real estate. The announcement at the Mobile World Congress of a version of BBM targeted specifically at enterprises – known as eBBM Suite – only strengthens its position.

What next?

What happens next will be fascinating to watch.

Facebook’s takeover of WhatsApp was certainly a gutsy, high-risk gamble. Obviously, no one can see the future.

It’s far from certain that any single app platform could completely replace carrier call and text services, or come to occupy a near monopoly market position.

Nonetheless, the fact that Mark Zuckerberg thought it was worthwhile paying $US16 billion for WhatsApp should be cause for serious concern at Telstra, Optus and Vodafone. In effect, he’s betting consumers will eventually choose his free apps over their voice and messaging services.

Meanwhile, there’s hope for BlackBerry yet.


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