Is Facebook the new Microsoft?

I don’t mean “Facebook is Microsoft” in the good sense. I don’t mean Microsoft of 90’s – the all dominating software giant. I mean Microsoft of last decade, unable to compete in the world of cloud computing, search engine and smart phone.

To counter this, Microsoft invested huge sums of money in companies like Skype( 8.5 billion),  aQuantive ( 6.5 billion) and Yammer( 1.2 billion). All these companies were supposed to provide Microsoft with added technology to keep them competitive in the non-desktop market. However, after these acquisitions also, Microsoft continues to struggle in these markets. They recently wrote down the entire acquisition amount of aQuantive in their financial statements. They seem to have managed to get some value out of Skype though whether it was worth 8.5 billion is still open( For comparison РThey paid 7.2 billion for Nokia mobile unit).

Facebook recently purchased a Chat application called WhatsApp by paying a hefty 19 billion dollars. I am purposely calling WhatsApp as a chat application and not a “social networking app” because I believe that these new apps are nothing but a glorified chat apps and does not represent the future of social networking. See my Chat Bubble post for my thoughts.

However, Facebook is fearing the loss of dominance in the social media domain and is desperately trying to buy up mobile based social media companies to keep up. They had offered to buy SnapChat for 3 billion and now have successfully purchased WhatsApp for 19 billion. WhatsApp has 450 million users. That is 44$ per user!!

How does Facebook plan to make up that kind of money? WhatsApp does not lend itself to advertisements the way Facebook does. They had gone with subscription model which would charge 1$ per year. If they continue with the model, Facebook can hope to recover cost in 44 years if all the current user pay. That is a completely absurd valuation for a chat application.

I am now going to wear my great prediction hat and say Facebook will admit that WhatsApp acquisition was a waste of money in 3-5 years. What are your thoughts? Any ideas on how Facebook is going to make use of WhatsApp? Do Comment.


Filed under My thoughts on Business & Stuff, Uncategorized

4 Responses to Is Facebook the new Microsoft?

  1. WhatsApp adds1 million users every day. With the current run rate, they can have billion users in less than 2 years. The next 1 billion can take more time, given smartphone needs to penetrate first for WhatsApp to be successful. But still I don’t see why it can’t be 2 billions in next 5 years. Cost recovery comes below 10 years in that case.

    More important, WhatsApp has 50 employees. Even if we consider average CTC to be 1 million dollars, which is too high even by Silicon valley standards, the operation cost is only 50 million dollars per year.

    Most important WhatsApp is planning to get into the voice space. If they can charge 1 dollar for chat, they can charge couple of dollars more for voice. And everyone including price sensitive Indians will be ready to pay, because more than 90% of your contact list is in WhatsApp, and in terms of price it is way cheaper than what the telecom companies charge.

    • Ashish Iddya

      Hi Debangshu,
      You forgot the cost of the servers. So, operating cost is surely more than the revenues that it is currently bringing in.
      Voice calling is not a path breaking feature. We all have Skype accounts and we all know that it has voice features.
      Does that make Skype a good buy for Microsoft?
      No, as we dont seem to use it as often as proper phone call.

      • Yup, I forgot the server cost :). But given that WhatsApp do not store any message, and given that infrastructure cost is coming down everyday, I will not be too concerned about Server cost.

        We all had Orkut account, we all moved to Facebook. The reason was because all our friends and family moved :). Its very similar for WhatsApp. Easy to use, no separate authentication, all your contact list available for chat. Anyone who used to send group forward messages 5 years back, is doing the same thing using WhatsApp today. People are keeping in touch with each other using WhatsApp today. They are creating groups similar to what they were doing in Facebook couple of years back.

        Skype is not exactly similar :).

  2. Srik

    The $19b should not be seen in a pure monetary sense. Whether or not FB makes $19b over the next n years is immaterial. What is important is what they get in non-monetary terms – user data (worth its weight in gold), contact list of 450 million people, which is practically the phone numbers of the entire world. Based on what you discuss on WhatsApp, you will see ads on FB.

    One should also see it in terms of the price that FB paid to prevent another competitor acquiring WhatsApp. Same is the price of Skype – it is the price paid by Microsoft to force Google to develop their own chat software (Hangouts) minus the existing user base.

    Say you are an NRI who made lots of money in the US and returned to India. You want a home for rent, you visit 2-3 places and you really like one. But the owner quotes a rent higher than the market price, would you not pay it. The extra amount over the market price is nothing because you are relatively rich. Same (although a bit exaggerated) is the case with FB and WhatsApp.

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