Facebook & WhatsApp – JK come home

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WhatsApp will have to be integrated to earn a good return.

  • Facebook has finally admitted that subscription is not the way forward for WhatsApp but I suspect that enterprise is merely a stop gap.
  • WhatsApp founder, Jan Koum has officially dropped the subscription fee of $0.99 and stated that the company is leaning towards the enterprise as a method of monetisation.
  • Many companies connect with their customers via SMS messaging and WhatsApp is proposing that these companies may be prepared to pay to do that using WhatsApp.
  • Facebook has always said that it would not really worry about monetisation of its assets until they hit 1bn users and I suspect that WhatsApp is getting very close to this number.
  • Jan Koum may be able to get enterprises to pay something to use WhatsApp as a channel to reach their customers but I very much doubt he will ever be able to make enough to justify the US$22bn that Facebook paid for the company.
  • This is because WhatsApp is still adamant that it will continue to operate independently from Facebook.
  • I think that this was part of the deal when Facebook acquired WhatsApp but I remain convinced that the real value from WhatsApp will only be released by putting the two together.
  • RFM research indicates that when considering a series of Digital Life services (like Facebook) there is far more value to be gained if these services are integrated.
  • This is because the ecosystem can then learn what its users do across a range of activities rather than just one.
  • If the services are not integrated then the ecosystem only learns about individual users within a single service and cannot connect the dots when a user spends time with multiple services from that ecosystem.
  • The value of understanding what the does across services A, B and C is completely missed and it is here where I think the real upside is.
  • Consequently, I think that for as long as WhatsApp remains independent and not integrated into the Facebook family, it will never create enough value to justify its acquisition price.
  • I see signs of Facebook taking Messenger into gaming like LINE and KakaoTalk and I suspect that the same will eventually be true for WhatsApp.
  • The transition from single services to a fully-fledged ecosystem is likely to take a long time because when Facebook is assessed on the quality of its ecosystem, it becomes clear that there is a vast amount of work to do.
  • For Facebook to really grow revenues in the long-term, its ecosystem needs to be firing on all cylinders and I don’t think this is going to happen before its current set up runs out of steam.
  • Consequently, I think that Facebook could see a pause in growth in H2 2016 which is likely to result in a heavy correction in the shares.
  • It is at that time that I would be looking to enter Facebook for the long-term upside.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.