Tesi: Facebook's Whatsapp acquisition: Competitive issues in the IM market

Just like Facebook, WhatsApp is easily accessible by every type of customer: the app

has charged an annual subscription fee of only 0.99$ until 2016.

People use it to stay in touch with friends and family anytime and anywhere. Among

the services offered, the application allows the sending of media such as photos, short

videos and documents.

WhatsApp (the name standing for the popular phrase “What’s up?”) started as an

alternative to SMS and reached for the first time 1 billion users in February 2016.

WhatsApp monthly active users worldwide (in millions)

1200

1000

800

600

400

200

0

Figure 1: Number of WhatsApp monthly active users worldwide (Statista)

2.2. The shift towards mobile

Technology industry is characterized by rapid and continuous changes and

developments, which force active companies to innovate. Facebook initially took

advantage of the spread of PCs in the early 2000s; this enhanced its leaderships in

social network services. This lasted until the advent of smartphones and tablet

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technology starting from 2009. This change influenced also the instant messaging

sector, with many new apps (WhatsApp, Viber, LINE) becoming increasingly popular

and so actively driving the shift towards mobile devices. Such apps are often called

Over the Top applications, since they are independent of the network being used at any

time just as they are of the smartphone itself, the device. Explanations of their success

in the mass media often highlight economic factors: the relative low cost of using these

apps, especially when compared to historically more prevalent channels such as SMS,

is indisputable. These features make all the costs associated to the use of Internet

negligible and users perceive IM apps to be free (Massimi, Harper, Rubens, Morris,

2014).

Smartphones officially outsold PCs in 2010 for the first time. Optimistic analysts

forecasted that the crossover might happen in 2012. Instead, by the last three months of

–

2010, 94 million PCs were sold and 100 million smartphones. Analysts believe that

this trend will never reverse (Charles Arthur, 2011).

The change that smartphones brought was an incredible computing power in the palm

of the hands: checking the email account and surfing on the Internet could success

without needing a desktop. The crossover was even stronger in developing countries,

where electricity supplies may be expensive or discontinuous, and the cost of a PC

prohibitive. Consequently, the mass market consumers were discovering that

smartphones were 'good enough' for most PC types of uses (Tomi Ahonen, 2011).

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Sales of smartphones and PCs worldwide (in million units)

140

120

100

80

60

40

20

0 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3

2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011

smartphones PCs

Figure 2: Million units sales of smartphones and PCs worldwide (the Guardian)

The shift towards mobile devices opened both a new business scenario Facebook had

not already taken into consideration and an appealing opportunity to increase revenues.

Such mobile market is almost unpredictable in many of its features and the emerging

social media consumer trends have been shaping Facebook strategy throughout the

years. Facebook itself emerged as the dominant social media vehicle after the decline

of Myspace and this fact strongly increased its popularity. But the best made products

have not always necessarily thriven, rather instead they always require popular

approval; focusing on the launch of new apps, regardless if being game or chatting

apps, there exists the idea that the higher the popularity of the proposer, the higher the

possibility that the new app will hit the market. Said that, the industry had shown and

continues in giving many examples of apps that proved to be successful despite being

The app “Flappy Games” is one of the

developed by not affirmed organizations.

examples of random success. Although not being particularly well designed, it

exploded in 2014 via word of mouth. On the other side, nobody forgets the difficulties

Nokia faced in attracting new customers when it came to the smartphone era

(MarketLine, 2014). 18

Facebook initially reacted by developing own applications such as Facebook

Messenger (2011) which did achieve some degree of success. However, the

abovementioned examples proved that the brand power only cannot always guarantee

long-term survival in online markets.

So, Facebook was aware both of its weaknesses particularly in the instant messaging

area and of the need to implement an aggressive strategy to maintain relevance. This

was put into practice through the acquisition of apps and services that were already

popular in areas where it would have been hard for Facebook to compete effectively

(David Kirkpatrick, 2010).

Facebook’ acquiring strategy

2.3. Historically, Facebook’s

To this day, Facebook has acquired more than 50 companies.

acquisitions held the objective to expropriate talent from companies for various

enterprises, such as advertising or app development. Whilst this is still a key objective,

it is now positioned to permit its acquisitions a degree of autonomy to maintain their

popularity. In an online interview released in 2010, Facebook CEO Mark Zuckerberg

“we

stressed this point stating that have not once bought a company for the company.

We buy companies to get excellent people... In order to have a really entrepreneurial

culture one of the key things is to make sure we're recruiting the best people. One of the

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ways to do this is to focus on acquiring great companies with great founders.”

https://www.youtube.com/watch?v=OlBDyItD0Ak

14 19

Facebook's largest acquisitions (in US million dollars)

19,000

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000 2,000 1,000

2,000 500 150 60 50

0 WhatsApp Oculus Instagram liveRail Onavo Face.com Bolt|Peters

(2014) (2014) (2012) (2014) (2013) (2012) (2012)

Facebook’s acquisitions (CrunchBase)

Figure 3:

The first signal of Facebook’s switching intentions, a true admission of all its

purchasing power, was the 1 billion dollars acquisition of Instagram in May 2012, the

deal at the time in terms of both invested capital and customer base.

largest Facebook’s

As its largest acquisition, the deal saw some criticism for the high price Facebook paid

for a company that had only 300 million US dollars profits. However, it then proved to

Facebook’s mobile offering while removing a potential rival.

be a great strategic fit for

The acquisition had advertising purposes as a justification. Facebook took advantage of

the expanding customer base using the app, the majority of them being young and high-

income teens. This was exactly the type of audience big brands were and are currently

looking for, so it represented a complete win-win situation for both marketers

(Instagram) and advertisers. More detailed users’ data simply translated in better and

wider mobile ads Facebook could rely on (Kashmir Hill, 2012).

Facebook has not yet revealed the actual earnings of instagram. However, according to

a report from eMarketer, Instagram accounted for 5% of the net mobile ad revenues of

Facebook in 2015. The report also mentions that Instagram will account for 9.5% of

Facebook’s total mobile ad revenues in 2016, which will grow to 14% by 2017, as the

chart below shows. 20

Instagram's shares of total Facebook's net revenue

16%

14%

12%

10%

8%

6%

4%

2%

0% 2015 2016 2017

Figure 4: Instagram's shares of total Facebook's net revenue (eMarketer)

So, how could WhatsApp be that much more important to the future of Facebook?

Firstly, the acquisition of WhatsApp would have been the easiest way to extend both

Facebook’s success and dominance in the IM market. Just owning Facebook

Messenger as the in-house messaging app was probably considered insufficient in

terms of growth prospects and competitivity guarantee.

Then, WhatsApp potentially offered access to millions of customers, what stands for

the biggest incentive for companies operating in social network markets. Over 450

million people access WhatsApp on a monthly base and 320 million people are active

daily users on average. Although Facebook has never openly given the impression to

struggle for number of users nor has it ever cared much about rushing monetization of

all of them, the idea of capturing as much users as possible seemed to be more

important to Facebook than it had been a few years ago (Adam Hartung, 2014).

Lastly, both sector experts and analysts agreed on the fact that Facebook may

wanted the control of photos. The trends at the time the deal was proposed showed

people were becoming more confident with sharing photos on WhatsApp rather

than on Facebook. The IM company itself gave updated stats on its daily flow:

WhatsApp's users were sending 16 billion messages per day on average, receiving 32

billion, and sending 500 million images per day.

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That was well above the 400 million photos received daily by people using Snapchat, a

photo-sending application that Facebook uselessly tried to buy for $3 billion (Parmy

Olson, 2013).

3. Competition policy applied to internet services

From the WhatsApp deal competitive issues could raise in the specific market both

Facebook and WhatsApp are direct opponents. The relevant market joining the parties

is worldwide recognized as the instant messaging sector, in which Facebook operates

through its own application named Facebook Messenger.

The IM industry is subjected to a particular competition law exposure due to its

economic features: the considerable increase in efficiency is due, among other factors,

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to direct and indirect network effects triggering a tendency towards monopolies

(Spencer Weber Waller, 2012). In this sense, one should consider the fact that in

platform-based markets like IM, large and dominant platform sizes are often crucial to

achieve an efficient utilization of the platform itself.

Such indirect network effects make platform-based markets more likely to be highly

concentrated. Although this could lead to dangerous monopolies, multiple platforms (in

our case the presence of different IM apps providers) are not necessarily associated

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with welfare benefits precisely because of indirect network effects . Furthermore, it is

not clear how other factors - theoretically driving competition - such as platforms

preferences and multi-homing possibilities act in depicting platform markets (Haucap,

Heimeshoff, 2013). For example, if it is true that multi-homing favour migration to

other providers, perfect multi-homing is quite rare.

An in-depth explanation of network effects will be given further as they are strictly connected

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with the notion of a two-sided market 22

Driving Force Effect on concentration