Look beyond Facebook ads - that's why it bought WhatsApp

By Rosie Baker | 5 March 2014
Nick Grudin Facebook

While the industry continues to fall over itself dealing with Facebook ads, the social network is moving beyond that and repositioning to voice calls, messaging, photo sharing. It will soon dominate every method of online communication and overtake Skype for calls, according to one outspoken analyst Jonathan Fishman.

The acquisition of WhatsApp, Instagram before it and the attempt to buy Snapchat all demonstrate Facebook's desire to “become the world's connection company”. As does the launch of its own app Paper, currently only available in the US but coming to Australia soon.

Speaking to AdNews last week, Facebook's global head of partnerships Nick Grudin said the social network was all about adding new ways to connect people with content and other people.

Through acquisitions and the development of different branded apps, Facebook is building what it calls an “ecosystem” of apps that allow users to discover content, connect with friends, read news, watch video, make calls, send messages and share photos all within Facebook.

Fishman, a technology analyst at Gil Adron published a report on Seeking Alpha calling the Whatsapp acquisition a “turning point” for Facebook, recognising the value of connecting beyond the Facebook wall and outlining potential monetisation.

“While investors look at the short term and focus on how Facebook is monetisng its users with Facebook ads, I believe that Facebook is almost through repositioning itself. It took the company $20B and two years, but years from now, no matter how you choose to communicate with another person, you will be using a Facebook service,” he said.

While many have questioned Facebook spending $19 billion on Whatsapp, calling it an overpayment, Fishman doesn't agree. Here's why.

Voice calls are the next pillar. Facebook already offers voice calls through its messenger app and Whatsapp is soon to add a call feature. Fishman reckons Whatsapp's rapid growth will see it overtake Skype's share of the international calls market. Nearly a third (28%) of all international calls worldwide were Skype to Skype last year. Skype has 300 million members – Whatsapp already has more than that.

He reckons Whatsapp will generate $654.5 million annually in direct revenue from subscription fees from 12 million members each paying $1 from the second year of use. Based on calculations of growing user base tipping over from the free first year to the paid service, it grows to $915 million by the end of 2016.

The indirect monetisation opportunity from Whatsapp comes from knowing who users interact with outside the network and using it to improve the news Feed and encourage users to spend more time on it, and therefore increase the time viewing ads.

Based on a number of assumptions about growth rates, new users on Whatsapp and Facebook and increased time spent on the News Feed Fishman reckons Facebook will see a $1.1 billion increase in indirect revenue by the end of 2015 – that's an increase of $0.76 in revenue per user taking it to $8.38 per year.

It's taken Facebook 18 months to start monetising Instagram, and it's still early days. It is only just rolling out paid ads in the US but Fishman thinks a conservative estimate would be that Instagram can bring in 50% of the revenue per user Facebook does, calculating that to be $3.81 per user annually. That would mean Facebook can make $572 million in advertising revenue on Instagram each year based on its 150 million users.

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