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I look at value and contrarian ideas as well as emerging technologies worldwide, both on the long and short side. I also like to discuss the influence of monetary policy on stock markets. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at... More
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  • Messaging: Facebook Does Away With One Threat For $19 Billion - What About The Rest?  2 comments
    Feb 23, 2014 3:49 AM | about stocks: FB, TWTR

    The messaging battle is on in 2014: Rakuten bought Viber for 900 million USD. Facebook bought Whatsapp for 16 plus up to 3 billion USD in restricted stock units a few days later.

    The moves were not unexpected*. I wrote on January 30, 2014 in a SA comment regarding threats to Facebook's business:

    I see a fast uptake in rival mobile chat apps such as WeChat, Snapchat, Whatsapp and others.
    Sure, FB has its own Messenger app, but the competition is growing. I still see a big long-term threat [for FB] here - on the other hand FB could just buy out popular messengers or other apps thanks to its huge market cap (a la Instagram).

    seekingalpha.com/article/1979421-mobile-...

    19 billion and a few weeks later we now know Facebook saw similar threats on the horizon.

    There are at least three big messaging competitors with global potential remaining:

    • LINE
    • WeChat
    • Snapchat

    (One could include many other services such as Tango, Zello, Kakao Talk and others...)

    While LINE and WeChat are more popular in Asia at the moment (where both originated) and Snapchat has more specific use cases (and no clear monetization strategy) all three are growing very fast.

    In fact, both LINE and WeChat have better monetization options than Whatsapp at the moment (stickers, game apps...) and more features (LINE for example has good VoIP and desktop clients, Whatsapp is tied to a single mobile phone number at the moment).

    With no apparent revenue ideas (FB promised to keep Whatsapp free , we will see how that holds up long-term), FB is not buying Whatsapp for ROI. I therefore see Facebook's move as purely defensive (some would even call it desperate) - FB got rid of a threat to its core business for a very high price. It's doubtful they can make the $15-20 per user back (assuming Whatsapp grows to 800 million to 1 billion active users from the current 400 to 450 million, which is a likely growth trajectory over the coming years).

    On the other hand, switching costs are minimal in the messaging space (download another app in your social circles) and people do not seem to care a lot about archived content.

    Summary:

    - I see upcoming IPOs in the space (LINE, SnapChat...) as likely given the valuations commanded. WeChat belongs to Internet giant Tencent, so I see no IPO coming.

    - With fickle users, I'm not sure if FB highly overpaid for Whatsapp and users won't migrate to competitors with more features (more client access options beyond mobile, VoIP and video chats) over time. Whatsapp has a basic feature set compared to many competitors. **

    - Few consumers seem to care about security and encryption at the moment. Whatsapp had many issues in the past but this didn't seem to hinder usage or growth. I therefore see messaging solutions from BBRY and others as difficult to monetize based on security and encryption features alone. It may still be a smart move for BBRY to spin off its messenger if the valuations keep rising - but BBRY was late to the game in opening up its solution to other platforms.

    - Vertical "Silos" in instant messaging keep growing. Open cross-platform messaging protocols such as Jabber ( introduced back in 1999 (!), nowadays known as XMPP , see en.wikipedia.org/wiki/XMPP ) existed for a long time. Most large vendors are obviously not interested in interoperable messaging solutions and want to tie users to their silo. In the end, this forces users to install several messengers to communicate with different people.

    - The big players AAPL (iMessage), GOOG (Talk / Hangouts) and Microsoft (Skype) already have solutions in place. It remains to be seen who else is left wanting to buy up in the space - otherwise, the valuations could fizzle over time. I wrote about the space a few weeks ago:

    The move to more controlled, private messaging is indeed interesting, Whatsapp already has more users than Twitter for example.

    If the tech bubble doesn't burst soon, I see new IPOs of more message-oriented companies like Whatsapp or Snapchat coming soon.

    Investment bankers look at the recent TWTR chart and FB valuation and will probably pester every company in the space to go public or sell out as long as the social media bubble party is still on.

    There's no chance all these companies will ever soak up enough (traditional) advertising dollars to justify their current valuations.

    I see the usage pendulum swing from open, "exhibitionist" networks like FB (where privacy settings are confusing and ever-moving goalposts so that FB users are encouraged to share too much) to more private and semi-private networks like Snapchat and Whatsapp, especially among younger people.

    That doesn't justify their valuations however - Snapchat at 4 billion is just the tip of the iceberg.

    I don't think this bubble will last for much longer, another 12 months, probably less.

    seekingalpha.com/article/1916101-snapcha...

    - Messaging (and mobile in general) is another big threat to search engine revenue. Benedict Evans recently wrote:

    Mobile discovery and acquisition is a mess - it's in a 'pre-pagerank' phase where we lack the right tools and paths to find and discover content and services efficiently. Social apps may well be a major part of this, as I discussed in detail here. These apps have the opportunity to be a third channel in parallel to Google and Facebook.

    seekingalpha.com/article/2033581-whatsap...

    (I recommend reading his entire article on Whatsapp, it's very good)

    - Finally, Twitter (TWTR) may have missed these developments since it long buried its "Direct Messaging" options in the user interface. Many Twitter users still don't know there are direct messaging options on the service and instead reply in public to another user. TWTR remains severely overvalued in my opinion at $30 billion and more dilution coming (150 million additional shares being added).

    __________________

    * What surprised me were the valuations and prices paid (in hindsight, Rakuten got a sweet deal compared to Facebook), not the deals taking place. It was clear FB had a problem on its hands with simpler message-oriented networks surging.

    ** As Benedict Evans (see links in the article) wrote:

    • Smartphone apps can access your address book, bypassing the need to rebuild your social graph on a new service
    • They can access your photo library, where uploading photos to different websites is a pain
    • They can use push notifications instead of relying on emails and on people bothering to check multiple websites
    • Crucially, they all get an icon on the home screen.

    I see the switching costs and pain to a different messaging service as minimal.

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Comments (2)
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  • Author’s reply » It looks like What's App has seen this hole in their offering and will introduce VoIP soon:

     

    Today Jan Koum, the CEO of WhatsApp — acquired by Facebook last week for $19 billion — delivered another news bomb on top of last week’s milestone: he announced that the messaging giant is finally moving into voice — a move announced at MWC, the conference for mobile carriers that apps like WhatsApp are squarely disrupting.

     

    The move will put WhatsApp — and by default Facebook — more squarely in competition against the likes of KakaoTalk, Line, BBM and other messaging apps that also offer voice services.

     

    Today, the co-CEO of KakaoTalk, Sirgoo Lee, noted that in countries like Korea his regional giant is wiping the floor with Facebook: The company has 130 million users in total, with 55 million of them in Korea, surpassing Facebook as the default mobile SMS platform, he noted.
    24 Feb, 07:54 AM Reply Like
  • Author’s reply » Author’s reply » A good comment from Om Malik (except for the addendum) on the topic:

     

    "Fast-forward to today and replace ­Yahoo with Facebook. Facebook showed us the value of aggregating all of those small chunks of information, including photos and status updates, that we wanted to consume on the now dynamic and interactive web. That single string of updates, known as News Feed, was a brilliant product that powered the company's rise from 2006 to 2011.

     

    Then along came Instagram and its peers, born for a generation that doesn't know how to live without an always-on connection. They facilitate new online behaviors that have been invented for a world of touch and mobile. These apps were designed to be great at just one or two things. The tech world had swung back to being simple, lightweight, and fast--at precisely the same time that Facebook feeds were becoming so bloated and complicated.

     

    Last fall, at my RoadMap conference, I pointed out to Bret Taylor, Facebook's former CTO, that rather than being social, Facebook now felt like work. The audience, also overwhelmed by baby pictures, birthday wishes, and benedictions of some kind or another, burst into applause. Taylor didn't quite agree, but he acknowledged the challenge Facebook has in trying to do everything for everyone. It can charitably be described as quixotic."

     

    http://bit.ly/NSNznN

     

    Simple. Lightweight. Fast.

     

    Yes to all three ingredients for these new types of mobile apps. But this also means that big competitors can apps in this space rapidly. Customers are fickle.
    5 Mar, 06:58 AM Reply Like
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