Facebook: The WhatsApp Conundrum

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At the Facebook annual stockholder meeting, Zuckerberg talked about WhatsApp.

His ideas on monetization are in the early stages it seems.

This makes me think the acquisition may have been value destructive.

At the Facebook annual stockholder meeting, Zuckerberg basically said any substantial monetization of the WhatsApp acquisition is not just a long way off but he doesn't quite know how to achieve it yet.

For the few people who don't have WhatsApp installed, the chat interface is shown below. By tapping the arrow back to chat you will go back to another clean interface where your conversations are ranked in order of recent activity. The app is free, it is very easy to use, has a clean interface and it is fast:


Source: iTunes

After an analyst asked Zuckerberg about the monetization strategy of the $22 billion acquisition, his reply was disconcerting (emphasis is mine):

In terms of starting to think about how we build a good organic business used case and that we people in addition to messaging your friend and your family maybe you message a restaurant to try and get a reservation right or you message a company if you have a question about how to use their product.

So, Facebook (NASDAQ:FB) is going to make back $22 billion by us messaging restaurants, taxi services, kindergartens, and insurance companies? And then some, as it is probably lost well over a hundred million per year operating the service since its acquisition. That sounds optimistic to me.

I agree with the strategy to grow the userbase instead of destroying its clean look by littering it with business communications or ads but if the ultimate monetization case will look something like Yelp's (NYSE:YELP), that does not excite.

It's certainly possible business communications are going to work. I noticed several companies utilizing WhatsApp to facilitate customer communications. One local insurance company offers the option of sending in a picture of the damages by WhatsApp to take care of reimbursement requests. Another company utilizes WhatsApp to take care of administrative tasks sent in by contractors. But there is no certainty it will work out when Facebook starts charging these businesses. If the channel offers a cost-effective way to deal with customers, businesses will like it, but if it isn't a good experience (hello chatbots!) for customers, they will seek out other forms of communication.

On the recent earnings call, Sandberg at least suggested they were thinking about some form of ads but it is clearly a challenging puzzle how to make money off the simple clean app without impeding its growth or fueling the growth of competing apps.

As much as I like the app and think it is a wise decision they are taking their time screwing it up, there is a time value to money. The acquisition is getting poorer by the quarter. As outrageous as $22 billion really is, you have to factor in what else they could have done with $22 billion, like return it to shareholders who could have invested it in a S&P 500 index fund:

^SPXTR Chart

If you compare it to that, Facebook is likely something in the ballpark of $24.5 billion (factoring in S&P returns and operating costs of WhatsApp) in the hole.

Or, it could have returned money to shareholders by buying back Facebook stock:

FB Total Return Price Chart

If you compare it to that option (which is admittedly quite unfair), they are $32.5 billion in the hole. I don't believe the latter is a fair comparison because Facebook's appreciation over the time frame is not a typical result achieved by buying back your own stock. It is also complicated because the price change in Facebook has undoubtedly been influenced by the WhatsApp acquisition. You could argue it kept it from appreciation further or argue it spurred the stock along, but it did.

I do think the above examples help to think more clearly about what it means to spend $22 billion of shareholders money and what it means to stall monetization. You are digging a deeper and deeper hole. Of course, there are great examples of tech acquisitions where companies patiently waited for the right moment to monetize, like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) with YouTube but every year Facebook doesn't come up with a monetization model is a year they are getting in a deeper hole and is another year where WhatsApp can get disrupted into a total loss.

If Zuckerberg's plan is then to make money on WhatsApp like with Facebook pages (emphasis mine):

So once you have that then I think the next question is how do you broaden the behavior so it's not just people interacting with their friends and you know people that they want to message, but also communicating with businesses and the way that we have a playbook for doing this. That is what we've done with Facebook and what we've started doing with Instagram and it's off to a good start, where first you build the customer behavior then you build what we call organic business behaviors which are making it so that we provide tools for businesses, to use our products for free to start engaging in the community to create value for people who are using the products but we don't start charging for that yet, so in Facebook that analogy is pages.

I'm getting worried. Facebook pages aren't even a good model to copy on WhatsApp. On Facebook, you can look up or even like a business page and it will provide lots of information or it will even show up in your feed. WhatsApp isn't a great environment to take in lots of information, it doesn't offer the visual experience for a company to brand its channel and there is no feed. Or are company conversations going to jump to the top of the queue constantly? When people are getting spammed by company communications (especially mass messages or bots) that is going to significantly deteriorate the customer experience.

My point being it is worrisome Facebook execs laid out $22.5 billion and $32.5 billion to buy a money-losing business, with no idea how to make money with it. Or as Zuckerberg puts it:

I was so optimistic about us acquiring WhatsApp, there are so many people around the world who love it and use it so deeply right, it is more than 1 billion people now that are using it.

They bought it because it has a lot of users. Party like it's 1999.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.