Sunday, February 23, 2014

The WhatsApp Deal: Did Zuckerberg Just Blink?

WhatsApp is the antithesis of Facebook.  It doesn't collect personal information.  Messages aren't stored in WhatsApp's servers.  There are no ads on WhatsApp.  As a messaging service, there's nothing on WhatsApp for strangers (or parents) to find via search engines.  It offers the one thing that's almost impossible to obtain on the Internet:  privacy.  No wonder it's growing by a million users a day, many of them in the young adult cohort coveted by commercial websites.

It's unclear what Mark Zuckerberg hopes to achieve by having Facebook buy WhatsApp.  If he engrafts WhatsApp onto Facebook, or makes it semi-clone of Facebook (i.e., has it run ads), it will surely lose much of the privacy it offers.  Facebook's business model, after all, is to vacuum up as much personal information as possible in order to cram advertising into users' faces.  But that could drain away much of WhatsApp's attractiveness to its current user base, and they could easily flee to any of a number of competitors offering private communications. 

If Zuckerberg keeps WhatsApp independent, he'll have to find some way of generating revenue--a shipload of it, since Facebook is paying $19 billion for WhatsApp and the only justification for such a Brobdingnagian price would be freight cars full of revenue.  But you can't charge users much for instant messaging services (the phone companies tried that with text messaging and users are moving away from them).  So there is a big question about what kind of rabbit Zuckerberg will pull out of the hat as a business strategy for WhatsApp.

One thing that seems apparent is that he's blinked.  Zuckerberg evidently has come to realize that Facebook isn't going to be the platform for all users all the time.  He's jumping onto one of the new, hot things on the Internet.  Diversifying Facebook's corporate profile may be a prudent move.  But the company now has two conflicting business models under its corporate roof, and it will have to sort out how to handle these conflicts.  History does not suggest success is assured by any means.  Microsoft entered various lines of business that were potential threats to its basic MS-DOS/Windows business--search engines, portals, mobile software, etc.  It didn't managed them very well, because boosting a newer technology could mean undermining its cash cow.  Newer, nimbler competitors, unburdened by these conflicts, ran circles around Microsoft.  Facebook is one of them.  But now it has taken in-house a conflict between the old (yes, Facebook is getting old) and the new on the Internet.  How Facebook handles that conflict could dictate the future arc of its growth.

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