Facebook's Biggest Fear After WhatsApp

Image source: Facebook.

It's difficult to call Facebook's (NASDAQ: FB  ) $19 billion acquisition of WhatsApp anything more than speculation. While it's certainly possible (although not easy) to imagine ways Facebook could get its money out of this acquisition if the app continues on its impressive growth trajectory, the risk Facebook is taking on in the deal is undeniable. The purchase can be only be justified with optimistic forward-looking assumptions -- a notion usually referred to as speculation, not intelligent investing. The risk in Facebook's pricey acquisition is highlighted by two major challenges looming over WhatsApp that simply can't be ignored.

WhatsApp. Image source: WhatsApp.

Monetization has only just begun
Sure, 2 billion users paying one dollar each, on top of some potentially lucrative profit margins, could add up to a serious business. Even more, Facebook CEO Mark Zuckerberg said during the question-and-answer session at the yearly Mobile World Congress last week that "other messaging apps are already monetizing their users at $2 to $3 a head," according to The Wall Street Journal

But let's bring this lofty speculation down to earth. First, it would be naive to assume that just because WhatsApp has grown to a half of a billion users so rapidly that it could eventually reach 2 billion. Second, it was only last summer that WhatsApp transitioned to a subscription model that consists of a measly $1 after hooking users with no fees during their first year. The result is a paltry $20 million in estimated revenue in 2013 -- a tiny rounding error in a $16 billion deal. As an unprecedented business attempts to monetize its user base at a scale no messaging service has ever operated at, why should investors be confident the rest of WhatsApp's user base would be willing to fork out the subscription fee?

$1 per year is good, but free is better
Last week, WhatsApp experienced its longest outage in history: four hours. During these four hours, a competitor to WhatsApp called Telegram received 5 million downloads and skyrocketed to the top free download in Apple's App Store in the 46 countries. Apparently Facebook's new app already has a viable substitute.

Some of the key features Telegram boasts. Image source: Telegram's website.

Not only does Telegram look like somewhat of a clone to WhatsApp, but it also has taken its promises even further than Facebook's new messaging app. While WhatsApp promises to never have ads on the service, Telegram has promised to make its service free forever, period. That means no ads and no subscription fees -- an awfully better value proposition than $1 per year.

Other than being an excellent substitute to WhatsApp, Telegram actually has some potentially popular features. For one, the company prides itself on its security and is subsequently offering $200,000 to anyone who can crack the security of its MTProto. Further, Telegram has a SnapChat-like feature that allows users to set a self-destruct timer on messages, enabling what Telegram calls Secret Chats.

Nothing to scoff at
Given that Telegram has both proven to be a formidable substitute and that WhatsApp arguably has not proved monetization at meaningful scale, Facebook ought to respectfully fear Telegram and hopefully come up with a plan to compete with free. The task doesn't sound easy. With challenges like these, it is far too early for investors to get excited about Facebook's new app.

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Read/Post Comments (7) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2014, at 3:33 PM, djtetsu wrote:

    Agreed, at the end of the day, there will always be the potential for the next social net work. It is not like putting together a factory to sell cars. It takes a few computer geeks, really..

  • Report this Comment On March 01, 2014, at 9:18 PM, glane wrote:

    This article seems overly optimistic about Telegram. Telegram's sole source of funding is 1 person - Pavel Durov. If you care to visit the website you can read it for yourself. The service is relatively new being in operation for less than a year. WhatsApp was free....at first, and now it's not. The fact of the matter is that Telegram's "free" messaging really is not free. It is simply unrealistic to expect that someone who happens to be wealthy is going to want to spend his own money providing a free service to the world "FOREVER". If you care to go to the website it says that IF the financial support runs out they will "invite users to make a donation or add non-essential paid options". Correct me if I'm wrong buy that sounds like users will have to pay for the service and/or be subjected to advertising. Maybe Mr. Durov will limit how much users can actually use the service. Sound familiar? Who's to say that Mr. Durov is so wealthy that no person or entity could ever buy Telegram from him? The wealthy don't get to be that way by giving away free stuff. It will make you popular, but it won't make you any money. I have a feeling that you are going to have to revise this article in the future. FOOL ON!

  • Report this Comment On March 02, 2014, at 12:45 AM, djtetsu wrote:

    glane, "invite users to make a donation or add non-essential paid options" sounds like they will either ask for donations or offer extra services for paying members.

    But also, this is irrelevant. As long as there is the next free service, the worth of the current hot network is in question.

    In other words, Telegram can stay free until it tips the tide to their side, for as long as they want to bring in users who doesn't want to pay the $1.

    After that, they can screw them all (try to monetize) and get replaced... so the cycle seems to be for social networks.

  • Report this Comment On March 03, 2014, at 3:41 AM, djtetsu wrote:

    Now that we have supply laid out, the only foreseeable obstacle is the competition. How soon can they catch up, and how quickly will they chew away at their market share?

    I think there will be a parallel with Apple. Although Android has given people something comparable, people will always remember the company that was the first in giving them the magic of the touch screen phones.

    As long as the quality is there, that company will DOMINATE.

    And not only that, the reviews for the Model S has been off the carts.. The cars are simply more technologically advanced.. and it is going to be a long while before anything comes close.

    I think the rants from the haters are so strong because even they can't imagine the stock not growing.. It's ok that you've lost with your shorts.. just let it go!

  • Report this Comment On March 03, 2014, at 10:02 AM, Biloxi8 wrote:

    Aren't you all bored to death with this stuff? There are so many other things you can do than looking at your computer/mobile screen!

    How about talking to some people?

  • Report this Comment On March 03, 2014, at 5:59 PM, natalia wrote:

    Mr. Sparks,

    Your mission to address the potential challenges of Facebook’s recent acquisition of the messaging application called Whats App, proved to be both timely and sensible. As a follower of social media trends, as well a communication major emphasizing in new media, the merger between these two messaging powerhouses came as a complete bombshell and yet the motivations behind the acquisition seemed immediately obvious to me as well. You identify some important issues in your post, such as the enormous risk Facebook is taking by putting so much faith in the future of Whats App, bolstering your opinion in the recent monetization of Whats App, as well the existence of no-cost-to-user, as well as ad-free messaging applications like Telegram. Do you believe that the risk of the deal stems from Facebook speaking too soon by predicting Whats App as the future of messaging or that Facebook has simply spent too much money investing in a communication that might not hold much weight as other technologies begin to arise? In otherwords, do you assess the risk to be that Facebook invested in the wrong company, or that they invested at all?

  • Report this Comment On March 03, 2014, at 5:59 PM, natalia wrote:

    Your assertion that the messaging application Telegram, should be seen as a viable threat to the growth and success of Whats app was certainly observant and makes Telegram seem like a formidable opponent. Furthermore, your prediction that because the application is currently (and promises to always be) both free and advertisement-free is certainly valuable in making your prior claim seem credible, particularly in light of Whats App’s recent monetization. As you say, “$1 per year is good but free is better.” However, while it is certainly incredible to see the damage 4 hours of service error could do to a company like Whats App, I believe you may have overestimated the power and threat that Telegram has for the future of Whats App. Firstly, while Telegram is currently rated the top messaging application in the world, that does not compare to the combined 30 billion messages sent each day between the Facebook and Whats App messengers. Secondly, part of the acquisition had to do with Facebook’s desire to gain greater acces to places where Whats App market seems to have the business edge, particularly in Europe. Through this merger, Facebook will attain access to markets that they have previous seen little success in, such as Spain and Italy, where over 80% of messengers are Whats app users. Thus, I think what was more important to Facebook, was gaining control and influence in these markets of users who already have the application. Of course, as Forbes mentions, the merger is also about “guaranteeing the next billion users.” Thus, I would argue that the steady growth Whats App has seen is somewhat more reliable, versus the 5 million-user increase Telegram which can be attributed the Whats App outage. In fact, the official Telegram messenger account reported: “Frankly, we’d rather have gradual organic growth.” Even the creators of Telegram are addressing this dominance as either short lived, or at least not indicative of reliable expectations for growth.

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