BlackBerry (NYSE:BB) shares have risen more than 10% since Facebook (NASDAQ:FB) announced it would buy WhatsApp for $19 billion last week. Other factors have contributed to the rally, but BlackBerry's recent share appreciation seems (at least partially) attributable to speculation over BlackBerry Messenger's (BBM) valuation.
If Facebook is willing to pay $19 billion for WhatsApp, then BBM could be significantly undervalued. Indeed, BlackBerry's CEO John Chen said he would be more than willing to sell BBM for the right price.
The problem is that, as a competitor, Facebook's acquisition of WhatsApp is terrible for BlackBerry: As a platform business, the economics do not favor multiple, co-existing firms. With Facebook's backing, WhatsApp could rise to dominate the space, while its competitors are pushed out of the market.
Mark Zuckerberg knows a platform when he sees it
Numerous commentators have criticized Facebook's purchase of WhatsApp, some going so far as to declare it the defining sign of another tech bubble. Certainly, $19 billion for a company that's only five years old with just 55 employees seems like a great deal of money, but Zuckerberg is intimately familiar with the economics of platform businesses.
WhatsApp, and Facebook itself, depend entirely on network effects -- a Facebook or WhatsApp account is only as valuable as the number of people that use the service. The more people using Facebook or WhatsApp, the more valuable they become.
Ultimately, this results in a natural monopoly -- at this point, Facebook has virtually no real competitors. Other social networks exist, but none fill the same niche as Facebook -- Instagram, Pinterest, and Twitter are used in fundamentally different ways.
All of Facebook's original competitors (Friendster, MySpace) are long gone -- unrecognizable shells of their former selves. Facebook had the same effect as it expanded globally, putting almost all of its regional competitors under.
One example is Hyves, a dutch social networking website that, at one point, was used by as much as two-thirds of the Netherlands. But as Facebook expanded into Europe, it completely displaced Hyves, pushing it out of the space entirely. Today, Hyves lives on as a gaming platform.
WhatsApp could become the one app
The same could one day be true for WhatsApp. With the backing of Facebook, WhatsApp could expand its user base significantly in the coming quarters, rising to completely dominate the messaging app space.
While BlackBerry's BBM and WhatsApp don't offer identical functionality, they are largely substitutes -- that is to say, if you use WhatsApp, and everyone you wish to chat with also uses WhatsApp, there's no reason for you to ever use BBM.
From this, it's no surprise that messaging apps dominate different regions -- rather than having an equal market share across the globe, certain countries are almost completely controlled by one messaging service. WhatsApp, for example, has more than 70% of the market in Mexico and South Africa according to Jana, and more than 60% and 50% in Brazil and India, respectively. Another competitor, Line, controls the Japanese market, while WeChat is dominant in China.
A zero-sum game
It's possible the messaging market could remain forever fragmented, with different services controlling different countries and regions. But, as the regional fragmentation demonstrates, both Blackberry and now Facebook are operating winner-take-all businesses: If WhatsApp becomes more popular, BlackBerry's BBM naturally becomes less valuable.
Now with the support of Facebook, WhatsApp could be about to undergo a massive expansion, pushing BlackBerry's BBM and other competitors out of the space entirely. Far from making BBM more valuable, Facebook's purchase has made WhatsApp an even bigger threat.