Did Facebook Buy WhatsApp To Compete against WeChat?

U.S. social media giant Facebook announced that it acquired the instant messaging app WhatsApp for $19 billion in total. The scale of this investment far exceeded the $1 billion it spent on the photo-sharing tool Instagram two years ago. At that time, the market had widely believed that was too expensive and suspected that it was the beginning of another Silicon Valley bubble.

Just two years later, the market no longer says Instagram, which has already been an important part of Facebook, was an expensive deal. Today, Facebook has thrown $19 billion at WhatsApp, which has been in operation for less than five years and has only 55 employees. The market does not readily comment on the expense. After the acquisition was announced, Facebook’s stock price fluctuated more severely and closed up 1.13 percent. After all, the acquisition has exceeded one-tenth of the market value of Facebook, which is over $170 billion.

What Aspects of WhatsApp does Facebook Favor?

As far as the two motivations of corporate mergers and acquisitions are concerned, from the economic perspective, WhatsApp does not profit from advertisement, but charges users 99 cents a year. WhatsApp already has 450 million monthly active users and is adding more than 1 million new registered users daily. That will indeed allow WhatsApp to have positive, stable financial statements, but its market value is absolutely far below $19 billion.

Therefore, the acquisition by Facebook was more out of strategic motivation. As is estimated by Mark Zuckerberg, Facebook founder and CEO, “WhatsApp is on a path to connect 1 billion people. The services that reach that milestone are all incredibly valuable.”

The influence of WhatsApp outside the United States should not be underestimated. From a survey of five representative countries in 2013, the market research company On Device found that the usage rate — the percentage of those who have mobile device products downloading the app — of WhatsApp in Brazil, South Africa and Indonesia was 72 percent, 68 percent and 43 percent, respectively, ranking No. 1 in the market of each country.

In the U.S., WhatsApp has a usage rate of 35 percent, second to Facebook Messenger’s usage rate of 46 percent, because the information services of telecommunications companies are comparatively cheap, while in the Chinese market, not surprisingly, WeChat wins the first place with a usage rate of 93 percent.

It can be inferred that Facebook was buying a way to tap overseas markets by acquiring WhatsApp.

Facebook, which just celebrated its tenth birthday, has become the oldest social media organization in history. Facebook has 1.23 billion monthly active users, equivalent to one-sixth of the world’s population; 945 million of them are mobile device users. Users share 400 billion photos and click 6 billion “likes” every day.

However, Facebook has been anxious about a few things recently: First, the loss of young users; second, the rapidly rise of WeChat from China.

The technology consulting company iStrategyLabs published a study the other day, indicating that Facebook had lost 3 million young American users aged 13 to 17 since 2011, while users older than 55 had increased by 80 percent. The study shows that young groups are moving away from Facebook.

A survey on the tenth anniversary of Facebook by Pew Research Center, a U.S. market survey company, also shows that adults’ usage rate has increased significantly in recent years. Nowadays, about 57 percent of adults are Facebook users. Also, 64 percent of users browse Facebook every day — the daily browsing rate was only 51 percent in 2010 — while the usage rate of youngsters aged 12 to 17 is 73 percent, without much change.

Some analysts forecast Facebook’s decline by reason of the old frightening off the young. A Princeton University research group conducted research on social networks’ spread, based on virus spread modeling. The research inferred that Facebook’s rise and decline was like the spread of infectious diseases — a rapid large-scale spread before eventually dying out. The research came to the audacious conclusion that Facebook would lose 80 percent of users in three years, like the previous decline of the social network MySpace.

While Facebook is suffering user loss, WeChat, a multifunctional, real-time application on the other side of the Pacific Ocean, is growing at an astonishing speed in China and even overseas.

A report from the market survey company GlobalWebIndex shows that WeChat’s global growth rate of users, excluding China, was up 379 percent from the second to the fourth quarter in 2013, easily defeating all the other social networks, including WhatsApp (35 percent), Facebook (11 percent) and Twitter (15 percent).

With a great many old users of Tencent QQ and its mobile-friendly, multifunctional product, Tencent published data for the first time in Nov. 2013, indicating that WeChat has 270 million active users, including 10 million overseas users.

Overseas media have also begun to pay attention to the WeChat tornado from China. The other day, The New York Times reported that the Chinese had already gotten used to the “highly addictive social networking tool.” The report commented that in the past, Chinese Internet enterprises were often regarded as a knockoff of Western products, but the activity and creativity of WeChat — for instance, it combines multiple social networking tools (camera, voice recorder, text message) — “could help change global perceptions of Chinese companies.”

CNN also reported in January that Tencent was showing its ambition to crack the U.S. market. For instance, Tencent invested $150 million in the e-commerce company Fab last year, and also intended to buy the photo messaging application Snapchat. Tencent will continue challenging Facebook and other technology companies in Silicon Valley.

WeChat took an active part in developing the overseas market, including cooperation with Google and an endorsement by Argentine soccer star Messi, which boosted WeChat’s performance in Italy, Turkey, India, the Philippines, Malaysia and so on.

Competition among social media applications is unpredictable over the next decade. Facebook, as market leader, has definitely felt strong pressure of competition from China. When comparing the two social media, we find that WeChat concentrates on multi-functionality and attempts to carve a way through the fragmented market of applications, while Facebook has a 10-year foundation of development despite a lack of experience in the Chinese market.

For one thing, the acquisition of WhatsApp has granted Facebook a product that can stand up to WeChat as an equal in terms of money; more importantly, it expands the strategic space of the overseas market.