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Internet Security Threat Report 2014

What's up with Whatsapp?

WhatsApp was virtually unheard of in the US until the Facebook purchase announced in February 2014, and still to be finally cleared, largely because texting had long been free there in a large domestic market with relatively low levels of international traffic. But it had been gaining popularity rapidly in Europe and even more so in key developing markets including Brazil, India, Mexico and Russia, which meant Facebook’s move ensured it became a major player in mobile messaging and social media as a whole there.

But the WhatsApp acquisition has proved disruptive to Facebook’s monetization strategy, given the anti-advertising philosophy espoused particularly by its founders Jan Koum and Brian Acton. “Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don't need," Koum tweeted in August 2011, directly quoting Tyler Durden, the main character from the movie Fight Club.

The founders have repeatedly emphasised that WhatsApp is founded on privacy and the idea of knowing as little as possible about its customers, and reiterated this after the Facebook take-over with the message:

You don’t have to give us your name and we don’t ask for your email address. We don’t know your birthday. We don’t know your home address. We don’t know where you work. We don’t know your likes, what you search for on the internet or collect your GPS location. None of that data has ever been collected and stored by WhatsApp, and we really have no plans to change that.

The trouble is that the rest of Facebook trades on such information, albeit supposedly anonymised. The whole ethos is based on shared information, so that at present WhatsApp sits somewhat uncomfortably at the edge as an autonomous company, appearing to have been purchased partly to ensure that it would not expand to become a major challenger across the whole social media space, particularly in emerging nations.

WhatsApp is continuing with its subscription model, but it is free for the first year and only $0.99 per annum thereafter, so its initial return on investment for Facebook will be poor. The consolation is that WhatsApp’s stance over privacy looks increasingly in tune with use sentiment in the post Snowden era and its competitive benefit may outweigh the lack of immediate revenue prospects, especially in key markets outside the US.

Meanwhile Facebook has been doing well ever since the damp squib of its IPO in May 2012, which was the biggest ever high tech flotation in raw cash terms with its peak capitalization of $104bn, but was followed by a shares slide.

The stock did not regain its IPO value of $38 for over a year, finally reaching the mark in June 2013, but since then it has outperformed the internet stock average, reaching $62.71.

What about Wall St?

Ironically it was concerns over Facebook’s ability to migrate its ad business to mobile as quickly as its user base was moving, which was cited as a reason for the IPO debacle. Since then the accelerating rise in mobile ad revenue has helped the stock first recover and then thrive, with even the WhatsApp acquisition only provoking a temporary 3.4 per cent share slump before a recovery as investors decided that this was a lesser evil than not buying the company.

Facebook has also successfully brushed off the perennial predictions of imminent decline as it loses credibility with younger users. Comparisons with early social media incarnations such as MySpace and Friends Reunited have always been flawed because they peaked too early at a time when the social media market was immature and fluid, with little inertia to stop users churning.

Facebook now has the critical mass that these early fledgling sites lacked and the evidence so far is that it is successfully holding its position as the home base for social media even if users are also dabbling with other cooler outlets. The WhatsApp experience shows that Facebook must be vigilant to anticipate significant emerging sources of competition or even effective churn, with video messaging and advertising being a case in point.

Its $1bn purchase of photo and video app company Instagram in April 2013 was Facebook’s first clear move into multimedia sharing, picking up a user base that has continued to increase to reach 200 million this month. As with WhatsApp, Facebook is keeping Instagram at a distance, keen for the company to retain its distinctive appeal, based almost on a nostalgic return to square shaped images redolent of the old Kodak Instamatic or Polaroid images, rather than the 16:9 aspect ratio of most mobile phone cameras. But Instagram also enables recording and sharing of short videos up to 15 seconds long, playing a key role in Facebook’s expansion on this front.

Since the Instagram acquisition, Facebook has introduced video advertising within its mobile apps, although initially confined just to ads for other apps rather than opening it up to the whole ad market. This is part of Facebook's Mobile App Ads for Installs scheme, which enables developers to drive people to their apps on Apple's App Store or Android's Google Play store from within Facebook.

As a result, ads have figured increasingly in Facebook mobile news feeds, particularly for free-to-play games, as an alternative discovery channel to Apple and Google's app stores. But in this case the videos do not start playing automatically when they emerge in a user's mobile news feed, as Facebook is anxious to avoid provoking a backlash from users over intrusiveness.

Despite WhatsApp being left out of the party, Facebook looks set to corner one-quarter of the overall mobile advertising market to stand as a clear number two to Google.

Copyright © 2014, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

Internet Security Threat Report 2014

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