Facebook makes pricey acquisition of Whats App

In a move that will undoubtedly be controversial with investors, the CEO of Facebook, Mr Mark Zuckerberg has announced that Facebook will acquire WhatsApp which is a popular social networking app which is increasingly seen as a potential rival to Facebook’s hither too dominant position in the social media world.  The USD$9bn price is a record for the company which has already acquired a number of other smaller social networking ventures like instagram.   However, even in the small amount of time since the decision was announced, the company has attracted criticism for acquiring another asset that has no identifiable cash flow associated with it.  Users of Whats App pay nothing or very little for the service and the app is in not supported by advertising.  It charges users one dollar per year after the first year of use.   There does not appear to be a strategy for monetising the app, it is simply a reflect of Facebook’s desire to protect its market share in the social media space at almost any cost.

The acquisition comes in the context of Facebook’s failed attempt to acquire snapchat which is another messaging service that performs a similar function to Whats App.  It appears that now that WhatsApp is owned by Facebook, it will be asked to adopt a similar strategy to Instagram which began as a little known free digital service that must now focus on growth and slowly ad in revenue streams as its growth begins to become exponential.   This strategy appears to have met with some success in the case of Instagram which has blossomed under its new ownership.  Facebook must be hoping that the same can be achieved with Whats App.

The skeptics of the acquisition point out that the value of the acquisition is actually larger than the annual revenue of Facebook which topped out at just over $6bn last year and part of the stated philosophy of the founders of Whats App is that the company will not include advertising in its revenue model.  This apparent complete lack of a strateg for generating revenue is what appears to be attracting the most criticism from investors and commentators who question how Facebook can justify acquiring the company with no prospect of revenue available from it.


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