WhatsApp: Contemporary Financial Issues - Case Study Example

WhatsApp: Contemporary Financial Issues Unit Introduction WhatsApp is a social media platform that enables users to send messages through their phones. The service requires internet connectivity instead of the convectional mode of messaging. The media requires that users download the WhatsApp application (App) which they use as the icon that leads to the messaging. The service is available across many devices that have internet connectivity. WhatsApp messenger has been created for a number of devices including iPhone, blackberry, Nokia and Android devices. The idea of developing WhatsApp was conceived by Jan Koum in 2009. It was incorporated in February 2009, Koum was joined by Brian Acton who facilitated the development of the nascent company. Acton was able to source for financing of $ 250, 000 from his former colleagues at Yahoo Inc, this led to consideration of Acton as a co-founder in November 2009 (Olson 2014 pg 1). In addition, more funding was provided by Sequoia. By 2013, WhatsApp had 200 million users and 50 staff members. Facebook Inc has recently acquired it at a cost of $19 billion. WhatsApp headquarters are located at Mountain View in California. WhatsApp Start Point WhatsApp was developed by Koum Jan in January of 2009 after he realized the AppStore was gaining much popularity. He had bought an iPhone and realized there was a great potential in the need for applications. He would later visit one of his friends, Fishman Alex who gave more insight about creating a new App. He came with the idea of WhatsApp derived from the statement, “whats up.” He went further to consult from friends including the cofounder Brian Acton. Acton was very insightful in the development of the App having been an engineer with Yahoo Inc. Koum incorporated the company WhatsUp Inc on a day that coincided with his birthday on the 24th of February 2009. The appliocation gave hom a rough time since it kept on crashing from time to time. This made Koun almost to give up and begin looking for a job. However, under the inspiration from Brian, he was able to continue with the project of developing more features in the App. The App would crash or get crashed in some instances, an aspect that was quite disappointing to Koun. The company started with the push notifications by June 2009. Koun played a major role in keeping on developing new updates for the App. The first development was an instant informative service that allowed all the individuals in the network to get a message once one individual updated their status. The major revolution in the App came with the introduction of WhatsApp 2.0, which brought a messaging service. This development facilitated a tremendous increase in the number of subscribers. At this time, United States showed a laxity in embracing the technology as compared to other parts of the world (Rusli 2014). WhatsApp Financials at Startup At the start of WhatsApp, Koum had an idea of what he wanted to developed but he faced turbulent times in sourcing for financial support for the implementation of the idea. Luckily, Acton appeared and contributed his ideas to the income generation of the company. He is the one who sourced financial support from his colleagues at Yahoo worth $ 250, 000; this was a seed funding I exchange of stake in the newly formed company. Before this time, Koum was relying on his savings since leaving Yahoo in 2007. The extra capital input was provided by venture capitalist Jim Goetz of Sequoia. This was a sum of $ 8 million despite the fact that they had turned down a number of offers from other venture capitalists. Later on, they wanted to streamline the payroll; they sought an additional $50 million of investment from Sequoia. This increased the value of the company to up to $ 1.5 billion (Olson 2014). Competitors WhatsApp has less number of competitors in the messaging services while those in the social media industry are quite many. The acquisition of the company by Facebook Inc is a major step towards reducing the preexisting competition from other players. However, there are several competitors especially in the Asian region. Despite the competitiveness the acquisition of WhatsApp by Facebook is meant to drop competition (Miller 2014). Telegram One of the emerging competitors is Telegram. According to IBN Live (2014) from New Delhi, there was an increase in the number of subscribers to almost five million; this has made the App to be one of the best in at least 48 countries. The competitive advantage applied by this App is based on the encryption that allows users to have an access to information from several devices such as desktops while it has a capacity to facilitate transfer a wide range of files and documents. WeChat Another competitor is WeChat. This is a messenger App that is gaining popularity among the users. The platform has a capacity to have group charts, video sharing, sharing of photos, voice messaging and even location sharing. It also has additional features that are not available in WhatsApp which includes, “Drift Bottle”, “Shake”, and “look around” which play a major role in finding new friends. This competitor exhibits compatibility with a number of devices such as all Android devices, Windows devices, Apple, and Blackberry devices. The other major competitor is Line, which has a big reputation and has a major download rate in at least forty countries. However, more than two hundred and thirty countries use this application. They have even calling features that have made the media to have an upper stake in the industry. It has a universal dimension in that it is capable of being used worldwide. Skype Skype also competes with WhatsApp in a way. This is the most widely used calling platform over the internet today. Despite its popularity in video calling, it has a messaging platform. This indicates that the platform can be used for a broad spectrum of activities including arranging for virtual meetings, learning of languages as well as celebrating events virtually. ChatOn This platform has been developed in Korea and has features that have much similarity with the WhatsApp. It has the capacity to share photos and videos, messaging, and group chats. In additional to these features there is an addition of a feature regarded as AIMS, which is used in sending messages that, have been animated. Viber Viber is a competitor since it has the capacity to make calls, send messages, share location, videos, and pictures. The App has the capacity to synchronize call history, messages, as well as the conversations in groups. It has a wide range of compatibility with many devices including Symbian and Bada devices. The Future Concerns of WhatsApp Even after the purchase of WhatsApp by Facebook, the future is still unpredictable based on the dynamisms in the information technology sector. WhatsApp is currently in the growth stage and it has much potential. A number of strategic interventions need to be developed in order to grow the company and its profitability. The main essence of any organization is to make profits and ensure that the profits are sustainable. The profitability is both a long-term as well as short-term concern. This indicates the organization will have to develop strategies of making the company profitable (Hustad, 2014). Top on the list is the need to be innovative so that customers are attracted to the service. Immediately WhatsApp was acquired by Facebook Inc, they announced plans to develop voice calling services (Jonathan, Sam and Albergotti 2014). Other innovative features will help the company develop its profitability. It is also apparent that the policy on advertising is an issue of concern that should be analyzed critically. Advertisements have the capacity to generate much revenue for WhatsApp. However, the founders have been very stringent on stating that the company would not go the advertising way. Marketing is a major aspect that is taken into perspective. As a result of the acquisition of WhatsApp by Facebook, there is a selective advantage in terms of marketing the brand. Facebook has over 1.15 billion subscribers all around the world (Rusli 2014). This means that a merger between the two platforms will be to their mutual advantage. However, WhatsApp remains to be the largest beneficiary since its customer base is far below that of Facebook. Another dimension of marketing is the involvement of advertisements in various platforms that highlights the features provided by the company. This can be done mainly through online adverts as well as through the mainstream media. Competitiveness is also a future concern of the Company. The fact that the company has a number of competitors, some of which have superior features over WhatsApp is an indicator that the race will be tight in ensuring that people get to embrace the platform in a bigger way. On the other hand, competition provides an opportunity for the development of new as well as advanced features in the App. This is seen as a facilitator of the development towards better results. Innovation as a product development strategy is inevitable for the Application. The changes in technology are moving very fast , the company has been in the trade for a very limited period of time. This means that there are many dynamics that are yet to be explored about the company. However, with the engagement of creative teams in developing superior features, the company will be catapulted to a higher level through product reputation that will ultimately result to an increase in the customer base. The customers are the most important people that will make WhatsApp to remain in the market or cease. This is because the customers, the App users are the main revenue generators for the company. For this digital technology, customer retention and loyalty can be enhanced through a number of ways. The most important aspect that customers will look for is the superiority of the services that the App offers. This is because the features provided are the most relevant aspects as far as the customer is concerned. Another thing that can promote customer retention is the communication to the customers. The customers should be given a platform to air their views while appropriate action being taken by the company. WhatsApp Statistics The development of WhatsApp was a contribution of a capital of $ 250,000 that came from friends of the founder. This led to the individuals getting shares from the App. Initially, the venture capitalist company Sequoia Capital, through Jim Goetz a sum of initial $ 80 million and later an amount of the tune of $ 50 million. WhatsApp has a wide coverage over a number of devices including Android and windows devices. However, it is not compatible with some of the blackberry and Nokia devices. Approximately 465 million users have the whatsApp application in their devices for messaging services. Their generation of income has been through charging people 99 cents after the elapse of the first year that is usually free. The worth of WhatsApp according to Facebook Inc was $ 19 billion despite the valuation of the company rating in the millions. The purchase included a $ 4 billion cash purchase plus a stock of $ 12 billion and an additional $ 3 billion, which comes in form of restricted stocks (Cheng, Schechner and Albergotti 2014). WhatsApp Business Model WhatsApp is a distinct application that has a distinct way of generating revenue. Despite having an opportunity to make money through the advertising platform, the founders have been against it. It has been argued that the business model adopted may not last for a long period. The applications have found an opportunity in the pricing of the mobile phone network operators who usually charge high fees in the messaging services. The carrier strategy that is adopted by the app will change if the platform continues to grow. This signifies the maturation of the company as well as the ultimate decline. However, the business model is boosted by the fact that instant messaging are capable of being sent across all platforms. This would ensure that not only calls are made and messages sent locally but also internationally. WhatsApp Profit Generation Facebook would not have acquired WhatsApp was it making losses. Despite the founders of the company having remained away from the limelight since its inception in the year 2009, the company has managed to record increased growth both in customer subscription and in revenues. As a messaging application, WhatsApp does not gain any revenues from advertising. Interestingly, the founder of the company, Koum argued that WhatsApp generated enough revenues and did not require any income through advertising. Further, Koum stated that the revenues were sustainable; ruling put the likelihood of the WhatsApp reverting to advertising to raise its revenues (Ratner 2014). According to reports, on 26th August 2012, 10 billion messages passed through WhatsApp daily. Currently, there are approximately 450 million WhatsApp users every month. 70% of these users use WhatsApp every day. Daily, WhatsApp handles at least 19 billion messages, which almost surpasses the worldwide text messaging. Since WhatsApp charges one-off fee of $0.99 on iOS and $0.99 a year on other platforms with the first year free (Bost and Gammeltoft 2014). There is poor monetization of the android platform, a reason why WhatsApp charges no subscription fee to users on this platform. This leaves users on the iOS as the only revenue generators for the company, while at the same time encouraging more android users to join the app. These revenues are enough to generate adequate and sustainable revenues for the company. With the high number of people using the service, the company has managed to generate profits without investing in any other revenue generating avenues. The Purchase of WhatsApp by Facebook Since the announcement that Facebook would acquire WhatsApp for $19 million, critics saw this as a wrong move for the company. Not only was it an inflated price for the company, but analysts claim that there are low chances of this acquisition adding any considerable value to the company. Facebook has however been on an upward growth trajectory, acquiring other small companies that are likely to improve its core competencies. In 2012, Facebook acquired the photo-sharing app, Instagram (Bost and Gammeltoft 2014). While to some, this is a way of Facebook edging itself against competition and ensuring that it remains relevant in the social media and messaging platform, others think otherwise. In the recent past, Facebook has tried to penetrate the messaging platform, thus targeting the smart phone market, which appears to grow every day. A section of critics even argues that there is an imminent techno bubble, whose rupture will considerably affect the survival of the weak companies. In an effort to edge itself against such in eventualities, Facebook hopes to acquire any smell company whose growth appears to surpass its own growth. Despite all these critics, boldly, Facebook argues that this is part of its mission statement of, “to give people the power to share and make the world more open and connected” (Booton 2014). As such, the acquisition did not just focus on the monetary value of WhatsApp as a company, but also as part of Facebook’s mission statement. Subsequently, Facebook appears to live to its mission and promise of connecting the globe through online messaging platform. Peak number of social media active users, with WhatsApp, only launched in 2009 being at 7th position. This indicates the potential of the company’s growth in active member usage. The rapid growth of the smart phone market could yet be another contributing factor to the acquisition. According to Booton (2014, web), with the increased popularity of smart phones among the people, Facebook sees this as an opportunity to own the various pieces of mobile internet. With this acquisition, Facebook hopes to maximize its income in the mobile business. Although WhatsApp has limited income-generating avenues, financial observers argue that it is unlikely that Facebook will start charging for the use of the service. If anything, the Facebook hopes to capitalize on the growing messaging community, subsequently consolidating its customers. As such, there is no likelihood of the company charging for the usage of the app. Why WhatsApp is worth the Billions ($ 19 billions) Forbes’ Kelly Gordon writes about five reasons that justify WhatsApp’s value and is convinced that the price was fine because Facebook’s benefits behind the deal is immense. According to Kelly (2014), Facebook’s 1.2 billion active users have been stagnating for the last few years especially its low active users in other countries such as Latin America, Asia, and India. By acquiring WhatsApp, which is a clear leader in some of the countries where Facebook’s active users are few, Facebook will be able to expand its users and fill the global gap (Kelly, 2014). Moreover, WhatsApp has always rivaled Facebook’s instant messenger but WhatsApp has never replaced the service’s ecosystem, instead, the SMS offered by WhatsApp that lacks ecosystem proves lean, uncluttered and ties to phone number. WhatsApp’s innovativeness of the SMS system is likely to stay because as many things such as messages change to data bundles, phone numbers are likely to stay and the SMS may serve the future (Rahn, 2014). This provides certainty and value to Facebook that guarantees future success. The messaging technology offered by WhatsApp embraced mobile technology, a technology that Facebook really needs (Kelly, 2014). Additionally, WhatsApp’s $19 billion prove cheaper compared to other rivals such as Linkedln, twitter and Snapchat given their (WhatsApp’s) enormous user base. Facebook pays only $42 per WhatsApp user as shares such as Linkedin, Twitter, Snapchat’s shares trade at $153, $140 and $50 per user respectively (Kelly, 2014). Acquisition has also seen Facebook as a conglomerate and therefore not everything will be swallowed under a single consuming brand because it owns major players with different attributes such as WhatsApp and Instagram. WhatsApp further proves to be more engaging than other social networks making consumers to be more passionate about it. Future profitability of WhatsApp Several features associated with WhatsApp indicate positive future profitability because they are unrivaled. Innovative technologies such as messaging technology are likely to stand and remain certain for long. In addition, WhatsApp already has active users that will expand Facebook’s global expansion and generate more revenues (Kelly, 2014). WhatsApp further grows at a faster speed and is likely to attract far more users than its competitors because over 600 million photos are sent per day and compared with other networks, its 70% of users are active every day. The already active users may influence more other users especially the current Facebook users who would finally expand the user base platform (Rahn, 2014). WhatsApp Lifecycle If WhatsApp gets to the maturity and decline stages, there will be a declining use rates, fall in stock value and some users will move to new social networks. WhatsApp may acquire or merge with other dominating social networks to revitalize its operations and adopt new technologies that may attract new users (Rahn, 2014). WhatsApp may look forward to introducing new applications, lower its prices to fight competition and find a new target market. WhatsApp may improve some features that may enhance brand differentiation and feature diversification. The most important thing for WhatsApp is innovativeness in its maturity stage to revitalize itself and attract more customers. Findings and Conclusion WhatsApp has come from a state of financial deficiency to become a reputable messaging site, even to the point of attracting an extravagant purchase by the giant social media site Facebook. The purchase was worth $ 19 billion. This was to be paid in various forms, that is, $ 4 billion cash purchase plus a stock of $ 12 billion and an additional $ 3 billion, which comes in form of restricted stocks. The company started by Koum was incorporated on the 24th February 2009. Koum relied on personal savings before he got a seed funding of $ 250,000. This was followed by another boost from a venture capitalist firm, which provided $ 80 million and later $ 50 Million. The trend in terms of customer acquisition has been very impressive. Random shoot in the subscriber base from the company was facilitated by Koum’s innovativeness through introduction of the messaging platform. This led to a tremendous increase in the number of subscribers. WhatsApp generates profit through charging its customers 99 cents after the elapse of a grace period of one year. The founders have been against revenue generation through advertising. The acquisition by Facebook has been predicted as a powerful strategy in promoting an increase in its subscribers, an aspect that will result to an increase in profitability. References Berman, D.K 2014, The Game: Is Facebooks WhatsApp Deal Crazy? Lets Do Some Math, Eastern edition edn, New York, N.Y. Booton, J 2014, “Analyst: Facebook Did Not Overpay for WhatsApp”, Fox Business. assessed http://www.foxbusiness.com/technology/2014/03/11/analyst-facebook-did-not-overpay-for-whatsapp/ Bost, C and Gammeltoft H 2014, “Facebook Bulls Buy WhatsApp Deal With 1.3 Million Calls”, Bloomberg. 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Assessed http://www.forbes.com/sites/hollymagister/2014/02/21/whatsapp-19-billion-secret-formula/ Olson, P 2014, Exclusive: The rags-to-riches The state of how Jan Koum built WhatsApp into Facebook’s new $19 billion baby.Forbes. retrieved from http://www.forbes.com/sites/parmyolson/2014/02/19/exclusive-inside-story-how-jan-koum-built-whatsapp-into-facebooks-new-19-billion-baby/ RAHN, C 2014, Mark Zuckerberg Says WhatsApp Worth More Than $19 Billion, Bloomberg News 25 Feb. 2014. Retrieved http://www.bloomberg.com/news/2014-02-24/zuckerberg-seeks-phone-partners-in-quest-to-connect-billions.html Ratner, J 2014, “Why Facebook Inc is paying $19-billion for WhatsApp”, Financial Post. Assessed http://business.financialpost.com/2014/02/20/facebook-inc-whatsapp-why-thursday/?__lsa=a77f-ddf2 Rusli, E.M. 2014, WhatsApp: The Bomb That Shook Silicon Valley, Eastern edition edn, New York, N.Y. Read More