Facebook & WhatsApp – The inevitable

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The inevitable integration of WhatsApp has begun. 

• WhatsApp has updated its terms and conditions and will begin sharing some of the data that it generates with Facebook in what looks the beginning of WhatsApp starting to pay its way.
• In a carefully worded blog post, WhatsApp uses the fact that it now offers new services and end to end encryption as the main reason for needing to update its terms and conditions.
• However, I think the reality is that WhatsApp is under pressure to justify the $22bn in cash and shares it was given by Facebook’s owners at the time of acquisition.
• Facebook paid this for a company that had almost no revenues and I have long believed that the only way for Facebook to avoid a huge goodwill write down (see here) is to fully integrate WhatsApp into everything that it does.
• The terms of the acquisition were that WhatsApp would remain independent but Facebook has said it would look to monetise its instant messaging services when they reached a billion users.
• I think that it is no co-incidence that WhatsApp is making these changes shortly after crossing the 1bn mark and I see this marking the beginning of the full integration of WhatsApp into Facebook.
• I suspect that both apps will continue to exist but underneath they will end up being one and the same thing.
• Sharing data is just the first step and pretty soon I expect that WhatsApp and Messenger users will be able to exchange messages followed by the ability to exchange photos and videos as well as see whether friends are online and so on.
• Once this has been achieved, Facebook will be able to quietly merge the two systems together without a ripple being made in the service to users.
• WhatsApp will then be fully integrated and Facebook can start to earn a return on the vast sum that it invested in WhatsApp.
• From Facebook’s perspective, this is a positive and encouraging turn of events.
• It gives me much greater confidence that some return will be earned on the $22bn invested and it also improves my view of how well Facebook understands the dynamics of a digital ecosystem.
• RFM Laws of Robotics 5 and 6 state the importance of integration of data both on the device and within the network, which cannot be achieved if one part of the ecosystem remains independent from the rest.
• The slow but inexorable integration of WhatsApp indicates that Facebook has understood the importance of these laws thereby increasing my confidence that Facebook is on track to become a fully-fledged ecosystem where users can live almost all of their Digital Lives.
• This is how Facebook goes from being a $17bn revenue company to a $40bn company, a lot of which could come from Google.
• This is why it is currently by far Alphabet’s most dangerous adversary and why I often find these two slugging it out behind the scenes.
• Hence, I see Facebook as one of the ecosystem players with the most upside but I think that there could be a problem with the short-term.
• This is because I think that bullish estimates are in-avertedly assuming that revenues arrive from its ecosystem strategy long before I see these products being ready for market.
• Hence, I expect a lull in growth and a correction in the share price before revenue from these new areas begin to kick-in.
• That’s when I am looking to take a large, long-term position in Facebook.