The Biggest Losers: Facebook Acquires WhatsApp; Wireless Carriers Lose

Facebook Paid $16B for WhatsApp. Lessons for  M2M and the Internet of Things Companies

In its biggest transaction of this kind so far, Facebook acquired WhatsApp, a messaging start-up with $300 million of revenue at best, for $19 billion in cash and stock. Breathless headlines and endless analyses and speculations continue to debate the merit of the acquisition, the high price paid, will Facebook renege on its promise not to sell advertising, and every imaginable angle to praise or criticize CEO Mark Zuckerberg’s move.

Most responses wrestle with the question how will Facebook recoup its investment. The answer is: it may not, maybe not even in the long term. But what this move does do is to bolster Facebook’s relevance and strengthen its position in the rapidly changing and highly vulnerable social media landscape.  This was the rationale behind the acquisition of Instagram in 2012 for $1 billion. Look at this as a strategic investment that is not subject to the common discounted cashflow ROI test, a concept known in financial investments as real options valuation and has been applied to quantifying the value of strategic and operational flexibility associated with uncertain investments in IT by Prof. Robert Fichman of Boston College.

But in the process, platforms such WhatsApp and Instagram are obliterating the future of SMS and MMS businesses for the mobile carriers, who are already surrendering an increasing volume of voice traffic to Skype and VOIP services offered by Internet cable companies. Carriers have to deal with infrastructure, regulations and taxation, and keep users connected, while platform vendors and social media entities are free to recruit users and innovate new ways to make money. And before the ink on the WhatsApp acquisition agreement had dried, WhatsApp announced adding a free voice call service.

So the wired and wireless carriers are clearly the losers here.

What Should M2M and the Internet of Things Vendors Learn from Facebook?

The connectivity question is gradually diminishing as everything (and everyone) is becoming an always-connected IP node in an ever-present Internet cloud of Internet of Things (IoT). The potential economic value of the IoT is migrating from establishing conduits, which has been the turf of wireless carriers for decades, to exploiting the value of consumer generated content, which is where Facebook and other vendors of messaging platforms are heading, skipping the infrastructure problem altogether.

M2M and Internet of Things vendors should focus on creating platforms for new business models that exploit the value of connected devices and people and get too tangled in connectivity discussions. It’s the content, not the conduit that matters.

Read more on the subject in my analysis of the acquisition of ThingWorx by PTC.