Welcome to the World

02/24/2014 11:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

With its recent acquisition, it is clear this company is attempting to reach, not only people in the US, but across the globe, however, MoneyShow's Jim Jubak thinks a few other powerhouses still stand in its way.

Welcome to the world, Facebook (FB).

That's what the company's $16 billion (or $19 billion if you count all the restricted stock) deal to acquire WhatsApp says to me.

It's a sign that Facebook understands that the social media space is bigger than the US and that, in a global context, Facebook and other US social media biggies, such as LinkedIn (LNKD) or Twitter (TWTR), are relatively small fries with a big fight ahead of them.

The current war in the social media space has, recent deals say, two fronts.

Front #1 is the battle to keep users interested and to get users to spend more time on your network. That's behind acquisitions like Instagram and Tumblr and the continued attempts to acquire Snapchat. It's behind pledges, in recent quarterly conference calls from Twitter, to invest in improving the user experience on its site. It's behind worries at Facebook that it's losing popularity with teens. (The number of teens using didn't grow at all from the second to third quarters of 2013.)

Front #2 is the battle to become a truly global social network. Facebook's Messenger, the network's messaging app, is a big deal in the United States, where, according to the Financial Times, 46% of people surveyed use the app once a week or more. That's a clear lead over the 35% that use WhatsApp and the 24% that use Twitter.

But globally?

75% of Brazilians surveyed used WhatsApp once a week or more, compared to 57% for Facebook Messenger. In Indonesia, WhatsApp pulls 43% of those surveyed, while Facebook trails somewhere behind Blackberry and LINE, a messaging app owned by Korea's Naver ((KS:035420) in Seoul) or (OP:NHNCF) that is the most popular messaging app in Japan (50 million users) and that has 300 million users worldwide. And, of course, Facebook hardly registers in China where WeChat, the messaging app owned by Tencent Holdings ((HK:700) in Hong Kong and a thinly traded ((NY:TCEHY) in New York) surveys at 93% use, versus 46% for Number Two Sina Weibo.

It's safe to say that globally, Facebook isn't much of a messaging play in Latin America or Asia.

Which is where WhatsApp comes in. For example, in a 2012 survey by the South China Morning Post, 45% of those surveyed in Hong Kong used WhatsApp. And there's that 75% rating in Brazil and the 43% in Indonesia.

Social media companies, like Facebook, have to respond to that market imbalance because the big players in Asia clearly have ambitious plans to break out of their home markets and to become global players. For example, Tencent has expanded to first Taiwan and Hong Kong, and then, to Southeast Asia. In January 2014, the company began its first (at least that I'm aware of) promotion for its service in the United States.

It's by no means certain that Tencent or LINE will be successful in their global plans. WeChat has very little visibility beyond speakers of Chinese, for example.

But looking at how quickly companies like WhatsApp have savaged the messaging revenue for the world's telecommunications companies, no company in the social media space can afford to be anything but aggressive. Messaging—what's called SMS (short message service)—is still a big business for the world's telecom companies. It generated more than $120 billion in revenue in 2012. But I think it's reasonable to talk about this as a shrinking business and one that WhatsApp and its peers will succeed in killing in a relatively short five or ten years. Users on WhatsApp already send as many messages as users on SMS. And looking at the price, it's clear why the trend is the trend. A phone company such as Verizon offers free unlimited texts domestically as part of its basic plans. (Although you could pay $34.99 a month for an SMSonly texting plan.) To send a text to another country, though, isn't covered by your basic plan. It costs about 15 cents a text to send one from the United States to South Africa. AT&T charges 25 cents a text for messages from the US to a user overseas and 50 cents a text if the text is sent from outside the United States.

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WhatsApp is free for the first year and 99 cents a year after that.

Disrupting an existing business, and rendering it unprofitable for incumbents, isn't the same as making money for a newcomer. The analysis I've seen focuses on either, how Facebook might be able to monetize WhatsApp by selling ads, or improving the targeting of existing ads. WhatsApp's extraordinarily high engagement levels—more than 70% of users comeback every day—would help Facebook sell more ads at higher rates, the thinking goes.

What's interesting to me, however, is how different the WhatsApp model is from that, at say, Tencent's WeChat. WhatsApp is clean now. No adds. No effort to sell a user anything else. (I have to admit to having become a big fan of WhatsApp in the last 12 months, as I've used it to follow my son to places such as Bolivia.)

WeChat users—and users of any of the Asia messaging apps—on the other hand, are used to lots and lots of pitches for ancillary services and apps. Tencent, for example, got 52% of its revenue in 2013 from online gaming. (The company is the majority owner of Riot Games (League of Legends) and a part owner of Activision Blizzard (ATVI), owner of Call of Duty and World of Warcraft. Tencent also has launched aggressive plans to create its own business-to-business and business-to-consumer marketplaces to challenge still-private Alibaba, China's Amazon.com (AMZN). Although now that Alibaba has entered the US market, it might be more accurate to call Amazon the US Alibaba.

If Facebook could monetize WhatsApp at a rate similar to the rate at WeChat or LINE, then, analysts calculate, WhatsApp could generate $1.5 to $2 billion in revenue. Of course, the big question, looking at the very different models at WhatsApp and, say, WeChat, and the very different user expectations, is the likelihood that Facebook could monetize WhatsApp at anything like the Asian rate.

I don't know that Facebook's acquisition of WhatsApp answers any questions about the social network space or about messaging apps. In fact, I think it raises more questions than it answers. But the deal does, at least, tell investors what the important questions to ask are.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Tencent Holdings as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.

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