Facebook is becoming a serious competitor in the voice and messaging communications industry. The popularity of its free business model funded by advertisers and the strategic acquisition of WhatsApp are driving their success to become a leading mobile company. How did Facebook re-build its business model to move into the communications space? Is their innovative strategy sustainable? What is the value-added of WhatsApp? How will they help Facebook become a global Internet communication giant?

1. Facebook’s race to become a
leading mobile company and
connect the world
The strategic acquisition of WhatsApp
SUMMARY
Facebook is becoming a serious competitor in
the voice and messaging communications
industry. The popularity of its free business
model funded by advertisers and the
strategic acquisition of WhatsApp are driving
their success to become a leading mobile
company. How did Facebook re-build its
business model to move into the
communications space? Is their innovative
strategy sustainable? What is the value-
added of WhatsApp? How will they help
Facebook become a global Internet
communication giant?
Laetitia Odini
Innovation Class, MIB Beijing 2013-2014

2. 1
Introduction
In 2008, Facebook had 100 million users. By the end of 2013, it had 1.23 billion monthly active users (Facebook,
January 29, 2014) (see Appendix 1) and is the leading social network in the world. Despite its ongoing success,
the Internet Giant is constantly trying to find new opportunities of growth. Since the flop of its IPO in May 2012,
Facebook has successfully shifted its business model to focus on the mobile experience and industry, which
represents a growing source of revenue for them. Meanwhile, technology, user’s tastes and the competitive
landscape are shifting towards a new generation of leaner, mobile instant-messaging applications like
WhatsApp. To fulfill their mission to connect the world and position themselves as leaders in the
communications space, Facebook acquired WhatsApp for a historical sum of $19billion. How did Facebook re-
build its business model to move into the communications space? Is their innovative strategy sustainable? What
is the value-added of WhatsApp?
How Facebook’s business model and service offering is developing
An innovative and solid business model
Facebook's mission is “to give people the power to share and make the world more open and connected” as
explained on their website.
Since its creation in 2004, Facebook has defined the digital social network trends. Their business model is built
around its consumers and their strategy has mainly been to increase its number of users to build an enormous
and valuable database. This was a success as today, according to Pew Research Center, an average adult
Facebook user has more than 300 friends. (Smith, 2014) Over the years, the products Facebook offers free of
charge to its users have also evolved. Today, the social network’s own products include News feed, Timeline,
Graph Search, Pages, Groups, Events, Photos and Videos, Home, Gifts and Messenger.
But what is the real value of Facebook? Facebook has become a multi-sided platform which serves different
customer segments with different value propositions, from gaming to advertising.
We can point out three key drivers of the success of Facebook’s business model.
(i) User Data: Facebook’s biggest resource is of course the 1.23 billion monthly active data base of users
generating useful content and value. Facebook statistics (Facebook, January 29, 2014)indicate that 757million of
them are active each day as of December 2013, many of which are using mobile devices and applications to
connect to Facebook across the world. As a result, Facebook has become very attractive for advertisers and
developers.
(ii) Social Network: The social network offers a unique combination of reach, relevance, social context, and
engagement to the advertisers. Advertisers can engage with users based upon their demographics. Pages,
brands and now advertisements represent increasing and promising revenue streams for the social network.
(iii) Efficient Cost Structure: Facebook launched two years ago the open compute project (Facebook, s.d.) with
the aim to build its own efficient and low-cost data center to support their user growth and store photos and
videos. The result is a data center 38% more efficient and 24% less expensive than other data centers. With

3. 2
revenues of $7,872 billion in 2013, they increased their GAAP operating margin to 36% compared to 11% the
previous year. This proves Facebook had a solid financial performance in 2013 and can be optimistic for 2014 (to
invest) (Facebook, January 29, 2014) Furthermore, they have only 6337 employees as of December 2013
(Facebook, January 29, 2014), which is very small compared to other Internet giants like Google (47,756
employees, $15.7B revenues). (Google, January 2014) This lean team helps the business improve its efficiency by
remaining focused and innovative to continue developing new services, products and trends in the digital
economy.
In their business model, customer segments include not only the Internet & mobile users, advertisers and
gaming application vendors, but also the third-party developers who can use Facebook’s platform, development
tools and APIs to build their own apps and websites.
Finally, Facebook has partnered with key companies in the TV Shows, Movies, Music and News Articles
industries who provide apps which help users share what they are watching, listening or reading. Some major
content partners include YouTube, Spotify or The Guardian.
One of the major challenges of Facebook today is to find ways of collecting revenues from its millions of users.
The main revenue streams today come from ad revenues and payment revenues, primarily from gaming apps.
(See Appendix 2) (Facebook, 2014)
Moving into the mobile app space and re-engineering its business model
For a while, Facebook struggled with making money in the emerging mobile landscape. Since its failed IPO two
years ago, Facebook has been moving in the communication space to sustain its growth and valuation, as
smartphone adoption rises. To benefit and profit from this high mobile penetration, the company repositioned
its advertising sales and developed new products to fit with the mobile user experience. In June 2012, ads in the
News Feed were introduced, increasing revenues generated by advertising. Early 2013, mobile app install
advertisements were launched. The ads allow developers to promote apps through Facebook’s mobile News
Feed, featuring an ad design with an “Install Now” call to action that brings the user to an app’s landing page in
the Apple Store or Google Play Store. The transition from desktop to mobile ads highlights Facebook’s shifting
business model.
As more and more companies and game developers go mobile, Facebook mobile app install ads sees a great
success. What are the reasons behind this success?
Firstly, the social network’s mobile presence is astoundingly high: 945 million monthly active users used
Facebook mobile products as of December 31, 2013, an increase of 39% year-over-year. Mobile Daily active
users were 556 million on average for December 2013, an increase of 49% year-over-year. (Facebook, January
29, 2014)Thanks to the information collected in its vast data-base, Facebook can target you based on your
demographics or on the websites you’ve visited, which makes it extremely attractive for advertisers.
Furthermore, a campaign from AdParlor, one of Facebook’s partners who handles advertising for hundreds of
companies, indicated in January 2013 that developers can advertise an app on Facebook mobile for as little as 2-
3$ (AdParlor, 2013). According to the study, Facebook had the best results: a click on the ad costs $0.45 average

4. 3
and 26% of people who click the mobile ad download it. This cheap option is attractive for developers who’s
apps will become visible more rapidly to users than via App stores rankings for instance.
According to the Facebook Product Manager in charge of mobile app install ads Deborah Liu, the number of
installs served through Facebook’s Mobile App Install ads grew to 245 million at the end of 2013, with 100
million apps downloaded in the last quarter. (Buzzfeed, 2014) As a result, mobile advertising revenue
represented approximately 53% of the $2.34billion ad revenue in the 4th
quarter of 2013 (Facebook, January 29,
2014) becoming for the first time Facebook’s first source of revenue in front of desktop ads. (See Appendix 2)
The mobile app installation advertising business developed by Facebook is another proof of their innovative
strategy to constantly adapt to new market trends and build new products to continue growing. Its success
benefits not only developers but also investors who need to make sure Facebook is profitable and continues to
have solid revenue streams coming from their innovative business model.
With its new business model, the Internet giant has successfully begun to address a major issue most web-based
companies face: monetization of membership and traffic. However, by focusing on the mobile app discovery
niche business, Facebook is likely to be exposed to fierce competition soon enough. Eventually, users for
instance may become accustomed and bored by mobile ads, or rivals like Google or Apple may launch their own
advertising business. Facebook will then have to find new ways to increase its value and make money through its
customers. In this perspective, they are expanding their reach towards the communications space with the
recent acquisition of the world’s most popular social messaging app: WhatsApp.
The Innovative strategy of Facebook to become a leader in the voice and messaging
communications industry: the acquisition of WhatsApp.
The future of mobile messaging: Over-the-top competitors threaten Facebook
As Facebook moves further in the communication space to connect the world, sustain and grow its valuation,
Over-The-Top (OTT) mobile services are dictating the direction the digital industry is taking. These leading-edge
new voice and messaging applications such as WhatsApp, WeChat, Kakao Talk … have grown exponentially in
the past years, while SMS revenues from traditional mobile carriers company fall suddenly. OTT messaging has
already surpassed peer-to-peer SMS traffic, according to a study from Informa. (Informa, 2013) (See Appendix 3)
A report from Telco2Research proved that WhatsApp and other OTT messaging apps have higher adoption in
markets where SMS prices are higher. (See Appendix 4) (Telco 2.0, 2014) This new generation of mobile instant-
messaging apps offer a quick, simple and reliable service to consumers, and are likely to become an important
monetization platform in the mobile industry.
According to a recent survey, in the US, Brazil, South Africa, Indonesia and China, Facebook Messenger is facing
stiff competition as WhatsApp gains popularity, especially in the 16-24 age group. (On Device Research, 2013)
(See Appendix 5) WhatsApp has actually taken the lead in social messaging on mobile across these 5 markets
combined. This trend was confirmed in October 2013 with, David Ebersman, CFO of Facebook, announcing there
was a decrease in daily users, specifically among younger teens. (GlobalWebIndex, 2013)

5. 4
Due to privacy issues and the lack of intimacy on big social networks, consumer behaviors are changing. Instead
of sharing information with hundreds of acquaintances on Facebook, they are turning to their smartphones and
using messaging apps to have more private conversations with genuine friends. (WORTHAM, 2014) As part of
their innovative strategy to penetrate the global mobile market and retain their younger users, Facebook
acquired the rapidly growing mobile messaging company WhatsApp last February in a massive deal worth $19
billion in cash and stock. This was the largest exit of a venture capital backed company in history. What is the
value-added of WhatsApp for Facebook and how can it help them innovate?
How does WhatsApp complement Facebook’s business model?
In its press release, Facebook explains WhatsApp has built “a leading and rapidly growing real-time mobile
messaging service … allowing millions of people around the world to stay connected with their friends and
family.” With 450 million active users each month, and 70% of those people active on a given day, it has
become the largest cross-platform mobile messaging service in the world. (Facebook Inc, 2014) Mark
Zuckerberg, CEO of Facebook, justified in a conference call with investors the multibillion-dollar valuation of this
tech startup of only 55 employees by its extraordinary growth curve. (See Appendix 6) In addition, the mobile
app currently has more than 1 million new registered users per day, while the messaging volume on WhatsApp
is approaching the entire global telecom SMS volume. All this while spending nothing on marketing. Therefore,
the purchase of WhatsApp seems to be a strategic and logical move to make their vision come true: be the
number one global company in mobile social media and communications.
WhatsApp’s business model main characteristics are its simplicity and monetization: the service is free for one
year and then 99c per year afterward. Zuckerberg argued that no further effort to monetize WhatsApp is
necessary. Obviously, if WhatsApp reaches one billion users, this will generate close to $1 billion in addition to
ample revenue opportunities. WhatsApp has no advertisement, no games and no user data collection, unlike
Facebook. It allows users to have private, intimate real-time conversations without being disturbed by ads. As
explained in a report from Telco2Research, (Telco2Research, March 2014) WhatsApp is “a task-specific app
founded on engineering excellence.” The challenge for WhatsApp is to always have quality networks and
connectivity so subscribers can connect reliably. It is important to note the business relies on people buying
smartphones with reliable mobile data connections, which are both key drivers of its success in emerging
markets.
Mark Zuckerberg pointed out that WhatsApp will be complementary to Facebook, and will be kept as an
independent service. Most users today enjoy private conversations on WhatsApp and more “fun” on Facebook.
Besides, WhatsApp has a lot of influence in European countries where Facebook messenger is nonexistent. In
Spain, Switzerland and the Netherlands WhatsApp had more than 80 per cent market share end of 2012 while
Facebook Messenger has less than 15 per cent. (Cutler, 2012) With this acquisition, Facebook will gain more
audience and become a broader conglomerate.
Furthermore, Facebook gained access to millions of address books, information it could not access before.
Although it is not their priority, Facebook could leverage WhatsApp data to help drive improved monetization on
other Facebook products such as improved ad targeting. With this huge investment, they are betting the future
of social networking relies heavily on interpersonal and more intimate conversations with family and friends.

6. 5
A shared mission: to connect the next 5 billion
Facebook latest project, Internet.org is to bring the internet to the two-thirds of the world’s population not yet
connected, by working with wireless operators and other partners. According to Facebook’s press release, the
acquisition of WhatsApp will help this initiative, as both companies share the mission and vision to connect the
next 5 billion who don’t have access to the Internet in emerging markets by providing basic data services for
free. “WhatsApp is on a path to connect 1 billion people” said Mark Zuckerberg, and is particularly implanted in
developing countries. Jan Koum, CEO of WhatsApp announced at the 2014 Mobile World Congress their goal “is
to be on every mobile phone in the world”.
Therefore, the acquisition of WhatsApp will help the internet.org initiative, especially in emerging markets
where Facebook is less present. As seen before, WhatsApp is already leader in major countries like Brazil, South
Africa and Indonesia. (Forbes, 2013) It has also taken off in emerging markets like India, where traditional SMS
are expensive and mobile phones are spreading rapidly across the country but only 13 per cent of the
population have Internet access. Internet.org announced that it had tied up with Unilever to give India’s rural
population Internet access. With growth beginning to stagnate in the US, Facebook is obviously looking to places
like India to keep growing and fulfill its personal growth strategy.
A study from Deloitte found that by expanding internet access in developing countries to same levels as today’s
developed economies, the internet.org project could “increase productivity by as much as 25 percent,
generating $2.2 trillion in GDP and more than 140 million new jobs, lifting 160 million people out of poverty.”
(Deloitte, 2014)
In addition, WhatsApp announced it will soon launch a voice service as well as text messaging. Jan Koum, CEO
and founder of WhatsApp, explains this will help people stay in touch with friends and family, no matter where
they are in the world. These new services would cannibalize both SMS revenue and voice-calling revenue, which
can be interesting new sources of revenue for Facebook in the future.
Conclusion
With the acquisition of WhatsApp, Facebook has made a big step toward becoming a leading mobile company.
The next challenge will be to monetize WhatsApp to benefit from its potential size of the user base and strong
engagement. Mark Zuckerberg argues the priority today is to connect the world and that when Facebook
reaches three billion users globally, there will obviously be plenty of new revenue opportunities other than ads.
Should WhatsApp keep its minimalistic approach and simplistic service? Or should it follow market trends and
add new services to its basic functions to become really profitable?
Nevertheless, we can ask ourselves if Facebook’s business model and innovative strategy are sustainable. In the
past few years, Facebook has followed the same acquisition pattern, leveraging its huge capitalization and stock
price to buy fast growing tech companies that either challenge its market dominance and catch more audience
such as Instagram and WhatsApp, or bring new capabilities and services. In March 2014, they acquired the
headset virtual reality maker company Oculus for $2billion: is this to move into a more integrated model which
includes devices? Is it to compete more effectively against its big rival Google and its Google Glass? Or is it to

7. 6
expand in the double digit growth market of the mobile gaming ecosystem? They also acquired just recently
Ascenta, a UK-based maker of solar-powered drones. Who of Google and Facebook will win the “high-altitude
race to connect the world’s most remote locations”? (Garside, 2014) Is their acquisition strategy sustainable in
the long term?
As Facebook continues to make bets on the future trends of the digital world and invest in high-tech products
and services, new and much more advanced messaging applications such as We Chat are arising in emerging
markets like China and already targeting western countries. Soon enough, Facebook and WhatsApp will be
facing stiff competition, even in the US. Will it keep acquiring new competitors to buy its way out of new market
challenges?

8. 7
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10. 9
Appendix 1
Appendix 2

11. 10
Appendix 3

12. 11
Appendix 4
Appendix 5

13. 12
Appendix 6