Treasury Bills – Meaning and its Characteristics
In the previous articles, we have studied various money market instruments as well as how they are traded in the market. In this article, we will have a closer look at treasury bills. It needs to be understood that treasury bills are the most widely sold instruments in the global money markets. They are the […]
Replacement Cost Approach Advantages and Disadvantages
In the previous article, we have already witnessed what replacement cost theory is and how it can be used to value sporting franchises. We now know the theoretical aspects of this type of valuation. We also know that the replacement cost approach is not used very widely when it comes to the valuation of sports […]
What is Acqui-Hire?
Acqui-hire is a different type of acquisition strategy which has come into existence with the emergence of technology-based start-ups. For many start-up companies, employees are now their biggest assets. Hence, it should not be surprising that other companies may want to acquire this employee base to meet their own business needs. Hence, if a tech […]
Global Initial Public Offers
Ever since the era of globalization, the world has started operating like one single market. The concept of a global village is often mentioned in the financial markets. This globalization has also had an impact on the investment banking business. Earlier, companies were limited to the stock markets of their home country when they wanted […]
Valuation of a Sports Franchise: Market Approach
In the previous articles, we have already come across a couple of methods used for the valuation of a sports franchise. However, we know that both of those methods have certain shortcomings which make them unsuitable for the valuation of a sports franchise. In this article, we will discuss a third approach called the market […]
Facebook, Instagram, and Whatsapp are three major social media applications. These three applications have a combined user base of about 3.6 billion users! This means that on average half the world uses at least one of these apps! Facebook currently owns all three applications. However, up until now, all these apps have operated in an independent manner. It does not seem like this will continue for much longer.
Facebook has announced plans to merge these three social media apps. Instead of being met with enthusiasm, this plan was met with a lot of scepticism worldwide. In this article, we will try and understand the financial reasons why it would make sense for Facebook to merge these apps. Also, we will have a look at some of the problems that Facebook is likely to face while attempting such a merger in the forthcoming article.
In order to understand the background of the current proposal, one needs to look at the history of these apps. Instagram and Whatsapp were independent apps created by founders other than Mark Zuckerberg. However, as a part of its expansion plan, Facebook decided to acquire both these companies. Instagram was acquired in 2009 whereas Whatsapp was acquired in 2014.
Initially, it was decided that the founders of these respective apps will continue working with Facebook. Facebook will only be the owner from the financial point of view. However, operationally the founders will be given complete freedom to grow their apps. This plan did not work out and one by one, all founders quit Facebook, citing excessive interference by Mark Zuckerberg and the Facebook management.
These exits were early indications that Facebook and Mark Zuckerberg had plans to merge these three very different apps to create one giant social media conglomerate.
Facebook’s Plan: For many years, Facebook did not mention its intention to merge the three entities. However, now Facebook has expressed its desire to merge the back end systems of the three different apps. Simply put, this app will allow a user on Whatsapp to send a message to another user on Instagram. Such cross-application messaging would be new to the social media scene. This project would be very ambitious given the fact that the entire development of Whatsapp and Instagram may have to be done from scratch in order to bring all three apps on the same platform.
Facebook is willing to undertake such a merger because of the many advantages it offers. Some of them have been listed below.
The relevance of Ads: Firstly, Facebook’s ads are shockingly accurate in the current set up as well. Facebook collects data about what you like and dislike, the kind of status messages you post as well as your browser history in order to provide you with accurate ads. If Facebook is able to merge Whatsapp and Instagram, it will suddenly have a sea of data at its disposal. Facebook may be able to intercept chat messages and provide advertisements based on conversations. More data would make the analytics stronger. Hence, instead of providing several irrelevant ads, Facebook will provide its users with' fewer but extremely relevant apps.
Lower Operational Costs: At the present moment, Facebook has to do the same work three times which adds to its operational costs. Any feature which is added by Facebook and Instagram is also inevitably added by Whatsapp. However, the development is done separately for each of the apps. If the back end systems of each of these apps are merged, then the development will only have to be done once. The same development can then be used across different apps. Obviously, this will reduce the rework that Facebook has to do. The operational cost reductions will be significant and will straightaway add to the bottom line of the company.
Consumer Retention: Facebook, Whatsapp, and Instagram are installed by very different kind of people. A lot of people are quitting using one of these apps. For instance, some users may switch to Snapchat whereas others may switch to Kick messenger and so on. However, the likelihood of the user uninstalling all three apps simultaneously is very less. Therefore, even if the user goes off one app, they will still be in the Facebook universe thanks to the merger.
Increase Stock Valuation: Lastly, it needs to be understood that Facebook’s actions are being driven by the need to be different from other social media companies. There are a lot of social media companies which are flooding the market. Hence, there is very little competitive advantage left for Facebook. If it does not take swift action right now, it may see its valuation stagnate or even fall. To prevent such an incident, Facebook is trying to add value by being different and creating the first social media conglomerate. This step should woo investors who will send the valuation northwards.
The bottom line is that Facebook is likely to get huge benefits if it is somehow able to merge these three apps. However, after the Cambridge Analytica incident, regulators have become alert. Ireland has already summoned Facebook executives to explain how they will tackle privacy concerns that might arise after these apps are merged. We will have a look at the problems related to the merger in the next article.
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