Challenges to Investment Banking Business
Investment banking has traditionally been a lucrative business. Investment bankers have always been in the news for the excessive amount of money that they made while the rest of the world was struggling. However, the relentless negative publicity that the industry has received in the past has changed the way it functions. Also, external circumstances […]
The Case for Index Funds
People who invest their money in stocks can be split up into two categories. One category of people actively decide which stock they want to invest their money in. This means that these investors spend their time and money doing research on individual stocks. On the other hand, the other category of people invests their […]
The Functions of a Financial System
Financial resources are scattered across the economy. This is the reason that there is a need for a financial system that can enable the timely deployment of these resources across different parts of the economy at the right time. A well-functioning financial system is supposed to perform several functions. Some of these functions have been […]
Single Stage FCFF Model
We now have a fair understanding of what the concepts of free cash flow to the firm is. We also know how to calculate this metric under various circumstances. It is now time to use this metric to arrive at the final valuation for a given firm which is the objective of the whole exercise. […]
Anchoring Bias in Behavioural Finance
The average investor may be able to keep their thinking in check and save themselves from a lot of biases. However, they still might not be aware of or be able to manage some of the more advanced biases. The anchoring bias is one such bias. It affects the thinking of even the most sophisticated […]
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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