Wednesday, February 19, 2014

Did Facebook Get a Good Deal on Whatsapp?

Facebook is set to purchase Whatsapp for $16B in a combination of cash & stock. Sounds like a lot of money for a simple IM app - is it?

Let's look at it from two perspectives:

(1) $Rev / Active User

Whatsapp has over 450M monthly active users (MAU). That works out to about $35 per MAU.

Facebook earned $7.87B across 1.23B MAU. That works out to about $6.49 per MAU. [1]

Which means Facebook paid about 5.5x it's current revenue / MAU for Whatapps's userbase. That's not bad when you consider that acquisitions are generally over 5x the target company's revenue. Even stock prices are often trading at higher multiples.\

(2) % of Market cap

Facebook's valuation comes not only from their earnings but also from their large MAU base. Their ability to increase MAU drives their valuation higher. Facebook is worth about $170B and has 945M mobile MAU.

So they spent just 9% of their market cap on a company that has 47% of their mobile MAU. That's not a bad deal.

Don't forget that Whatsapp users are probably stickier - they probably use Whatsapp more than Facebook Mobile so there's a premium for that as well.

Facebook got a great deal and also showed how much they value their users. They expect to make a lot more money off them when they monetize Whatsapp.

We shouldn't underestimate Facebook's ability to monetize their mobile user base. After all, in a few short years they were able to generate 53% of their total ad revenue from mobile users.

[1] Facebook results for FY2013

Thursday, March 14, 2013

Did Samsung Jump the Shark w/ the new Galaxy S4?

The new Samsung Galaxy S4 has finally been unveiled and along with the phone, it also reveals how hard Samsung is trying to be different. 

Breaking free from Android
The free OS is an effective way for them to sell phones but its also a burden as the Galaxy brand is popular because of Android software & Samsung's hardware.  The S3 is the best selling Android phone because of the hardware & distribution channels, not any Samsung-specific features. They are struggling to add value beyond their hardware.   

They don't want you to buy the Galaxy S4 because its the best Android phone, they want you to buy it for its Samsung-only features. There's no value in building commodity hardware.

All the wild features they conjured up, such as the Air Gestures, Air View, and varied camera options, was done to differentiate from Android.

It doesn't work - just as it didn't work for HTC or LG either.  Consumers don't care for them, they are smarter than that.  Did you ever find yourself in the scenarios below?

Samsung Galaxy S4 Air View
Did you want your phone to automagically pause a movie playback when you looked away? 
The Galaxy S4 can do that.

Did you want to scroll through a page by hovering your finger a few millimeters over the screen rather than taking the effort to actually touch the screen and swipe?
The Galaxy S4 lets you do that.

Ever felt the need to take photos from both the front & rear camera simultaneously for a picture-in-picture effect?
The Galaxy S4 satisfies that need.

What's more useful to you? An innovation like Google Now or the features above?

Structural Challenges
This focus on software imply a structural change in Samsung's approach. They want to emulate Apple's famed ability to connect with the consumer and deliver a symbiotic hardware-software combination that brings the human interactions to the fore.

Unfortunately, letting users hover their finger over the screen to scroll does not cut it.

Samsung has dominated the Android scene because of their ability to manufacture & distribute class-leading hardware with high margins not because they understand the user's needs. These gimmicks heralded as innovations in the S4 indicate how much more Samsung has to invest in understanding how users interact with hardware.

The farther they stray from their strengths, the more opportunity they give Google to gain ground with their Nexus line of smartphones. Google understands users and they can massage Android to do things that Samsung can't even contemplate.

Ultimately, who do you trust when it comes to the software on your phone: Google or Samsung?

Monday, January 28, 2013

RIM's Retail Adventure with BlackBerry 10

BlackBerry 10 is just around the corner and industry analysts, BlackBerry fans, and the media are all fawning over RIM's achievements.  The media has done a great job covering BB10 & its unique interface, RIM's success in attracting developers, and the company's overall turn-around in outreach.

One thing that hasn't been discussed is RIM's retail strategy for BB10. It's surprising since this is absolutely crucial for BlackBerry 10's mass market acceptance. As much as RIM executes on its PR strategy, its the actual salespeople interacting with consumers who will have the most effect on making the sale.

This is especially important for BlackBerry 10, not only because of the challenges of negative brand equity in North America but also due to BB10's unique gesture-based interface. It's not obvious and no amount of TV commercials or tech blog articles will educate Suzy in Idaho who wants to get a new smartphone when her cellphone contract is up for renewal. You need someone trained in BB10 to explain to the average person how to use the smartphone. It's the only way they'll make a sale.

Historically, RIM has avoided retail. For their smartphones, they have always depended upon the carriers & their sales staff to close the deal. This worked great until the iPhone came along and the slew of feature-rich Android's that followed. The sales staff (justifiably so) would recommend the iPhone or Android's, after all, its what they use themselves.

When the Playbook was launched, it was up to RIM to take control of the sales process - and they failed miserably. In retail stores like Best Buy or Staples, the Playbook display units were never staged correctly, from not being connected to the store's WiFi to not even powered on because the battery was drained and the tablet wasn't plugged in! It wasn't a case of store incompetence as other tablets were staged correctly. The sales staff were also not educated on the multi-tasking power of the Playbook or its desktop-capable browser.

With BlackBerry 10, this needs to change. The phones need to be staged correctly across all retail channels (carrier-branded stores, big box stores, etc...) and the sales staff need to be trained on every aspect of BB10. I'm not talking about watching slide decks either, they need to get some hands-on time with BB10 before they try to sell it to consumers. Ideally, in major markets, RIM would have its own staff in retail stores interacting with the consumers. Apart from selling the phones correctly, they would get invaluable customer feedback for BB 10.1.

At this point, the most ardent BlackBerry fans will point to Asia, where RIM has BlackBerry stores ran by 3rd party retailers. That's great and all, but RIM needs to convince North America on BB10.

Positive press helps and so does a Superbowl ad, but nothing helps more than a person telling you how awesome the BB10 is while its in your hand.

Wednesday, April 18, 2012

RIM's Developer Dilemma

There's been quite a bit of news lately regarding RIM's efforts to entice developers to join the BlackBerry bandwagon.

First, RIM released some stats on BlackBerry App World, stating they have about 20,000 apps for the Playbook, without mentioning the quality of the apps.

Secondly, ReadWriteWeb had an interesting infographic about mobile app stores that showed 13% of BlackBerry developers have made more than $100k from their apps. Impressive, but remember the number of available apps (and developers) are significantly lower than iOS.

However, the stats are meaningless given the consumers' perception. The data linked above are only pertinent to developers, one half of RIM's problem.

This leads me to RIM's current dilemma: the diverging incentives of consumers and developers.

Consumers expect all the popular titles that are available on iOS and Android, apps like Angry Bird Space, Netflix, Skype, Infinity Blade, etc... on their mobile device. They won't consider a smartphone or tablet that won't have those apps.  The obscure apps, irrespective of quality, won't cause consumers to purchase a BB10 device.

On the flip side, RIM is targeting the app developers by telling them they can get noticed in App World due to the limited number of titles already compared to the iOS or Android markets, both of which have a lot of repetitive apps. A fair point, but this only applies to smaller developers, not to the Rovio's and Netflix's of the world. The big developers already have well known titles, they don't need to be "discovered". They will not be enticed by a platform that only has 1M users at the moment along with an unknown growth rate.

Therein lies the problem:
BlackBerry's App World may offer higher returns for the smaller developers, but the smaller developers won't draw in the consumers. Instead, the consumers are drawn by the well-known titles, whose developers may not be interested in Playbook/BlackBerry 10's small audience.
It's a difficult problem. Ultimately, it is the consumers who bring in the dollars so convincing (read: paying) the big dev shops to bring their app to BlackBerry should be priority #1. This would be supported by easing the development process, which RIM is finally starting to understand.

RIM's focus on 3rd-party development (in terms of toolsets, outreach, and documentation) has been fantastic in the past year or so. They've done the following:
  • new streamlined application submission process
  • new set of tools (NDK 2.0)
  • embraced existing popular (non-RIM) libraries for easier portability
  • contributed to open source initiatives (Webkit, Qt)
  • involved in the community (GitHub, Dev Events, social media, etc...)
These are monumental changes and a complete shift in corporate behaviour; very impressive that this turnabout could happen so quickly in a large organization. I can only imagine the fights they must have had with the internal Legal department regarding some of these initiatives.

However, will all this be enough to convince Netflix, Rovio, Epic Games, etc... to spend the resources to port their games to the BB10 platform?

Let's hope so. 

Monday, April 9, 2012

Facebook Buys Instragram for their ....?

$1 BILLION dollars.

That is how much Facebook is "paying" for a service that allows users to take photos from their phone, apply some filters, and upload it to the web, and share it over Facebook and Twitter.

The verb paying is in quotes because we don't know how much of the transaction is in cash and how much is in stock. Did Facebook mention $1 Billion based on a projected valuation of Facebook stock post-IPO or current valuation in the secondary market? Either way, it is still a lot of money.

What motivated Facebook's decision to purchase Instagram? Let's consider a few options:
  • Customer Acquisition
    Doubtful. Facebook has over 800M users and Instagram has about 30M users with about 300M monthly page views (eMarketer, Kimberly Maul, Feb 2012). It's a safe assumption that most Instagram users are already Facebook users.
  • Defensive Move
    Perhaps another competitor was in talks to buy Instagram so Facebook acted swiftly and decisively. It would be a strong signal to send to Google, but is it necessary? Don't think so.
  • Talent Acquisition
    While I'm sure this was a factor, it wouldn't justify a $1 Billion price tag.
  • Strategic Entry into Mobile
    Instagram has figured out how to capture people's attention on their mobile app. It has a great user experience, allowing folks to look at other people's photos and see the stories. Facebook's mobile app is fairly clunky and not conducive to photo viewing. Facebook could build their future mobile app around the Instagram foundation.
  • Buy into User Behavior
    As mentioned in a previous post, it's really hard to change user behaviour. Consider the following assumptions:
    • On Instagram, users explore and comment on artistic photos (made easier to generate with the filters), continuing to look at unique photo after unique photo, ultimately wasting a lot of time on their mobile phone. A great opportunity for ad placements.
    • On Facebook, users comment on their friend's drunken antics and move on once they've gone through the entire album.
    Rather than build something similar and hope users switch, Facebook just bought them out, hoping to monetize their users' behavior on a mobile platform.

    Here's an interesting stat: 64% of those surveyed said they view photos on their mobile phone  while only 39% said they use the phone for updating a social networking page*. (see image below)

    Instagram is the foundation of the Facebook's mobile strategy, giving Facebook access to a medium that captivates a user's attention on their mobile device. With Facebook's vast resources, they can easily expand the userbase beyond the current 30M userbase.

    Looks like Instagram is a lot more than just a fancy image filter service. To answer the question posed at the very top, Facebook is buying Instagram for the relationship they've built with the users.

    Is that worth $1 Billion dollars?

    Time will tell.
* Thanks Vivek for correcting my earlier interpretation.

Deviancy from Disruption - pt 2

The previous post discussed the differences between Google & Facebook and why Google is struggling to align itself with the new social web, where people are the data sets that are indexed and sorted, rather than the webpages themselves. My hypothesis is that this re-alignment isn't a technology challenge as it is about customers. Unfortunately, Google is the victim of their own success.

Google's re-alignment faces numerous challenges across various domains:
  • Technology
  • Organizational
  • Customer
This isn't a big issue for Google. They have the resources and talent to adapt their algorithms and R&D their way into a social web.

As a large organization, even with the famed flat organizational structure,  re-aligning the different teams to focus on a new vision is challenging. We've seen some results of these changes, as many of Google products have received an updated UX and Google+ integration. Kudos to Google for pushing the changes as quick as they did.

However, the larger challenge is changing customer habits. This is why Google's struggle is beyond their control. They can't engineer their way to get the users to be more social on Google products. We are trained to treat Google as a librarian, someone we ask to find a book (pardon the pun). Our interactions are only as long as the time it takes to find the book.  We are also trained to spend more time on a few specific books, much in the same way we tend to congregate at the same local lunch place. It is just our habit.

So, how does Google change our habits? Can they wean us of Facebook or will they find new avenues to be social? The biggest avenue is mobile and that is where they can win. Facebook hasn't really told us how they plan on monetizing their mobile presence, but I'm sure they are on it.

Thursday, April 5, 2012

Deviancy from Disruption - pt 1

There’s a great blog post by an ex-Googler, James Whittaker, on his thoughts on how Google has changed as a company during his tenure:

His talk about how the Google strayed from their roots to battle Facebook left me thinking about how disruption can cause a dominant player to completely change track and lose sight of their vision. More on that below.

I found the following bit interesting:
I couldn’t even get my own teenage daughter to look at Google+ twice, “social isn’t a product,” she told me after I gave her a demo, “social is people and the people are on Facebook.” Google was the rich kid who, after having discovered he wasn’t invited to the party, built his own party in retaliation. The fact that no one came to Google’s party became the elephant in the room.

Google went beyond building their own party, they tried to change their entire purpose in life.

Consider the following:

  • What was Google’s original mandate? To sort & organize the web.
  • What is their core technology? Matching ads based on the website content and user’s search/browsing history.
  • What’s the point of all the innovative, yet diverse, Google products? They keep users on Google-owned properties, reducing the cost of the displayed ads
  • What is Google’s supply chain? The websites that its spiders index and sort through.
What about Facebook?
  • What is Facebook’s mandate? To understand the people who use the web.
  • What is their core technology? Matching targeted ads with much higher accuracy. For example, a concert organizer for a Mos Def concert in Japan can create ads that reach out to rap fans (incl. specific rap fans who may like Mos Def based on their musical taste) living in Japan.
  • What is Facebook’s supply chain? The users’ interaction on the website.
Google is trying to change who they are because Facebook just disrupted the entire online advertising industry.

Google is scared for the following reasons:

  1. Facebook ad’s are more valuable because they can be targeted to a very specific individual and they can incorporate rich ad campaigns. Google cannot match that level of accuracy nor the richness with their dominant textual-based ads.
  2. Facebook ad’s have a significantly lower cost as they don’t have to pay a 3rd party website for ad placement as Google would with AdSense. 
  3. Facebook has greater user engagement. People spend more time on Facebook, so the ad impressions increase, resulting in greater revenue. Google, on the other hand, is used as a tool to find what they are looking for.
Google is stuck between a rock and a hard place. They can’t increase user engagement on the search portal by preventing users from clicking the links, because that would hurt their suppliers. To make it worse, their typical ad placements just lost their value, going from prime-time Seinfeld season finale ad placements to 2AM Everyone Loves Raymond re-runs ad placements.

Part 2 continues the conversation.