In February 2014, WhatsApp was sold to Facebook for an unbelievable figure – 19 billion dollars. Within the next few weeks, it was all over everybody’s blogs, Facebook statuses, lunch conversations, and even kids in school were talking about it. People could not understand that a company whose only product is a messaging app could be worth that much money.
WhatsApp is not the only messenger out there. Snapchat, Facebook Messenger, LINE, WeChat, and many others are also stakeholders in the industry. They proved to be a cheap alternative to operator-based text messaging via SMS, and they provide many more features that SMS doesn’t have. According to statistics, in August 2015, WhatsApp has an active user number of 800 million, Facebook messenger has 700 million, and WeChat has 600 million. If we just do a simple math and not include all added features that each messenger provides, all chat messengers have a combined valuation of over 200 billion dollars. That’s half of Google or 4 times more than Yahoo!.
Interestingly on the contrary side, all these messaging apps struggled to figure out their revenue model. Evan Spiegel, the co-founder of Snapchat, acknowledged in an interview the extreme difficulty of making a feasible one. Many internet companies are backed by ads revenue. Google, for example, revealed in their multiple annual reports that more than 90% of their revenue comes from ads. One of their many services, Google Adsense, analyzes a web page and provides advertisements that best fit the content of that page. However, most people on messengers send private messages to their friends, and it is impossible to insert any ad into the conversation. Out of privacy concerns, it is also unlikely to run algorithms on user’s messages to provide personalized recommendations.
Realizing this limitation, apps began to expand their service into other communication areas, such as emojis, playing games with friends, sending money, interesting new content, etc. This is a very successful first step. In 2013, LINE reported in their Q2 quarter report, that out of their $100 million quarterly revenue, game purchase and in-game purchase accounted for 53%, and emojis accounted for 27%. Snapchat is piloting the new discovery feature that pushes sponsored content to the user. With the existing ads before playing video revenue model, the company stated that their revenue is estimated at $50 million dollars this year.
In addition to these efforts, LINE and WeChat also aim to build up their own ecosystems. WeChat launched a feature to send money to multiple friends in January 2014. It targets the Chinese tradition of giving monetary gifts to friends and family for auspicious blessings on special occasions. On 2015 Chinese New Year’s Eve, more than 1.5 billion “red envelopes” were sent on a single day. WeChat also keeps a semi-bank account for a user. Besides sending money to friends from the account, the money could also be used to make purchase, refill phone cards, call a taxi, pay utility bills and many more. WeChat has built a successful image within China and it has penetrated into many aspects of people’s life.
In conclusion, the entire messenger ecosystem is very enormous. The user-to-user communication nature allowed exponential growth in the user base. With the vastly and constantly growing user base, companies are able to reach billion dollars valuation within a very short amount of time. The next step, to achieve their billion dollars revenue, companies are experimenting to expand their services into our daily life. LINE and WhatsApp have built up their ecosystem that allows users to call taxis, stream music, order foods, and we can predict soon other companies will have similar strategies to expand their verticals.
Google has been around since 1998. We are all familiar with its presence. Many people have this muscle reflex to type in Google.com when they want to look up something. The search results are well optimized that only in rare instances you need to click into the second page. It is so successfully marketed that it even reserved itself a permanent entry in Oxford Dictionary. Google is also a very successful company in numbers. It dominates the global online search industry and its market share outruns the second place by more than 50%. It employs more than 50,000 employees worldwide and it has become an Internet conglomerate.
Normally, when a tech company reaches this stage, we would expect the management style to be more conservative and risk-averse. Intuitively, managing a company of 50,000 employees is, by a number of magnitudes, harder than a company of 5,000 employees. In a large company, a small mistake could have cascading effects and become disastrous.
Google seems to be an exception. On Aug. 10th this year, Larry Page announced his plan to found a parent company named Alphabet, and he seats the CEO position. It oversees all traditional Google products like Gmail and Android; Google X, which hosts several moonshot experiments; Calico, the life sciences branch on longevity; Nest; and Google Venture and Capital. Sundar Pichai, SVP of Google, has now officially become the CEO.
This is a bold decision with a possibly very bright future, but it could also be atrocious over the years and destroy the culture that Google has built over the past 18 years. Larry Page explained in his public letter, “in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant”. Alphabet is now comprised of several parts of the old Google. All the experimental branches like Google X or Calico can operate with more independence and momentum. Ever since Google X was incubated, it suffers from limitations brought by traditional parts of Google, because it operates on a much higher velocity. Investors and general public have expressed concerns on unfruitful experiments, and it reached a peak when Google announced to shut down the consumer branch of Google Glass. All these concerns have become irrelevant now. Each individual company has its own goal, and it is free of the limitations set forth by the traditional Google. Furthermore, the management benefits are phenomenal: Larry Page and Sergey Brin are more excited in experimental products, and Sunday Pichai is a proven successful manager who can focus on the continued growth of the traditional Google.
Nevertheless, the downside of this decision is also nontrivial. Apart from its obvious risk level, it separated the revenue generator, Google Ads, from the moonshot projects. It is not likely that Google Ads will stop funding the moonshot companies in the immediate future, but it is possible that all these experimental projects will seek for venture capitalists or private equity investments. Over the years, the corporate culture will likely be very different across all individual companies. This makes talented Google employees harder to join moonshots, and detriments the overall talent acquisition process. Another downside is that the traditional part of Google might lose its innovation velocity. As all the moonshots depart from the traditional company, Google might give more focus on stability. It hurts the search engine in the long run because the market share might drop as innovation becomes stagnant.
In conclusion, Larry Page and Sergey Brin’s rebranding decision is very ambitious. If it works, Alphabet will be even more successful financially, and it will have more impact on people’s daily life. It gives more freedom to experimental projects like longevity research, drone delivery and Internet penetration into rural areas. However if it fails, it will become a management disaster where companies compete with each other for resources and eventually it hurts the traditional Google brand. It is essentially a refactoring in the computer science vernacular. The refactoring will likely take very long time to implement, and only time will tell whether it is effective or not. However, when it does prove to be successful and implemented correctly, the benefit is very substantial.
Page, L. (2015). Google Announces Plans for New Operating Structure . Available: https://investor.google.com/releases/2015/0810.html. Last accessed 2nd Oct 2015.