Depending on whom you speak to, Facebook's $19 billion purchase of WhatsApp is either a stroke of brilliance or a colossal waste of money -- but mobile phone firms face both threat and opportunity as Mark Zuckerberg's network makes its (free) call.
You see, mobile telcos already know they've been outflanked by the big tech firms that now offer key services over their networks. They even have a name for such services: over-the-top (OTT) content. The term encompasses things like iCloud, Facebook, Twitter, Google services, Netflix and many more.
While all these services are different, what they share is that they all make at least some of their money by piggy-backing connectivity offered by the carriers. These services are great for customers, of course, but carriers already recognize the steady erosion of their traditional profit centers: voice calls and SMS.
That's a real problem for carriers, which need new sources of revenue to compensate for the loss of those profitable businesses. Yet OTT operators, like Facebook, offer most of the key services smartphone users choose in this mobile connected age, reducing the value of a carrier's business to that of supplying the pipes.
In conjunction with the need to continually invest in new communications technologies, such as LTE/4G, carriers know they need to find some way to create a sustainable business -- they can't make the kind of profits they need offering mobile bandwidth at an all-in price.
Word from the B/OSS (billing and operations support systems) world is that carriers are well advanced on plans to find a way to make money out of OTT services, using an inherent ability within LTE to limit bandwidth access and tie bandwidth and service deals to individual users and devices. At its simplest, carriers seek an excuse to introduce tiered service-specific pricing schedules in an attempt to supplement their mobile provision revenues.
What does that mean?
It means you'll pay for service-level guarantees for the specific services you like to use. You might add a video services bolt-on, you might pay for guaranteed stutter-free Facebook access. You might pay for WhatsApp, if you want your voice or messaging communications to get around in timely fashion.
Trust me. This isn't a pipe dream. This move to tiered pricing has been discussed within the mobile industry for years. Carriers have sold most of us on LTE/4G services because of its faster mobile broadband, but they want us to like LTE because of its support for a thing called on-device policy control. What that means is that it is possible to charge device- or user-specific pricing for services. You might be watching a video on a train and want it in higher resolution with guaranteed service, and carriers will offer you this. Netflix and others are already reaching deals with mobile telcos in order to guarantee bandwidth to video viewers choosing to watch something on their mobile devices. These deals see a portion of customer charges passed along to carriers in exchange for a service guarantee.
So where does Facebook's WhatsApp fit into this?
Facebook has always had ambition for the phone. It's ill-starred attempt to put its own user interface on some mobile phones proved too much too fast, but the acquisition of WhatsApp means Facebook hopes to make another play to take over your phone.
Here's how that game may play out: Facebook will offer free calling, texting and image-sharing services between Facebook users and others, both on Facebook and beyond. There may be a small charge for end users, but the carriers will want a slice of this action too. Carriers will then be able to offer all-you-can-eat Facebook access charges to customers, in exchange for which users will enjoy completely free communications wherever they happen to be. People will pay for this, and there's little doubt Facebook will get a knock-back from the carriers.
Eventually, people will become used to using Facebook as their primary interface when communicating on their phones -- that's why WhatsApp's roughly 450 million users are so enticing to Facebook. The plan it has to take over your smartphone and yield fresh business demands scale, and half a billion people on a 7 billion-person planet certainly is scale.
"The reality is that there are very few services that reach a billion people in the world. They are all incredibly valuable, much more valuable than [the price Facebook is paying for WhatsApp]," Zuckerberg has said.
Many commentators feel that the deal's all about boosting Facebook's mobile advertising prospects. This could indeed be the case, but the hot spot for WhatsApp isn't advertising. It's communication.
The vision that's at stake here must be Facebook's hope that by tantalizing its existing user base with the prospect of free calls and texts for life it can ensure that millions -- perhaps billions - of other users will choose to switch to its future communication services.
On its own, that's not such a great business. Where's the money? But in conjunction with the desire within the mobile telcos to make cash out of OTT services with which to supplement their declining voice and SMS revenues, then there's a deal to be made.
Carriers might offer those millions of users guaranteed uptime for Facebook's services in exchange for a supplemental fee (the Facebook everywhere package, for example). That fee will deliver smartphone users on every platform free access to a platform-neutral, country-neutral communication system within an environment they already use (Facebook).
Carriers will therefore have an OTT service they can make revenue from, one that's not owned by them, but one from which they can appeal to a significant slice of users. And Facebook will get a cut -- even a dollar a year from a billion users is a billion dollars, plus whatever the company makes from other income streams.
Facebook isn't alone in this space -- Skype exists. But Skype doesn't offer anything like Facebook's engagement levels -- so Zuckerberg's WhatsApp has a chance.
Will it work? That's hard to call, but put into this context, Facebook's $19 billion acquisition makes a lot more sense.
Jonny Evans is an independent journalist/blogger who first got online in 1993. He's author of Computerworld's AppleHolic blog and also writes for others in the U.S., the U.K. and Europe. Winner of an Azbee Award in 2010, Jonny enjoys new and disruptive technology and likes music almost as much as he likes his large and shiny dog.
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