Facebook’s (NASDAQ: FB.US) $19bn acquisition of WhatsApp has been the most debated acquisition of the year so far; how could a company that makes almost no revenue could be worth $19bn? However, Facebook sees an opportunity here as WhatsApp could become a huge threat to traditional telecoms companies like Vodafone (LSE: VOD) (NASDAQ: VOD.US)
What is WhatsApp?
WhatsApp is a mobile device app that lets users send messages, pictures and video to each…
Facebook‘s (NASDAQ: FB.US) $19bn acquisition of WhatsApp has been the most debated acquisition of the year so far; how could a company that makes almost no revenue could be worth $19bn? However, Facebook sees an opportunity here as WhatsApp could become a huge threat to traditional telecoms companies like Vodafone (LSE: VOD) (NASDAQ: VOD.US)
What is WhatsApp?
WhatsApp is a mobile device app that lets users send messages, pictures and video to each other around the world over the internet for free. Essentially, this means that users don’t have to worry about cross-border charges and can send as many free instant messages as they want.
Unfortunately, this poses a huge threat for traditional mobile carriers such as Vodafone, which have seen revenues take a hit thanks to the rise of free messaging services over the past few years. WhatsApp is the largest of these messaging apps and has 465m users worldwide; messages sent across the service already exceed the number of messages sent across the global telecoms network.
Further, WhatsApp’s management believe that the number of users will hit 1bn in the near-future, a huge concern for Vodafone, especially as WhatsApp plans to offer its users the facility to make international, free voice calls in the next few months.
With WhatsApp offering free voice calls, some analysts believe that this move could cost the global telecoms industry a staggering $400bn in revenues by 2018. To put that in some perspective, Vodafone’s revenue during 2013 was only $44.5bn.
WhatsApp’s move into voice calls could make the majority of Vodafone’s investment to improve the quality of its networks around the world a waste of time, as users seek lower costs by making calls over mobile data.
All is not lost
Still, all is not lost as City analysts predict that WhatsApp’s free voice calls will consume a huge amount of data, great news for mobile data providers such as Vodafone. However, some analysts have speculated that the extra demand for data will put a strain on the network, implying that more infrastructure investment will be required by Vodafone.
As of yet it’s unclear how this will play out in the long-term, although it is almost certain that Vodafone will have to spend more on infrastructure and grapple with falling revenues as a result of this deal.
Nevertheless, Vodafone’s management is seeking acquisitions that are, “sizeable and could transform the company” and with £25bn left from the Verizon Wireless sale, the company has plenty of firepower. Actually, Vodafone is seeking to drive away from its legacy telecoms business as the sector becomes ever more competitive and instant messaging services like WhatsApp gain traction.
In particular, Vodafone’s recent acquisition of Kabel Deutschland, as well as the rumoured takeover of Spain’s largest cable operator Ono and British Sky Broadcasting are all indications of Vodafone’s shifting strategy.
So, the rise of WhatsApp is a huge threat to Vodafone’s legacy telecoms business but the company is expanding into other markets, which should offset sliding voice and text revenues during the next few years.
Times are changing
The telecoms industry is traditionally thought of as a defensive market, well known for reliable dividend payouts and steady growth. However, Facebook's deal with WhatsApp is set to blow the telecoms market apart and some companies will be more affected than others.
But the telecoms industry can be hard to understand with abbreviations like SMS, MMS, ISP and VOIP floating around all over the place. So to help you understand, analysts here at the Fool have put together this free, no obligation report, to help you become a pro in the world of telecommunications.
Click here to download your free report today.
> Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in British Sky Broadcasting.