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Live from the Mobile World Congress: Mark Zuckerberg lays out his plans for world domination

February 25th, 2014 |  Published in Mobile World Congress 2014

 

 

MWC2014 Zuckerberg wide shot

 

Gregory P. Bufithis, Esq.

on site at the Mobile World Congress in Barcelona

 

25 February 2014 – It was worth the 45 minute queue. Mark Zuckerberg was the keynote speaker here last night and he laid out his plans to bring the internet — including Facebook by the way — to the next billion people. His answer to all this is to provide a “dial tone for the internet”. He said: “why should people spend one or two or three dollars to get basic data if they don’t know what’s in store for them. People need a reason to get online”. It was his idea is to provide a suite of free “basic services” such as messaging, food prices, Wikipedia, weather and, it goes without saying, Facebook. This is the next step in Zuckerberg’s plan for world domination. It seems the only chance for the rest of us is to devise an app to defeat him … and then sell it to him.

But it’s a tale that’s been hiding in plain sight for years, and it begins with an explanation of how Facebook has reached over a billion users. It continues with a roadmap for how the seeds of Facebook’s future growth – to two billion and beyond – have already been planted. In both cases, what matters is emerging markets in Asia, Africa, and Latin America: the striving, proto-middle class “next billion or more” whose first impression of the internet is often that it seems to consist entirely of a site called Facebook.

Last year, Facebook teamed with a number of the world’s largest tech companies, including Nokia, Samsung, Ericsson and Qualcomm, in a project called Internet.org. The goal is to offer free or low-cost Internet services to consumers in developing countries that currently do not use the Internet through their handsets. Zuckerberg said during his keynote that Facebook was looking for up to five more carriers in emerging economies to help to expand the initiative during 2014.

Zuckerberg rattled off a whole series of numbers evidencing the massive growth of mobile and internet across emerging marketsd such as there will soon be more mobile phones than people, and 75% of those phones will be something other than smartphones. Most of these phones have no data plan associated with them, and if they are capable of browsing the web at all, it’s through a protocol all but abandoned years ago in developed countries, known as WAP, which can only access websites specially tailored to it. As Zuckerberg explained it, Facebook realized that one way to maintain its meteoric growth was to make it easy and free to access Facebook on devices like these, devices that in no way resembled the desktop computer for which it had originally been developed.

NOTE: in May 2010, Facebook announced Facebook Zero, a simplified, text-only version of Facebook that can be accessed if you’re in the right country and you’ve got the sort of WAP-enabled “feature phone” that comprises the majority of the phones on the planet. In the 18 months after Facebook Zero launched in Africa, the number of Africans on Facebook ballooned by 114%.

Zuckerberg’s pitch … his “compelling argument” … to operators is “You should give Facebook away to consumers for free. Facebook is one of the most addictive things on the internet. If you have someone try out Facebook for the first time, it might lead them to want to try the rest of the web, and a lot of these other services they can charge for.” The way Facebook Zero works is perfectly suited to convincing people who have never touched the internet to give it a try. Once a user is hooked, the carrier has an opportunity to sell data services on top of Facebook Zero: loading text is free, but if you want to see pictures, you’ll pay the usual fees for data. The same goes for any external links a user follows while they’re browsing Facebook.

The ever-present existential threat to operators: their first subscribers were relatively rich; the ones they are gaining now are ever poorer. So the revenue per user is shrinking. At the same time, the amount of data being pushed through their networks is increasing, and customers are demanding faster connection speeds, pushing up the cost of infrastructure. The networks are looking for ways to get more users, and make more money from each one of them.

And the WhatsApp mobile messaging service that Facebook is buying for $19 billion? Many analysts and others said it was a gross price, way over the mark. Not Zuckerberg: “By itself, WhatsApp is worth more than $19 billion. Few services in the world can reach one billion users, and they are all valuable.” He said the acquisition would allow WhatsApp to focus on connecting more people around the world, instead of having to generate revenue if it had remained an independent company. WhatsApp says it has around 465 million monthly users, and Facebook says it is on track to reach one billion subscribers.

Over the past couple of years, investors in listed software companies have begun to prefer, and thus re-rate, those companies that are allocating excess capital to grow addressable markets aggressively (even if at the expense of margin erosion) and/or to pursue growth through acquisitions, rather than to sit on, or return excess cash to shareholders. The Facebook/WhatsApp deal is just the latest example of this. It is telling that despite a heady headline exit valuation of $19bn for WhatsApp, Facebook investors are quite willing to give it the benefit of the doubt – and in its first trading day post-announcement, had marked up Facebook’s market capitalisation by $4bn – equal to the cash portion of the deal. The real question is how much are Facebook’s investors willing to share of Facebook – to further enhance Facebook in mobility, in user engagement, in demographics, and in competition (against Google)?

Because this is all about a massive land grab. We are in a winner-takes-all market, with digital platforms that come out on top standing to claim a disproportionate share of user activity. By buying photo sharing and messaging apps, Facebook has now bought services in two of the key mobile activities. With the recent launch of Paper, a well-received app for showing off its news feed, Facebook may also have a third strong app up its sleeve as it looks ahead.

 

And note: Whatsapp CEO and co-founder Jan Koum is also here in Barcelona. And he delivered a further shock to a telecoms industry already nervous about the strengthened competition from its low-cost messaging platform. From next quarter, the company’s 465m users will be able to make calls to each other, opening a new threat to the traditional revenues generated by telecoms groups that have seen their SMS cash cow slain by the rise of messaging platforms such as WhatsApp. And WhatsApp will not stop there, according to a Financial Times interview with Koum. He wants to have a voice service bigger than any of the existing mobile players, with a goal of 1bn users. The company is adding more than 1m customers a day, and has needed to double its servers every year to keep up with “insane” demand from emerging market economies such as Russia, India and Brazil as more people owned smartphones.

But it is not all bad news for mobile operators – WhatsApp subscribers will need mobile data access, which means revenues for telecoms groups and the potential to move customers to tariffs based purely around data rather than voice and SMS. Koum said carriers were keen to work with WhatsApp to drive customers on to data plans, and pointed to a deal it had struck with KPN’s E-Plus service to a co-branded mobile service in Germany: “The world is moving to data. Carriers partner with us to drive usage of data plans. The core of the partnership is data plans. The world is going to data, bits and bytes, zeros and ones. Not just us, all these apps are using data not just for communications, to watch a movie or tweet news. We are a small part of it.”

The world is going to data, bits and bytes, zeros and ones. All these apps are using data not just for communications, but to watch a movie or Tweet news. Facebook has proved it can monetize mobile, generating more than half of its advertising revenue from its apps, and mine user data to give marketers increasingly accurate targeting. It now appears to be building an ecosystem including photo-sharing app Instagram and WhatsApp that could help it dominate mobile advertising. To do this, it needs services which draw users, engagement and data. As I said, it’s a land grab.

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