THE BLOG

Facebook Plays Short and Long Game with WhatsApp and Oculus Rift

07/02/2014 04:07 pm ET | Updated Sep 01, 2014

When Facebook decided to invest a cool $19 billion ($16 billion upfront) for messaging app WhatsApp the entire world was bound to take notice. Telecommunications types, in particular, were keen to understand how this latest move would impact them as mobile operators have been feeling the heat from over the top (OTT) players like Google and Facebook for years. (To put this $19 billion in perspective, AT&T, one of the world's largest telecom carriers, invests about $20 billion in networks and spectrum in an entire year.) Shortly thereafter, in another surprise move and with the dust not quite settled on WhatsApp, Facebook picked up virtual reality startup Oculus Rift for $2 billion. This left many in the industry wondering what exactly was going on.

While WhatsApp and Facebook's previous $1 billion acquisition of Instagram were in keeping with its social network roots, Oculus Rift was in the video game industry and had yet to release a product. This led many to ask: what was Zuckerberg thinking? But if you dig deeper, these acquisitions are intertwined and central to Facebook's short- and long-term play to develop the next-generation communications platform. With WhatsApp and Oculus Rift, Facebook takes on Google and mobile operators in the race to do just that.

Let's start with WhatsApp. Why make that purchase? Because messaging is one of the top activities on smartphones and messaging apps are increasingly viewed as social networks. WhatsApp is already an international phenomenon, even if it has not made as much of a statement in the U.S. just yet. In some markets, WhatsApp generates almost as much messaging traffic as all traditional carriers combined. Instead of using carrier text and voice messaging at cents per message, WhatsApp users consume a few bytes of their data plan for close to zero, and send WhatsApp $1 a year. That's correct: WhatsApp charges nothing for the first year of service and then a mere $1 per user per year. That's not much to a phone company, but nice work for an app company that's getting close to half a billion users. This leads phone companies to pine after all that revenue they're losing. As if that's not enough, WhatsApp will add a voice-calling service to its offering. WhatsApp currently boasts more than 450 million active monthly users, and Facebook's entire history is all about getting more and more people to sign up. The rapid rise of WhatsApp's user-base was largely due to the low cost and its commitment to not collect user data for advertising revenue, despite users providing detailed personal information to the company, including private texts to friends. If these qualities remain intact, the combined user base of both networks will be truly massive.

Zuckerberg assured the world that acquiring WhatsApp was not simply about money, but rather that it was in tune with his vision that everyone in the world should be connected. Maybe we should accept what he is telling us. After all, who is going to argue against the idea that communications (in the broadest sense) has delivered social and economic benefits to people in affluent countries? If we expand opportunities to communicate by providing cheap and effective tools, people and economies benefit, and that's a good thing. However, all those customers will in reality just have more disposable income so they can then pay bigger subscriptions and respond to ads. This will mean Facebook gets richer, even as Zuckerberg implied that this financial gain would be a happy coincidence, and not the fundamental reason for the acquisition.

WhatsApp is obviously an important element of Facebook's strategy and the company is committed to honoring the app's principles: cheap, reliable, easy to use, no ads and preserves privacy. Just like Google, Facebook is increasingly faced with the harsh reality that many people simply don't like or trust its platform. Buying companies like WhatsApp and Oculus Rift and giving them the freedom to stick to their core roots is an important component to growing the all-important subscriber base and restoring the value and "cool" factor of Facebook long term. Rather than trying to integrate acquisitions into the mothership, Facebook and Google (e.g. Nest acquisition) are taking a similar approach by putting their significant marketing and development resources behind the acquired companies while letting them continue to innovate autonomously.

The autonomous component is key. Facebook's internal innovations within its original social networking platform (Facebook Platform and Facebook Messenger for PCs) have been failures. So, just like corporate giants in other industries, Facebook needed fresh infusion from the outside. For example, while Snapchat and Pinterest have been innovating in social media, Facebook bought its way in with the Instagram purchase in 2012. Facebook's own "me too," Snapchat look-alike app called Poke -- an internal endeavor -- again didn't make it off the ground. And it's not just Facebook.

Google's list of abandoned projects has its own Wikipedia page that is worth a read. However, when you compare these two companies' success rates in innovation to other big companies (e.g. AT&T, GE, Ford, Nokia) they all have lists of failures alongside their successes that keep them in business. Somehow we expect Google and Facebook to be different because they are still relatively new, but now they are big, and like any large corporation, are just as prone to screwing up big projects. Following in the path of corporate giants that came before them, buying innovative small companies is critical to their long-term strategy and relevance.

When it comes to these companies' actual wins, some might argue, for example that the Android OS and Google Web Services are only successful because they have helped boost Google's real business -- Google search and Web ads -- which are still responsible for the bulk of Google's revenue. This is a similar theme for Facebook. Both companies are riding the Web advertising wave, but now to stay on top in that field they need to remain the go-to players for the next advertising platform: augmented reality provided by Google Glass and Virtual Reality provided by Oculus Rift (Facebook). However it is important to note that advertising revenue has become, for both of these companies, not the primary goal, but rather a means to an end. Google's actions suggest that the company has a bigger picture in mind, and Zuckerberg wants to build a lasting place in history for himself and Facebook. Both companies are entering these new modified-reality markets to ensure they have a growing subscriber base and their advertising revenue is protected well into the future to give them the funds they need to do what they want in future endeavors. But that's where the similarities come to a grinding halt.

Google Glass addresses the ubiquitous nature of communications which started with the mobile phone. Google wants you to be able to communicate without taking your phone out to check for messages, text and more. In contrast, Facebook imagines a world where a computer has essentially removed you from the real world and placed you in a virtual world. While Glass enables users to text, receive messages, take pictures, record videos and chat, Oculus Rift provides users (remember that important WhatsApp subscriber base) with the opportunity to interact in a virtual online city. Think digital billboards, among other advertising opportunities. In a nutshell, the key distinction comes in the way these technologies are meant to be used: Google Glass wants to augment the real world by making technology and devices fade into the background, while Facebook wants to improve reality by eliminating it. Google Glass thinks the real world is fine if you can speed it up and make it better with faster search and navigation -- Oculus will put you in a room by yourself where you can communicate with people thousands of miles away, putting the real world out of mind.

This difference in end goal is immediately apparent just in each product's design. Google Glass is slick and almost Apple-like in its appearance, and is convenient for everyday use, whereas Oculus Rift is bulky and unlikely to be worn outside. Google Glass may still look a little ridiculous for the time being if it's being worn in public, but nowhere near as ridiculous as Oculus, a virtual reality device only meant to be worn behind closed doors.

Zuckerberg's comments on the acquisition provide additional support to the long-term Oculus play.

Strategically we want to start building the next major computing platform that will come after mobile. There are not many things that are candidates to be the next major computing platform. [This acquisition is a] long-term bet on the future of computing.

He also views the technology as more than a device for video games, noting that "immersive virtual and augmented reality will become a part of people's everyday life." So what can we conclude for Facebook's future? While gaming is a good place to start, there are many other uses for virtual reality that can be imagined. With a growing developer community and partners, there is a myriad of applications that can be developed. With a user base of more than one billion (thank you, WhatsApp) and a growing and shiny new virtual reality platform, Facebook might be ready for what's next. Imagine experiencing the FIFA World Cup, sharing adventures with friends, or learning in a virtual world simply by putting your goggles on. This is Facebook, next generation. If it had to use its very deep pockets to acquire its way into this new world, so be it, but the social interaction with your online friends has the potential to become an addictive (and arguably scary) pastime.

And where will Google Glass fall? Facebook and Google see the next generation communications platform in a fundamentally different way. Glass makes your everyday life easier; the Rift enables you to escape it all together. Which approach will win remains to be seen, but what is certain is that we will see more ads along the way than anyone can possibly consume -- just the way both companies planned it. Both companies will see a new wave of revenue, but as said, their motivations are now bigger than just making money from ads. The money from ads ultimately fulfills much bigger ambitions. Whether that's simply a place in the history books or changing the world in a fundamental way, time will tell.