WhatsApp and OTTs

WhatsApp was incorporated in February 2009 by Jam Koum. A few months later, his former colleague in Yahoo, Brian Acton, provided $25,000 lent by Yahoo employees and became a co-founder. They were both in their 30s and well-seasoned in the Silicon Valley culture.

WhatsApp was an instant text messaging application. It was not a radically new service. Skype, for instance, had been providing instant messaging services for years. The key difference was that WhatsApp was developed specifically for the iPhone, being part of what we have called the third generation of the internet. Just as Skype was developed for the PC (second generation of the internet), WhatsApp was specifically designed to benefit the personalized and always-on nature of the smartphone. Once again, the medium is the message.

After some beta tests, the service was launched in November 2009. It was provided for free, being a substitute for the expensive short message services (SMS) provided by cellular carriers. The service went viral as early adopters invited their contacts to join the network. The selfish desire to make use of the free service with one’s regular contacts helped to grow the network.

WhatsApp’s fast growth was made possible by building on previously existing networks, as had already been observed in other cases. Of course, WhatsApp was made possible by the already universal internet. Furthermore, WhatsApp built upon the personal list of telephone numbers in the memory of the smartphone. Each user could invite the individuals who were in his or her smartphone’s contact list. The service went viral so rapidly that a fee of $0.99 had to be introduced for new members to join the platform, to limit demand.

As usual, financing was provided by a well-known venture capital firm, Sequoia, which had already invested in several platform companies such as Google, YouTube, PayPal, Linkedln, and Airbnb. Not only did Sequoia identify the power of network effects, but, more specifically, it also identified how WhatsApp could build on previously existing network effects: “WhatsApp is simple, secure, and fast. It does not ask you to spend time building up a new graph of your relationships; instead, it taps the one that’s already there.”3

Over time, WhatsApp was enriched to allow the exchange of pictures and voice messages, as well as VoIP services. WhatsApp quickly surpassed Skype as the leading communication platform despite being launched six years later.

WhatsApp works across operating systems (iOS and Android), across cellular carriers, and across countries. It is a digital platform that allows the interaction of large pools of users in a previously fragmented ecosystem.

Five years after the launch of the service, WhatsApp had 450 million users, but only 55 employees. Such a lean structure and the limited expenses - WhatsApp does not require infrastructure as it uses that of the traditional communications carriers - enabled WhatsApp not to rely on advertising. This was one of its main competitive advantages over other instant messaging platforms. WhatsApp was also built with limited access to users’ data (no log in, no names, no profile; only the telephone number). Big data was not the business model. Even subscription fees have been on and off, being requested for some periods and in some countries, but not as a universal feature and a business model supporting the platform. The business model was to build the best communications service, grow the largest communication network, and then sell it. WhatsApp was sold to Facebook in February 2014 for $19 billion. As Mark Zuckerberg explained, “if you look at the number of things that have reached a billion people, they all end up being incredibly valuable and important things.”4

Since the acquisition, WhatsApp has still not included advertising or subscription fees in the platform. However, Facebook has linked WhatsApp users’ phone numbers with the identities of Facebook users, increasing its ability for targeted advertisement services. The European Commission imposed a fine of $122 million on Facebook in 2017 because, when Facebook notified the acquisition of WhatsApp in 2014, it had informed the Commission, both in the notification form and in a reply to a request of information from the Commission, that it would be unable to establish reliable automated matching between the accounts of Facebook users and those of WhatsApp users. However, in August 2016, WhatsApp announced updates to its terms of service and privacy policy, including the possibility to link WhatsApp users’ phone numbers with Facebook users’ identities. The Commission found that, contrary to Facebook’s statements in the 2014 merger review process, the technical possibility of automatically matching Facebook and WhatsApp users’ identities already existed in 2014 and that Facebook staff were aware of such a possibility.5

In December 2020, the US Federal Trade Commission filed an antitrust suit against Facebook, including the divestiture of WhatsApp (and also Instagram). “Facebook’s acquisition and control of WhatsApp represents the neutralization of a significant threat to Facebook Blue’s personal social networking monopoly, and the unlawful maintenance of that monopoly by means other than merits competition. This conduct deprives users of the benefits of competition from an independent WhatsApp (either on its own or acquired by a third party), which would have the ability and incentive to enter the U.S. personal social networking market. Moreover, WhatsApp’s strong focus on the protection of user privacy would offer a distinctively valuable option for many users, and would provide an important form of product differentiation for WhatsApp as an independent competitive threat in personal social networking.”6

Eventually, all large platforms developed their own communications apps. Facebook owns WhatsApp (with 2 billion users out of 4.5 billion individuals connected to the internet in 2020) and Messenger (1.3 billion users), Microsoft owns Skype (300 million users) and Hotmail (now Outlook). Tencent owns WeChat (1.2 billion users). Other popular platforms are QQ, Telegram, and Snapchat.

 
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